Buying an existing cafe

[Brandon3002]

Hi everyone,
I’m new here and would like some advice.
I’m interested in purchasing a local cafe (purchase price is £55,000) in a popular village with not too much competition other than a local, very busy costa. My issue is with the purchase price. There is 4 years left on the lease, and the current owners have only been operating for 4 months, (current owners didn’t realise the work involved) I believe it is currently breaking even. I would make it work as I have many years of managing successful cafes but it’s my dream to own a cafe. I don’t want my dream to overshadow the reality. I don’t require finance, but I find the price hard to swallow when the business isn’t established and I will be the one building it up? So my question would be, is £55,000 too much money to essentially take on a 4 year lease?

Side note: it is a popular village and commercial properties are hard to come by!

Thanks in advance

 

[Mark T Jones]

Only you know the answer to your question - and you basically answered it

Some will argue that a lease is actually a negative premium. A liability rather than an asset.

What are you actually buying and what is it worth to you?

 

[MOIC]

What are the terms of the lease and can it be transferred to you?

Have they had any offers that you're aware of?

If any of the fittings and appliances are worth anything to you, offer the second hand value of what you think they're worth.

If they're breaking even, they'll want out sooner, rather than later.

 

[Paul Kelly ICHYB]

Are you buying the business (ltd co) or taking things over?

If the current owner does not want to work there, if you cover (some of) their investment (fixtures and fittings) and take over the liabilities, you would be doing them a favour.

You need to see some form of accounting, at least what the costs are and the sales. Then speak to an accountant.

Does the £55k cover the lease for 4 years, or is that additional?

 

[BobzYourUncle]

Is the cafe kitted out with new equipment? Or is is running on old equipment from the previous owners before them. Not cheap to buy commercial fridges, ovens and cookers if they on their last legs, unless they are leased. If they are leased. Your paying alot for a business that doesn't have any goodwill or equipment. After 4 years do you have to pay another sum to renew the lease . How much is the weekly rent ? Is it up for rent review soon? Look at the running cost.. especially energy and stock cost aswell staffing. What percentage of your projected turnover will this take. We have a friend who has a cafe in Hampshire makes £5k per week. Rent is £250 per week its breaking even . Before it was making profit. Energy cost is their biggest culprit its a largish cafe.

 

[The Byre]

Some will argue that a lease is actually a negative premium. A liability rather than an asset.

And I am one of those 'some'!

I believe it is currently breaking even. I would make it work as I have many years of managing successful cafes but it’s my dream to own a cafe. I don’t want my dream to overshadow the reality.

As Mark says, you have answered your own question!

As this cafe has no meaningful trading record, it can only be worth its assets minus liabilities. If it is only breaking even and the equipment is old, then it has no assets. The cost of that lease is a liability. I would also look carefully at the terms of that lease - it may be due for an RPI-indexed hike!

My wild guess is that the present owners got suckered into opening a cafe and now are trying to dump their losses onto someone else! The reality may be that they are going to have to walk away from this turkey anyway.

There is a recession coming, so keep your powder dry for when you will be able to pick up failed projects for little or nothing!

 

[DoolallyTap]

What are you purchasing for 55k, a kettle and some tables and chairs, cannot be goodwill or established business after only 4 months. Go back and tell them their valuation is total rubbish, you are prepared to take the lease over so they are not liable but other than that just wait for them to give up and then reopen up at negligible cost.

 

[Brandon3002]

Are you buying the business (ltd co) or taking things over?

If the current owner does not want to work there, if you cover (some of) their investment (fixtures and fittings) and take over the liabilities, you would be doing them a favour.

You need to see some form of accounting, at least what the costs are and the sales. Then speak to an accountant.

Does the £55k cover the lease for 4 years, or is that additional?

I would be taking things over.
I have asked for costs and sales since they took over and am waiting for them to get back to me with them.
The lease is an additional 12,000 pa

 

[Brandon3002]

Is the cafe kitted out with new equipment? Or is is running on old equipment from the previous owners before them. Not cheap to buy commercial fridges, ovens and cookers if they on their last legs, unless they are leased. If they are leased. You’re paying alot for a business that doesn't have any goodwill or equipment. After 4 years do you have to pay another sum to renew the lease . How much is the weekly rent ? Is it up for rent review soon? Look at the running cost.. especially energy and stock cost aswell staffing. What percentage of your projected turnover will this take. We have a friend who has a cafe in Hampshire makes £5k per week. Rent is £250 per week its breaking even . Before it was making profit. Energy cost is their biggest culprit its a largish cafe.

Thanks all for the replies, it has confirmed what I first thought. I have looked at the equipment and a lot will need replacing and work will need to be done in the cafe. Coffee machine is leased. Weekly rent is £250 and will be reviewed in 2 years time. It’s a small cafe, but even so, energy cost is a huge worry.

 

[m4hmo]

Another cafe, great, please be different if you go down this road, please don't use the same cheap sausages everyone else uses. Please use organic eggs. And the rest.

 

[Mark T Jones]

Thanks all for the replies, it has confirmed what I first thought. I have looked at the equipment and a lot will need replacing and work will need to be done in the cafe. Coffee machine is leased. Weekly rent is £250 and will be reviewed in 2 years time. It’s a small cafe, but even so, energy cost is a huge worry.

Without committing to anything, you could start working some detailed projections using the knowledge and information you have gained.

My personal view is that you can actually build a business plan around properly researched projections

 

[BubbaWY]

Bought a cafe in January 2020. Typically, just before lockdown so it failed before we had a real chance to make a good go of it. (There were other factors around why we ended up selling it once restrictions were lifted).

Id say the valuation sounds ridiculous especially as there is no trading history. In effect you would be blindly spending £55k on something which may or may not see a return. The only assets are the cooking equipment and furniture. There is no goodwill to the business.

As for the lease, it will no doubt come with a personal guarantee. So if you buy the business and it fails within the first year, you are still going to be liable for the rent. Even if you manage to sell it on, you could still be liable for the rent (if the lease is reassigned, rather than a new one issued, which I believe is usually the case).

I think you need to do some serious negotiations and revisit what you would be getting for your money i.e. try and put a value to the equipment you would be buying. But try put to the back of your mind your dream of owning your own cafe. It needs a serious, sensible appraisal and decision before parting with your cash.

 

[BubbaWY]

I forgot to ask...is the cafe currently registered for VAT under its current ownership? If not, then I cant see how it is doing the turnover to justify the sale price, regardless of what equipment it comes with.

 

[Lisa Thomas]

I haven't read all the replies but if it's only just breaking even and energy prices are about to soar yet again in March, this is not a risk I would want to take, despite how tempted you are.

Definitely ensure you pay good accountants and solicitors to carry out proper due diligence if you are determined to consider taking this forward.

 

[The Byre]

I don’t require finance, but I find the price hard to swallow when the business isn’t established and I will be the one building it up? So my question would be, is £55,000 too much money to essentially take on a 4 year lease?

As the lease is due for review in two years' time, that makes it a two-year lease.

The coffee machine is leased??? What sort of idiot leases a £3k coffee machine??? (I shall now go and renegotiate the lease on my socks!)

You will have that £55,000 in a year from now, so as I stated earlier, keep that powder dry. Opportunities during recessions are like a convoy of number 17 busses - you wait for ten years and then five come along all at the same time. These people will be out of business soon and you can talk directly to the landlord - or just buy the building!

 

[HFE Signs]

I appreciate you are giving goodwill to the opportunity and location but first and foremost what is included in the £55k aside the goodwill?

 

[GraemeL]

There is nothing about this cafe that I like. Outlay £55k AND 12k a year for 4 years, thats 100k and you do not even own the premises after the lease ends.

 

[Paul Kelly ICHYB]

I would be taking things over.

So you have to essentially start from scratch, unless the current owner keeps the liability for the rent (plus guarantee) and you pay them!

Assuming it is still open and trading, stand outside it for a few days and count the customers going in. Without accounts, this is the only way you will be able to assess the current business.

 

[Brandon3002]

It is VAT registered and I would say the equipment wouldn’t be worth any more than 10k. I believe she’s based the valuation on the location. I will definitely have another conversation with the owner and am more than happy to bide my time due to recession on the way and I am in no rush. Thanks again for all your helpful replies. Again, it has confirmed all my feelings towards this “opportunity”

 

[Clinton]

I believe she’s based the valuation on the location.

A valuation based on location. That's hilarious ?

What's she smoking? Can I have some, please?

Unless she can find a complete idiot somewhere, nobody is going to pay her £55K.

Here's what you do: Offer her £10K for the equipment and tell her you you won't charge her for taking on that huge liability that is the lease. Give her 7 days to decide. She'll get back to say no.

Contact her in six months and say you'll renew the offer but only at £5K. Again, give her 7 days. If she says no, go back to her in another six months. Offer her the same deal but with the price revised to £0.

She'll sell it to you for £0.

 

[Mark T Jones]

A valuation based on location. That's hilarious ?

What's she smoking? Can I have some, please?

Unless she can find a complete idiot somewhere, nobody is going to pay her £55K.

Here's what you do: Offer her £10K for the equipment and tell her you you won't charge her for taking on that huge liability that is the lease. Give her 7 days to decide. She'll get back to say no.

Contact her in six months and say you'll renew the offer but only at £5K. Again, give her 7 days. If she says no, go back to her in another six months. Offer her the same deal but with the price revised to £0.

She'll sell it to you for £0.

Beautifully summarised

Possibly time to close the thread on a high?

 

[Solvelaw]

Get it properly valued taking into the account that even if there is a renewable lease, that there is grounds where landlord can legitimately oppose the renewal. I would say that if you do buy part of the deal is that existing lease is surrendered and new longer lease with break clauses agreed. It is more work but better to have a surer foot that a loose foot. You also need access to figures and bank statements as if there is a failing business then you are taking a headache. Perhaps a walk around village to gauge activity and footfall.

 

[BubbaWY]

And also do some research i.e. Google/Trip Advisor reviews. Does it have a good reputation or is it poor, etc.

 

[DontAsk]

Visit the village, stop people in the street and ask if they can recommend a cafe nearby. See what answers you get.

 

[bodgitt&scarperLTD]

Unless she can find a complete idiot somewhere, nobody is going to pay her £55K.

In the pub and restaurant trade, idiots are ten a penny.

Our local tearoom changed hands at the start of Covid. Very similar scenario- five year lease, £22k/yr rent, asking £80k. For what exactly? I went to quote some work there for the new owner (she couldn't afford me btw). Asked a few questions- she paid full asking. Literally as hospitality businesses was being shut down, she paid full asking price for a lease- a liability.

The whole industry relies upon starry eyed couples buying a worthless asset from other previously starry eyed couples. OP, don't be them.

 

[Sil_14]

If it's the premises you're after, as you've stated that commercial properties don't come up often in this area, then focus on the lease. Hire a solicitor to look at it and advise you on various possible scenarios to take over. If their business is failing and there're 4 years left on their lease, it will end up costing them more that 55k in rent, rates, utilities, not to mention the rent review in 2 years... If you believe that you can turn this business into a profit (assuming you've done your research etc) find a legal way that works in your favour to transfer the lease onto your Ltd. And bear in mind that given the current economic context, and despite a seemingly tight lease, everything is negotiable but expect additional costs ie. landlord's solicitor's fees for issuing a new lease, your own solicitor for the completion, financial guarantees etc. But in no case should you pay a dime to the current tenants as you would basically, as said above, taking that liability off their shoulders.

 

[Mark T Jones]

In the pub and restaurant trade, idiots are ten a penny.

Our local tearoom changed hands at the start of Covid. Very similar scenario- five year lease, £22k/yr rent, asking £80k. For what exactly? I went to quote some work there for the new owner (she couldn't afford me btw). Asked a few questions- she paid full asking. Literally as hospitality businesses was being shut down, she paid full asking price for a lease- a liability.

The whole industry relies upon starry eyed couples buying a worthless asset from other previously starry eyed couples. OP, don't be them.

Sad but true

Fortunately the OP is less starry-eyed!

 

[SillyBill]

In the pub and restaurant trade, idiots are ten a penny.

Our local tearoom changed hands at the start of Covid. Very similar scenario- five year lease, £22k/yr rent, asking £80k. For what exactly? I went to quote some work there for the new owner (she couldn't afford me btw). Asked a few questions- she paid full asking. Literally as hospitality businesses was being shut down, she paid full asking price for a lease- a liability.

The whole industry relies upon starry eyed couples buying a worthless asset from other previously starry eyed couples. OP, don't be them.

It is quite ironic also that these businesses are probably the most time intensive and the most demanding of a hands on approach from their owners too. That people enter with a dream of "escaping" the rat race to open a cafe/restaurant is plain scary when you know even a hint of what'd be involved to make it work. I have run mid sized chemical businesses and yet even I'd be scared of from what these businesses entail, must be a massive wake up call and culture shock for a large % of them.

 

[BobzYourUncle]

Just went on Daltons commercial business agents to nosy at what's on offer. Over 2000 cafe's for sale plenty to choose from. But I just can't get over some of the ridiculous sums alot are on sale for leashold wise. Theres so many examples but this one stands out the most. Cafe advertised at £85k for 4 years remaining lease, located somewhere in Hove. £9,500 ( £177 approx per week) rent. It does £1k per week turnover. Has 1 full time and 3 partimers. Rent renew due in 2024 wherby it will go up to £10,500 per annum.
Just the rent and staffing cost alone must account for nearly 50% of its turnover?? Not even factored in stocks or utilities etc..
Have no idea what these busineses are basing their valuation on. But it's just crazy bonkers.

 

[Lucan Unlordly]

£1000 over lets say a 5 day week, £200 a day = just 20 all day breakfasts. Doesn't sound right even in the worst case scenario?

 

[bodgitt&scarperLTD]

Just went on Daltons commercial business agents to nosy at what's on offer. Over 2000 cafe's for sale plenty to choose from. But I just can't get over some of the ridiculous sums alot are on sale for leashold wise. Theres so many examples but this one stands out the most. Cafe advertised at £85k for 4 years remaining lease, located somewhere in Hove. £9,500 ( £177 approx per week) rent. It does £1k per week turnover. Has 1 full time and 3 partimers. Rent renew due in 2024 wherby it will go up to £10,500 per annum.
Just the rent and staffing cost alone must account for nearly 50% of its turnover?? Not even factored in stocks or utilities etc..
Have no idea what these busineses are basing their valuation on. But it's just crazy bonkers.

But it’s got so much potential!

 

[Mark T Jones]

Just went on Daltons commercial business agents to nosy at what's on offer. Over 2000 cafe's for sale plenty to choose from. But I just can't get over some of the ridiculous sums alot are on sale for leashold wise. Theres so many examples but this one stands out the most. Cafe advertised at £85k for 4 years remaining lease, located somewhere in Hove. £9,500 ( £177 approx per week) rent. It does £1k per week turnover. Has 1 full time and 3 partimers. Rent renew due in 2024 wherby it will go up to £10,500 per annum.
Just the rent and staffing cost alone must account for nearly 50% of its turnover?? Not even factored in stocks or utilities etc..
Have no idea what these busineses are basing their valuation on. But it's just crazy bonkers.

Dreamers and nutters. I deal with it on a daily basis.

The OP has excluded themselves from that category by immediately back-pedalling on the 'dream', asking a good question and listening to the answers.

For every @Brandon3002 there will be 10 others who will steadfastly ignore advice and will continue to sell themselves the brilliance of their (non) plan.

In finance terms, its pretty easy to eliminate most of the dreamers and nutters - simply request hard, factual information and enjoy the silence

 

[Mark T Jones]

But it’s got so much potential!

Hospitality business plan killers:

Potential
People person
Great cook
Hard working.
Passionate

And, still topping the charts

DREAM!

 

[Lisa Thomas]

I see the same with pubs. People get redundancy money and use it to buy a pub then fritter their life savings away. I've seen two different companies recently who bought pubs for their children and had to liquidate, losing everything when it didn't work out.

 

[Mark T Jones]

I see the same with pubs. People get redundancy money and use it to buy a pub then fritter their life savings away. I've seen two different companies recently who bought pubs for their children and had to liquidate, losing everything when it didn't work out.

In the old days it was ex-services and ex-coppers.

 

[Paul Kelly ICHYB]

The whole industry relies upon starry eyed couples buying a worthless asset from other previously starry eyed couples. OP, don't be them.

This is my quote of the month!

 

[Mark T Jones]

In the pub and restaurant trade, idiots are ten a penny.

I've no idea how valid the actual stats still are, but the principle will remain -10 years ago, from a senior ex-pubco employee

' The average start-up couple will look at no more than 3 opportunities, of which they will fall in love with at least one.

From that point, it isn't a question of selling the opportunity, it's a question of forcing them to stop and think'

 

[MBE2017]

The whole industry relies upon starry eyed couples buying a worthless asset from other previously starry eyed couples. OP, don't be them.

This quote could just as easily apply to ******.

 

[Mark T Jones]

This quote could just as easily apply to ******.

Far less effort and stress!

 

[Clinton]

When buying a cafe, the starting point should always be, "I'll buy a coffee and you throw the cafe in for free".