Buying an existing cafe

[jonnydepp]

Hi all
I'm a newbie in many ways here, as a user and potential cafe owner. This is the situation.

• I'm an IT contractor, with irregular work, 2 mortgage free houses (120k i live in and 70k empty, can be rented quickly for £450pm). On top of that some 20k of credit card debt..
• I found a cafe, I like it and the idea is both myself and partner work and run it. The cafe has some 10 staff, plus owner, reported turnover around 250k, agent valued it 115k, but advertised at 99k. Has around 60 covers (includes 16 outside). about 40 inside, 20 upstairs in separate room for meetings.
• Cafe sells breakfasts, lunches with alcohol, I've been in about 10 times now and the place is always busy
• Owner says she's been in the business too long, wants out and something different.
• I've had the 3 years books sent to me, to me they look good, VAT returns quarterly vat bills around 10k. The agent says adjusted net profit around 90k, with all staff (we'd probably take 2 out if we moved in).

My questions and concerns are:

1. Is it really worth that much?? Can a business that big really turn over that kind of money? It is a very attactive cafe, organic home grown vegs, great food at slightly more than average prices, great coffee, shabby chic style (but cheap) furniture..but if 250k is what a business this size is capable of turning over that much money, that to me seems like a great business unless the books are "cooked". Could they be, how can I prove?
2. t is being sold (according to the owner) as a Ltd company and "everything including the staff goes with it". If the company has debts, they stay with old owner, not mine. How could I start take over the business that has 3 years of accounts with 250k turnover? Friends tell me first year or so its best to be a sole trader, not limited?!? How would I do that?
3. Staff - I'm worried about losing some staff because they're good! I'd have to let 2-3 go fair;y soon with another 1-2 later to bring in family to work, but how to do it without risking employment tribunals if I have to take them on?
4. What are the advantages of being a sole trader or should I just keep the Ltd as it is and carry on everything? I was told I could put a lot of money away in the first year if I go sole trader route?
5. How best to fund it? Business loan secured on the houses? Sell the 70k one which I don't need anyway and fund the cafe completely from that because the 450 a month is far less compared to what the cafe could potentially return every month in comparison?
6. Are there regulations for inspections for hygiene when a new owner takes over a business? Will I have to go through everything as a new owner or will it just be a smooth transition?
7. Are there regulations for cafe premises to have male, female and disabled toilets or can the disabled serve as female at the same time?
8. Does the kitchen have to be covered in stainless steel or tiles as someone told me or is plastered wall acceptable?

I'd be grateful if any of these questions (only some of that I have for now) can be answered by you guys who have experienced similar situations and/or know the rules. I've made a provisional 80k offer, pending the accountants view on the books for the last 3 years, but would be prepared to decrease or increase that, based on your advice too.

Thank you all very much for taking the time to read all this and answer if you're able to.

 

[jonnydepp]

I forgot to mention, the place has an alcohol licence to 3am and has room to open a small restaurant in the evenings.
Open from Mon-Sat, sunday closed. I would open sundays too.

 

[IanG]

3. Why on earth would you sack perfectly good staff to bring family in? If you family need jobs then you don't necessarily have to provide them. Or if they're cheaper and you want lower costs, how sustainable is that?

4. Told you could take a salary? Your legal structure is more than where you can stash money.

5. 450pm on rental income is a different job in a different sector. I almost said less work than running a cafe but I've done neither so I can't compare. But you might consider a rental yield of 450pm in a month when you've potentially done little more than collect said yield to be somewhat more attractive than grand that you've slaved for.

6. No experience but I'm going to say even if there is not an immediate inspection that is not what you might say smooth as any standards in place will need upholding. By the time you've sacked everyone you've going to have no one doing that for you so it'll fall to you.

Others no idea.

 

[Socio South West]

1. Verifying turnover - You have had sight of the VAT returns - that is a pretty good indicator of the turnover.
As a customer you can also do the maths - x customers spending y per day over z days per annum - £250,000 over say 280 days = just over £800 per day. That looks quite feasible on a 60 cover place.

2. Basis for trading - For a small business it often easier to go for a 'goodwill & assets' sale whereby your company buys from their company, and the shares and any debts etc don't change hands. OK, it may get a bit confusing for suppliers in my experience, but it avoids a lot of the complications of changing company ownership, and can also have advantages for the outgoing owners, depending on their plans.

3.Staff - Most restaurant staff turnover is fairly high, and some natural wasteage should soon occur. Even though the right to claim unfair dismissal doesnt kick in until a couple of years employment has passed, you do need to keep your team onside with you: There is nothing that puts a punter off more than a bad staff atmosphere if you handle things badly.

4.There are pros and cons to the various models of ownership: A company protects you personally in the event of a collapse but does give you additional statutory requirements and makes you more transparent.
It's easier to get money out of a partnership/sole trading enterprise than from a company, but from a company it can be tax free.... speak to an accountant to explore the pros and cons in depth.

5 Without careful budgeting its hard to say whether it would be better to realise some of your capital to fund the business, or use income from the empty property to support the borrowing, which assuming the loan was over 10 years, would cover about half of the repayments. My inclination - without in depth examination - would be to protect your capital base wherever possible. If the business does well enough, you can divert the income from the empty property into your private pocket instead of the business.

6,7,8 - need input from someone with more experience of current catering regs.,

 

[Nosgaming uk]

I have experience of being on the staff side of a business when a new owner comes in and immediately starts changing things, cutting hours, new uniform rules and letting people go creating a lot of bad feelings towards the owners resulting in lack of motivation and ultimately a whole new staff team I the end that costed money and one to train.

Although I understand that it would be your business and you making the loan repayment etc I think you have to consider that it may be more beneficial to wait a few months before changing things too much.

 

[Cromulent]

Yay for nepotism!

The life blood of good business plans.

 

[Philip Hoyle]

I've had the 3 years books sent to me, to me they look good, VAT returns quarterly vat bills around 10k. The agent says adjusted net profit around 90k, with all staff (we'd probably take 2 out if we moved in).

So do the VAT returns match the 3 years of accounts? What is the net profit shown on the last 3 years of accounts?

You seem to be placing a lot of reliance on what the agent says rather than checking things out for yourself. Remember, the agent is acting for the seller, not you, so you can pretty much ignore anything they say. You have to check it all out yourself.

 

[fairdealworld]

Listen to IanG. One thing you've got to grasp about running a cafe (or a retail business like me) is the value of good staff in such situations. Never ever let a good member of staff go unless you are about to go bankrupt and certainly not to replace them with 'family', on the contrary do everything possible to encourage them to stay. Yes there is a lot of 'churn' in cafe/restaurant staff but there is a lot more churn in some places than others, if you have good staff you should be working to reduce churn not to increase it. Get rid of some of your staff, the rest will dislike it and also feel the writing is on the wall and start to look for opportunities elsewhere.

You are essentially planning to expand by opening Sundays and doing a restaurant type thing in the evenings - let the family do those jobs! If they work out well then when some natural churn does occur they can be 'promoted' to the day time/non Sunday jobs if they want to be.

Re: hygiene issues. The best way to find out is to ring your local authority. Some years back I thought of putting a cafe section into an existing shop. I phoned the Council and they sent an officer around who was most helpful and encouraging. Given that your proposed premises are already a cafe they'd probably just advise you on the phone. I was quite surprised by how little they actually required except that the place be CLEAN plus fridge at right temperature and that sort of thing. Keeping a place really CLEAN is where good staff come in of course! In the end I didn't go ahead with the cafe section idea because of problems related to my landlord and I moved my shop to regretfully smaller premises in another area. But going on my previous experience if the opportunity ever came up again I'd regard the Council as a help rather than a hindrance and I'd simply phone them and ask about the sort of issues you mention, they really aren't there to trip you up but to try to ensure that you do things the right way.

 

[jonnydepp]

Thanks, this is much appreciated.

So do the VAT returns match the 3 years of accounts? What is the net profit shown on the last 3 years of accounts?

You seem to be placing a lot of reliance on what the agent says rather than checking things out for yourself. Remember, the agent is acting for the seller, not you, so you can pretty much ignore anything they say. You have to check it all out yourself.

I have checked the accounts and to my understanding the accounts are correct, the agent is not saying anything different from what is stated in the accounts except that the Adjusted net profit (the money I ultimately pocket in the end) is around 90k. The accounts show 22k profit for the company, but other money that can be drawn added to that profit comes to a lot more.
The profit has grown over the 3 years, (gross 150k, then 199, then 246. My concern is how easy is it to "cook" the books? Could it have been setup from year 1 to show "growth"? The vat seems genuin, although I can't figure out that someone would happily pay 10k vat every quarter for 18 months in order to bump the value on a cafe which is busy enough as it is??
I've been to the place again today, ordered several drinks snacks, chatted to a friend while monitoring everything. The place was packed from 11 - 1,30ish, people being turned away because there was no tables downstairs even though the upstairs was not used and empty. The room can sit 20-25 people easy, but the manageress in the owner's absence (abroad) was turning people away!! Now the same manageress has displayed very unprofessional behavior several times by grabbing empty cups before customers completely finished with them (one from our table!!) and not a single smile on her face!
I don't plan on "getting rid" of staff or making any changes for the foreseeable future until I settle and find my ways around everything in here, but if I get this cafe, she could be the first to go just on the basis of disrespect towards customers. A smile does not cost anything, but she is not giving any. Not on!!

 

[Newchodge]

The staff will be protected by TUPE and their servicde with the previous owner will count towards their length of continuous service, It is not legally possible to get rid of them in order to bring in family members.

 

[Socio South West]

You seem to be obsessed with this 'cooking the books' - you have been in the restaurant, so know the menu, and can see what people have been ordering, and how many people have been in there: You are in a position to make a reasonable estimation of the takings, and if that loosely matches the figures you already have, then don't worry yourself further on that. You might be surprised that the books are being cooked the opposite way to your thoughts, and some income is not going through the books......
Have you asked when the last VAT inspection was, and what discrepancies were picked up at that visit by the VAT Inspector?

Forget the staff issues.... concentrate on the business overview, getting the purchase deal and the business plan right.
You can give the staff training in their approach to customers, when and when not to remove stuff from tables etc when you have control of the business.... THEN you can see whose face fits and whose doesnt, but thats some way down the road just at the moment.

 

[jonnydepp]

The staff will be protected by TUPE and their servicde with the previous owner will count towards their length of continuous service, It is not legally possible to get rid of them in order to bring in family members.

I thought TUPE might come somewhere into it and I'll most likely keep everything as is because its a "if it ain't broken, don't fix it" situation. But bad behaviour and not treating the customer with 100% respect won't be tolerated, specially when it comes to a manageress! So I would try to "re-train" or highlight areas for improvement, possibly reward them if they do well.
Generally they're all good, but a little slow at times. Standing around and waiting in my view gives the wrong impression. Even going around with a cloth is better than standing.
Because the owner is not there a lot of the time, she has extra staff I could do without. I'm talking 2-3 out of 11 in total. There are 6 FT and 5 PT. One is a 16 student helping on saturdays and my 16 yo daughter can do that. I also come in with my partner to be there FT - that's 2 staff I would need to pay and i don't need them.
I would need to know how I can legally and in a fair way to the staff let them go after a certain period, I wouldn't and couldn't do it in a unfair way as I've been there myself and know the feeling of losing a job!

 

[Newchodge]

The only fair way to do it would be through redundancy. You would have to consult with the staff, establish a fair selection procedure and carry it out in an open and transparent way, paying the appropriate redundancy compensation to anyone who is selected and has more than 2 years' continuous service at the cafe (not just with you).

It would also be legal to do it by following your capability procedure (which, of course, you will have in place) if anyone's work is not up to standard. That takes time and can be tricky.

Come back for advice on the process when you get to that point.

 

[Twinkle Toes]

Hi all
I'm a newbie in many ways here, as a user and potential cafe owner. This is the situation.

• I'm an IT contractor, with irregular work

So no experience of running a cafe, not even a successful IT contractor, yet your going to sack staff, which even you say are good at their jobs, and employ family members.

Good luck.

 

[jonnydepp]

You seem to be obsessed with this 'cooking the books' - you have been in the restaurant, so know the menu, and can see what people have been ordering, and how many people have been in there: You are in a position to make a reasonable estimation of the takings, and if that loosely matches the figures you already have, then don't worry yourself further on that. You might be surprised that the books are being cooked the opposite way to your thoughts, and some income is not going through the books......
Have you asked when the last VAT inspection was, and what discrepancies were picked up at that visit by the VAT Inspector?

Forget the staff issues.... concentrate on the business overview, getting the purchase deal and the business plan right.
You can give the staff training in their approach to customers, when and when not to remove stuff from tables etc when you have control of the business.... THEN you can see whose face fits and whose doesnt, but thats some way down the road just at the moment.

I didn't ask about the last VAT or hygiene or any other inspection to be honest.
And yes, the offer has been put forward and I'm waiting for a reply. Just not sure if I've put in the right offer. 82k against a 99k asking price.

 

[jonnydepp]

So no experience of running a cafe, not even a successful IT contractor, yet your going to sack staff, which even you say are good at their jobs, and employ family members.

Good luck.

Hmmm.. Richard, its very unfair to say I'm "not even a successful IT contractor" because I have irregular work. I'm in that situation because I'm sick of IT and want a change - simple. I take on the odd short contract because I'm being pestered by agencies who know what I'm capable of. I did and can still earn lots of money doing it, but am simply tired of driving up and down the country. Anyone who has done what I do, will agree that it is a very non-rewarding job. I've been a successful IT contractor for 15 years, accumulated 4 properties, all paid off and mortgage free, so I think your comment is inappropriate in that respect. I don't have experience running a cafe, but my partner does. Thanks for your contribution anyway..

 

[jonnydepp]

Listen to IanG. One thing you've got to grasp about running a cafe (or a retail business like me) is the value of good staff in such situations. Never ever let a good member of staff go unless you are about to go bankrupt and certainly not to replace them with 'family', on the contrary do everything possible to encourage them to stay. Yes there is a lot of 'churn' in cafe/restaurant staff but there is a lot more churn in some places than others, if you have good staff you should be working to reduce churn not to increase it. Get rid of some of your staff, the rest will dislike it and also feel the writing is on the wall and start to look for opportunities elsewhere.

You are essentially planning to expand by opening Sundays and doing a restaurant type thing in the evenings - let the family do those jobs! If they work out well then when some natural churn does occur they can be 'promoted' to the day time/non Sunday jobs if they want to be.

Re: hygiene issues. The best way to find out is to ring your local authority. Some years back I thought of putting a cafe section into an existing shop. I phoned the Council and they sent an officer around who was most helpful and encouraging. Given that your proposed premises are already a cafe they'd probably just advise you on the phone. I was quite surprised by how little they actually required except that the place be CLEAN plus fridge at right temperature and that sort of thing. Keeping a place really CLEAN is where good staff come in of course! In the end I didn't go ahead with the cafe section idea because of problems related to my landlord and I moved my shop to regretfully smaller premises in another area. But going on my previous experience if the opportunity ever came up again I'd regard the Council as a help rather than a hindrance and I'd simply phone them and ask about the sort of issues you mention, they really aren't there to trip you up but to try to ensure that you do things the right way.

Cheers, just what I planning on doing tomorrow. Got all the departments contact details and will go over it with them.

 

[Chris Ashdown]

What is the situation with the lease and do you have any right to renew at a reasonable cost

What is the net profit and how much is the owner taking out in wages

 

[jonnydepp]

The LL is happy to renew the lease at 15k pa which is VERY competitive in comparison with leases around, for less space. These premises are over 3 floors and he has indicated he would do either5 or 10 years, whichever suits the new owner. Net profit is around 22, gross 180k. When recalculated adjusted net come to about 67 + 25 from chef's wages who has left because the junior chef has taken over the kitchen successfully. Owner took out just the basic tax free director wage around 8k.

 

[ethical PR]

Would it be profitable once you allowed a full time wage for yourself and your wife rather than the minimal 8k the current owner takes out?

Do either of you have experience of managing a retail or food/drink establishment?

What value would you both bring to the businesses?

 

[jonnydepp]

With an IT background, I can increase custom through advertising, open on Sundays, have a team to open in the evenings, keep a close eye on staff who do "slow down" a little when they're on their own, cleanliness would be top of the list..etc. My background is Mediterranean,so additions to the menu which would be attractive to people who like "different". At the moment, the menu is changed every so often and the customers seem to be attracted to the place for that specific reason. Partner has experience required to do the "hands on". Would it be profitable? Well if the owner can take out circa 90k in adjusted net profts, I would be perfectly happy if it stayed the same without me adding to it. I am prepared for a drop in wages as long as we can both get the around 20k each, I'm happy. The business can do that and a lot more easily as there is plenty of potential .I just want away from making a living doing IT. I'm very capable in the kitchen and have been cooking for big family gatherings (50+), no reason why I can't add to the kitchen myself.

 

[Chris Ashdown]

What exactly is " recalculated adjusted"

Never forget the old owners of any business were very good at their knowledge and probably tried many things during there time in management, new owners often have their own idea's and make big changes straight away often to the detriment to the company

 

[jonnydepp]

What exactly is " recalculated adjusted"

Never forget the old owners of any business were very good at their knowledge and probably tried many things during there time in management, new owners often have their own idea's and make big changes straight away often to the detriment to the company

The definition of adjusted net income is usually defined as: The amount of money the new owner “will make from the business—the true bottom line” and what the buyer of the business can expect to “clear” from the business once they own and operate it in their own way.

Adjusted net income usually contains these line items below from the business financials and tax returns—these numbers are “added back” to the net income at the end of the year to obtain the “adjusted net income” of the business.

1. Owner's Salary
2. Depreciation
3. Interest
4. Amortization
5. One Time Expenses (Items like equipment, trucks, etc)
6. Owners Personal Expenses (Auto expenses, entertainment, travel)
7. Owners Pension/Retirement
8. Rent (If the real estate is being sold with the business)

Thanks, I appreciate the advice. Any changes I make will not be for a while and until I am 150% sure it will not have a negative effect on the business.

 

[Chris Ashdown]

Something seems strange on accounts normally salary, depreciation, interest and amortization are all included in the Balance sheet which at the end of the day tells you what the company is worth

Question why would someone sell a company making 90K clear profit a year for just over 99K

 

[ethical PR]

"With an IT background, I can increase custom through advertising".

You mentioned in an earlier thread that you feel you can increase customers coming through the door, through advertising because you have an IT background.

I wasn't sure what your thinking was around this and how having an IT background would help you with your marketing efforts?

For a local café/restaurant, depending on your target audience and the location, a lot of your marketing is likely to be done offline and third party marketing, rather than though online advertising or social media, so even if your IT background is in digital marketing or social media, it won't necessarily help you that much.

Don't forget as part of your due diligence to make sure you have a good understanding of who you want to market your café to, what communications channels your target audiences use and that you have identified what budget and resources you will need to carry out any marketing activity.

Good luck

Helen

 

[Scalloway]

Something seems strange on accounts normally salary, depreciation, interest and amortization are all included in the Balance sheet which at the end of the day tells you what the company is worth

These are items that are at the owner's discretion

Salary - the owner could be taking a small salary to boost profits, or equally milking the company for as much as it can stand

Depreciation - the rate is set by the owner. It could be too high or too low. The equipment could be at the end of its useful life, so depreciation is low, or it could be new, expensive, top of the range, with a high value for depreciation.

Interest - the business may be funded by a different mix of loan or equity than the new owner would have, or the rate may be high or low by current standards.

 

[jonnydepp]

"With an IT background, I can increase custom through advertising".

You mentioned in an earlier thread that you feel you can increase customers coming through the door, through advertising because you have an IT background.

I wasn't sure what your thinking was around this and how having an IT background would help you with your marketing efforts?

Good luck

Helen

Leaflet design, improvements to the website, use of social media. It has a web presence, but can be improved massively. The current owner hardly uses any advertising and again, even today the place was busy prior to lunch time. Lunch time - always busy.
Redesign of menu - the menu design is appalling, style, quality, layout...All of this could be improved without incurring additional costs and would give the business better appeal.

Thanks for the advice, I will certainly keep that in mind.

 

[ethical PR]

Yes you are right, in marketing terms these are areas you can look at and if you have skills as a designer, this will certainly be an advantage when it comes to developing your on and offline content.

The important area, as I mentioned is to have a clear idea of your target customers - demographic profile, consumer habits etc and to understand what sort of communications - look, feel, activity will appeal to them.

Do remember if you are running a business, any time you spending on marketing is a cost to the business, as it is time, you could be spending doing something else that might have a better return for the business. Don't get bogged down too much by areas like social media, it's all too easy to spend too much time, without a proven return.

And just because somewhere is busy, doesn't mean it is making money.

Good luck

Helen

 

[simon field]

And just because somewhere is busy, doesn't mean it is making money.

Sage advice Helen

 

[jonnydepp]

Thanks guys, keep the comments coming. I take everything on board that you say. I spoke to the council today on some other issues and they really do seem helpful.
Toilet question I asked - they stay as they are as the business would have been closed down a long time ago if they didn't comply with standards.
Licences - easy to transfer, no cost.
Food handling and hygiene certificate - useful to have as an owner, but as long as staff handling food have the certificates, its enough. If the business changes hands, they would come for an inspection and start from scratch, but at the moment it is a 5 star rated.
Kitchen - I asked if it needs to be stainless steel or tiled. No need as long as the walls have oil based paint so they can be cleaned properly.

 

[Talay]

My advice, don't do anything for 3 months unless absolutely forced to. Learn, listen, pick up on the nuances of the business and when you have some empirical data of your own, look at where you can slowly make changes to improve certain areas.

Remember, if it ain't broken, don't go fixing it !