Advice for buying an existing cafe

[newbie_cafe]

Hi there,

I am looking for a bit of advice on opening my first café. To give you a little background, I have worked for many years in a coffee shop/sandwich bar environment, mostly for very successful independents. In most cases I have taken on significant management responsibilities, and I also have a fair bit of useful experience working in project management and marketing. Ultimately I have decided I prefer working in a café environment, and as I have always had a pretty strong idea about what it takes to make a great, profitable café business I have decided to have a go at opening my own place rather than going back to work for someone else.

There is a real gap in the market for a modern, comfortable, ‘foodie’ café in a large village (or small town depending who you ask!) close to my home. Despite a high proportion of wealthy retirees and young families, the few cafes currently trading tend to be takeaway/greasy spoon type places catering to workmen who drive down from the industrial units on the outskirts of the town. I would like to create somewhere that is a female and family-friendly alternative to the pubs/greasy spoons currently on offer.

I have been looking for several months but there is no suitably sized empty commercial property in the centre of this town. Instead I have made contact with one of the existing caffs who I heard were interested in selling up, with the intention of closing temporarily in order to rebrand/relaunch the business as a much smarter café.

Although the current owners are not able to provide accounts, they have informed me that business is just breaking even, although they claim it has been more profitable in the past. They are asking for me to pay the asset value, plus a little extra for goodwill. If I were to pay the full amount I would not leave me with enough cash to do the necessary renovations. I do not want to borrow money if at all possible, and in any case no bank would give me a loan for this without being able to see the accounts for the current business!

My questions/concerns about this are as follows:

1) Should I be expected to pay any goodwill on a business with no up-to-date accounts anyway? The goodwill portion of a sale is based on proven turnover surely?

2) I also believe they are massively overestimated the asset value of the business, particularly as a lot of their catering equipment is of domestic rather than industrial standard. Again, they have provided no written evidence of their own valuations, despite supposedly having had four done so that they could take an average of the lot and use this to decide their asking price. I am skeptical and would like to have my own independent valuation conducted, but they refused. I’m not sure where we can go from this.

3) As part of the sale I would be offered a new 5 year lease, but I am concerned at what would happen if the landlord won’t let me renew at the end of the term. As I say I intend to turn this business around, and once turnover has increased I assume the value of the business will be significantly above what I will might end up paying for it now? However, if the landlord observes the success of my business, what is to stop them from thinking, “well I could have a go at doing this myself” and refuse to renew so that they can take over my café? In this case I would have lost out on the opportunity to sell the business at a significant profit! I am seeking legal advice on this but if anyone has any practical experience of this situation I am interested to hear how it was resolved.

Despite the above concerns, I have decided on a maximum price that I am willing to pay based on how much I think it is worth (using gumtree/eBay to estimate the cost of the second-hand equipment), and also how much it would cost me to take the alternative route and set up a place from scratch. This amounts to just over half of their asking price, and when I suggested this to the current owners it was unsurprisingly refused immediately!

As such we’ve reached a bit of an impasse. I really don’t want to overpay for the business, but the premises has a great location and some nice period features. The current owners are saying I must increase my offer or they will list it on the open market through an agent. Could they be calling my bluff? I have been moving at a pretty slow pace, and if they believe they could get the full asking price through an agent surely they would have done this several months ago?

Any thoughts welcome!

 

[silvermusic]

Although the current owners are not able to provide accounts, they have informed me that business is just breaking even, although they claim it has been more profitable in the past. They are asking for me to pay the asset value, plus a little extra for goodwill.

To put it bluntly they're full of cr*p in my opinion. It's been bumbling along for years making nothing or a loss is probably nearer the truth.

 

[GaryA2B]

I have to agree with silvermusic sounds like they are just trying to get as much as possible (who wouldn't I guess).

Refusing to produce accounts and an independent evaluation suggests to me if you hold out they will budge on the price.

 

[ethical PR]

I wouldn't look at making an offer until you see the last three years accounts, have put together a budget on refurbishment and yearly running costs and have done your market research to ensure there is the footfall you need to make the venture profitable.

How can you have a figure in mind to offer when you haven't carried out any due diligence.

What do you know about footfall for your target market in terms of the local communuty. Is your town a destination for shopping/tourism etc does it attract the sort of person who you see as a customer for your cafe?

You may just need to be patient and wait for the right property to come along.

 

[LowPrices.uk]

This is what I would do.

Work out a sensible price at which buying the business will make sense to YOU, and perhaps even include a margin of error. Forget about their "goodwill", just do the sums yourself and make the offer that will work for you. Put this offer to them and let them call your bluff if they like. Always put a low offer in first, as once an offer is made, it might be accepted. If they don't like it, they can tell you what they want and you can think about it. Make sure you do not overpay, if necessary walk away.

Rgds

 

[ethical PR]

And how would you suggest they do this without access to the books ? - it's a foolhardy approach when you don't know your costs.

How would they 'do the sums themselves'?

 

[GaryA2B]

I would approach it more as buying premises rather than purchasing a business.

 

[ethical PR]

Exactly the OP needs to look at location first if they are looking to become a destination business.

 

[Walkol]

Goodwill? The goodwill is of no use to you as you are completely rebranding.

Assuming you're happy with the location, offer absolutely no more than what you think the asset value to YOU will be. Be prepared to walk away. Let them put it on the market - if they're only breaking even (which, as they wont show you accounts you have no idea if that includes their wages, or is even true) nobody is going to pay much for it IMO.

 

[Chris Ashdown]

The books are not needed as the buyer is looking to start afresh

There is nothing to stop her asking a valuer to look over the place without asking the present owner, obviously they wont see all but enough to give a reasonable guess at the fixtures and fittings

No need to pay Goodwill there is not any

The lease may be renewable or may not, but you could ask to see the lease to confirm this, nobody will buy without seeing the lease

The owner will want something to walk away with although the threat of paying the landlord for 5 years lease if they are not making a living from it will be worth informing them so the understand

Costs to sell via a agent will be quite high make sure they understand and very hard without 3 years accounts

 

[LowPrices.uk]

And how would you suggest they do this without access to the books ? - it's a foolhardy approach when you don't know your costs.

How would they 'do the sums themselves'?

I will declare now that I don't have any experience buying a business, because I always start them up myself on the internet. That said, the very first thing I would do is monitor the number of customers going into the premises. I could then start to make calculations for potential profitability.

Rgds

 

[Scott@KarmaContent]

I will declare now that I don't have any experience buying a business, because I always start them up myself on the internet. That said, the very first thing I would do is monitor the number of customers going into the premises. I could then start to make calculations for potential profitability.

Rgds

You really shouldn't be offering advice to people on something that you know absolutely nothing about, especially when somebody could be making a sizeable investment.

 

[LowPrices.uk]

You really shouldn't be offering advice to people on something that you know absolutely nothing about, especially when somebody could be making a sizeable investment.

It's full disclosure so they can take my free advice or not as they choose. The reason I haven't got any experience buying a business is because I wouldn't ever need to, because I start them from scratch. I do however have plenty of experience of buying other things, and I do know that the price you buy something at is one of the most important things to get right, hence me deciding to give my free opinion on the matter. The profit is made when you buy, not sell.

 

[GaryA2B]

It's full disclosure so they can take my free advice or not as they choose. The reason I haven't got any experience buying a business is because I wouldn't ever need to, because I start them from scratch. I do however have plenty of experience of buying other things, and I do know that the price you buy something at is one of the most important things to get right, hence me deciding to give my free opinion on the matter. The profit is made when you buy, not sell.

Think he kind of covered that by starring by saying he had absolutely no experience of buying a business...

 

[Scott@KarmaContent]

This is what I would do.

Work out a sensible price at which buying the business will make sense to YOU, and perhaps even include a margin of error. Forget about their "goodwill", just do the sums yourself and make the offer that will work for you. Put this offer to them and let them call your bluff if they like. Always put a low offer in first, as once an offer is made, it might be accepted. If they don't like it, they can tell you what they want and you can think about it. Make sure you do not overpay, if necessary walk away.

Rgds

He didn't here.

 

[newbie_cafe]

Thanks everyone for your replies...and not to worry, I was more looking for general thoughts from business people of whatever background rather than hard and fast advice. I particularly like the first response - I've been thinking for months there full of c**p, so nice to hear someone agree!

As my original post was massively long already I didn't go into much details about the due diligence I have already undertaken. As EthicalPR rightly states it would have been difficult to get a figure in mind to offer without having researched footfall, running costs, renovations etc...but I have spent 3 months doing this and have come to the conclusion that the venture is viable. Although it would have been nice to have their accounts as a starting point, I have observed the footfall in the area frequently, spoken to many residents in the town, and used my own experience of working in similarly located cafes to have an idea of average spend per customer (e.g. how many customers on average eat a full meal with alcohol, and how many spend 3 hours hogging a seat while they nurse a cup of tea!) I have also priced-up renovations, budgeting for unexpected costs, and as the current owners have at least been able to provide copies of utilities bills I am able to make an educated guess at the running costs. I am also aware that cafes should make an average of 60-70% GP on most items sold, and my prior experience has helped me to estimate the staff hours I would need. It's not perfect but I there is always an element of guesswork in forcasting I think!?

It is also well know that this town is "on-the-up" locally. It is a mile down the road from a well-known, touristy town with a thriving cafe culture, but due to the increase in house prices in the bigger town a lot of young couples/families/downsizer from the city types are moving to the village where I hope to open up. Other new businesses have opened recently in response to this gentrification (e.g. a craft ale bar, florist, beauty salons) so I have reason to believe my business would succeed if I am able to get the property. It just needs to be at the right price.

Thanks again for your thoughts, and for letting me rant on like this which is quite helpful in itself! It looks like I have two options:

A) Stick to my guns and hope they budge once they realise it won't fetch their asking price through an agent. Although I'm concerned they might! Their price is well over what it's worth, but its still not huge (under 20k). To some people, perhaps the 'down from the city' types I mention above, this would be peanuts and they might just waltz in and buy it without worrying that they are overpaying.

B) Hope something else comes onto the market.

Wish me luck!

 

[GaryA2B]

Sounds like you have done all you can.

Best of luck with it all.