Buying an established cafe

[Deb3108]

Hi, I'm new to this and not very good with forums generally so I apologise if this thread is in the wrong place.
Am interested in buying a small established cafe, has been valued at 35K, my daughter already works there so we know some things about it. My husband ran a business with his dad, but they built it up and then folded it when my FIL retired so we've never bought an existing business before. So my question is do we get it valued? We've looked at the paperwork, or her excel spreadsheet and are aware we need to get an accountant to look over her actualy books. But as far as the business value, how do we know its pitched at the right level.
She has a 72K turnover, all fixtures and fittings included.

 

[Bob]

With turnover below £79K, she is just under the VAT threshold. Is this because she is not declaring all the takings. Bear in mind that cafes have very little input tax as purchases of food except for some drinks is zero rated. A supply in the course of catering is taxable at 20%. So if your turnover increased to £80 K and the threshold didn't change, you would suddenly have to pay HMRC almost £16K in output tax which would come off your bottom line

 

[Deb3108]

With turnover below £79K, she is just under the VAT threshold. Is this because she is not declaring all the takings. Bear in mind that cafes have very little input tax as purchases of food except for some drinks is zero rated. A supply in the course of catering is taxable at 20%. So if your turnover increased to £80 K and the threshold didn't change, you would suddenly have to pay HMRC almost £16K in output tax which would come off your bottom line

Interesting that you thought it was kept below the threashold for a reason, that didn't occur to me, although we were aware it was VAT exempt. But what do you think of the asking price?

 

[Bob]

To be honest, at that level of turnover, I'd keep the money, save the worry and get a job in someone else's cafe
You've either got to defraud HMRC by not registering for VAT or any real growth in the business will be swallowed up by VAT

 

[promdressers]

Interesting that you thought it was kept below the threashold for a reason, that didn't occur to me, although we were aware it was VAT exempt. But what do you think of the asking price?

Deb, no disrespect intended, but what do you mean by "VAT exempt" ?

 

[Deb3108]

Deb, no disrespect intended, but what do you mean by "VAT exempt" ?

It means it falls under the 79K VAT threshold, you don't pay VAT on a turnover of less than that.

 

[promdressers]

It means it falls under the 79K VAT threshold, you don't pay VAT on a turnover of less than that.

Okay, it is the word "exempt" is not really the correct term, as it implied the business itself is exempt from VAT, whereas as it simply does not have a sufficient turn over.

Anyway, I have no idea of how one values a cafe business, but how much PROFIT is declared? £72K does not seem huge after taking away wages, rent and stock. Who is marketing it ?. If it is a company called RTA, then it is probably grossly overvalued, they appear to live off sign up and withdrawal fees and never seem to sell a business.

Presumably you would aim to grow the business? As mentioned, simplistically speaking, a 10% increase (to £80K) in turnover will result in a VAT bill of £13,333 so you will have to be aiming a lot higher to make it worthwhile.

Also remember that there may be undeclared working hours by the principles. You may have to pay wages for that time, or work them yourself.

Sorry to sound so negative. Good luck but scrutinise. And do it again.

 

[10032012]

Hi, I'm new to this and not very good with forums generally so I apologise if this thread is in the wrong place.
Am interested in buying a small established cafe, has been valued at 35K, my daughter already works there so we know some things about it. My husband ran a business with his dad, but they built it up and then folded it when my FIL retired so we've never bought an existing business before. So my question is do we get it valued? We've looked at the paperwork, or her excel spreadsheet and are aware we need to get an accountant to look over her actualy books. But as far as the business value, how do we know its pitched at the right level.
She has a 72K turnover, all fixtures and fittings included.

Get in valued. Get an accountant to look over the accounts. Find out how much profit it makes.

 

[Socio South West]

What are the fixed assets worth? Do you have an inventory that you can work out what it would cost to replace them? A large part of any catering business is the equipment, and you need to be reasonably sure that you aren't being sold a package of aged dilapidated gear on its last legs.

A lot of businesses will be valued according to the Gross Profit figures, and although that information is historical, it is a guide to where you will be starting out from.

The other thing that may influence the price that you haven't mentioned is the property - leasehold by the look of it: What are the terms of the lease and how long has it got to run, or will you get a new lease? Look out for the dilapidations clauses if you are taking over a lease - that is certainly worth getting a survey done for.

 

[Billmccallum]

at £35K one would assume that its a leasehold premise, how long is left on the lease? what are the rent review periods? can the lease be assigned? is the landlord aware/happy with assigning the lease or will he/she want to prepare a new lease when the current one expires?

Lots of other questions about turnover -v- profit and owner managed or staff managed etc....

 

[Deb3108]

Thanks everyone. We are arranging for an accountant to look over the books. Its a 3 year lease. The landlord is aware the cafe is for sale.

 

[accountsandlegal]

Deb, no disrespect intended, but what do you mean by "VAT exempt" ?

You have to be careful when using the word exempt in relation to VAT. If you are under the VAT threshold you simply don't have to register. VAT exempt applies to products or services that VAT is never applied to regardless of turnover such as insurance.

In this case you wouldn't say exempt.

 

[KeithGreen]

Without seeing the figures I can't be sure but a £72k turnover cafe seems overpriced at £35k. This in itself isn't a problem because all businesses are priced to allow some negotiating headroom.
I've done some back of an envelope calculations making several assumptions and I'd have thought maximum value circa £25k.
Take a look at the various "business for sale" websites for some comparisons as well, but again bear in mind my comment above about the asking price being a negotiable figure.
The warnings above about growth taking you over the VAT threshold do need to be considered very carefully, after all you couldn't simply put your prices up 20% to account for the VAT.
Yes, and be careful about the lease terms as well.
Good luck and I hope you are successful.

 

[Paul Norman]

When buying a business, you do need to do some very thorough checks to make sure you understand what you are getting. This will include a thorough review of the books of accounts, any contracts that exist, any liabilities that you will be taking on.

I am, as indicated above, interested to know what the £35k includes. With such a modest turnover, it seems a lot, unless it includes some fittings and the lease premium.

 

[Shorty-AV]

You should always get an independent advisor to value the business. They will take into consideration all the different factors unlike an accountant who will value the business simply on the financial records.
The advisor will also be able to assist you on any VAT and leasing issues that you may have.
An independent advisor will usually cost between 1 and 1.5k.
Hope this helps and good luck!

 

[splashernet services]

Do not play with VAT.

 

[Bob]

Do not play with VAT.

???

 

[splashernet services]

Most cafe business turnover nowadays are over 80k but some of them tend to declare less than that to avoid the 20% added price on their products therefore making them more expensive for the clients.
This is a double sword weapon as it might seem convenient for the time being but when the TAX man will find out you going to end up in serious trouble.