Due-diligence checklist for buying a Cafe

[RichardinDorset]

Any advice on what to look out for and ask about when buying a cafe business?

So far I have:

1. If leasehold, will the landlord re-assign the lease? Will they want a huge bond?
2. Is the asking price less than 3 times the owner’s benefits.
3. Can the actual owner’s benefits be proven. (how much undeclared benefit is there?)
4. Is the rent less than 10% of the turnover?
5. Is the wage bill less than 25% of the turnover?
6. Is the food/goods cost less than 30% of turnover?
7. Are all food hygiene inspections up to date?
8. Are all unpaid bills disclosed?
9. What are the current staff's employment packages and when where they last reviewed?
10. What promises have been made to staff?
11. Is the owner going to setup elsewhere?
12. Is the kitchen equipment all working and reliable?
13. What on going arrangements/deals have been made with suppliers?
14. How long is the lease and when does it get reviewed?
15. Check previous 'history' such as past hygiene issues etc.

 

[Philip Hoyle]

Also:-

1. Check what equipment is on hire/lease, i.e. tills, kitchen equipment, fridges, freezers, credit card terminals, scales, etc.
2. Check status of burglar and fire alarms/protection - again check if hired/leased, but also check for ongoing service/maintenance contracts for fire extinguishers, alarm systems, etc.
3. Find out about waste - how much does it cost to remove - are they under contract - how long are you tied into the contract - are levels of wastage reasonable or do they throw away too much or too little.

Whilst your financial indicators are useful, you can't trust the accounts presented to you. Even if prepared by an accountant, there'll be the disclaimer "prepared in accordance with the information provided" - they won't have been audited.

To get around this, you need to do some digging. Ask to see the VAT returns for the last 2/3 years and check the figures agree with the accounts presented to you. Ask to see suppliers statements/invoices to prove how much they spend on food/drinks - again, does it fit in with the annual accounts. Check the payroll records for the same. Check overheads - ask to see invoices for rates, power, and any other large costs. Far more importantly, though, sit outside/inside and count customers, how much they spend on average, and extrapolate to see if the turnover per the accounts is achievable from what you've witnessed. You need to know their accounts (P&L account) like the back of your hand and have proved to yourself that all the big figures are right.

 

[RichardinDorset]

Thanks Philip. I'll add you comments to my checklist.

The art does appear to be in building a 'real' picture of profitability. This is especially difficult when the owners can take cash out of the till directly to bypass the taxman...

We have monitored the place at different times of day etc.

Currently it's managed by salaried staff.

We're looking for something to to invest in which will provide a moderate return (5-10%) and will provide some diversification. It would ideally cover the initial investment in around 5 years too...

 

[webgeek]

Though it may not seem like a big deal at the moment, stipulating the intellectual property that is currently in use, to be included in the sale.

Things like the branding, website, marketing collateral, social media accounts, review site accounts, etc, etc, etc. There's a host of IP that can make life much easier (or difficult), depending on whether it gets included in the deal.

We had acquaintances buy a B&B, only to find that they didn't stipulate they kept the name, and the previous owner "took it with them"!!!