Purchasing a cafe

[Cornishmaid]

Hi everyone,

I’m taking this unusual time at home to do some research into a future business idea. Here comes a familiar topic for everyone which I am struggling to find specific answers to via the forum and other resources.......

I would like to open a cafe (I’m prepared for the onslaught and welcome real honest advice!)

I’m looking to purchase a small cafe with myself and my partner being owner-operators. This will be in a different area to the one we live in now (moving back to my home town so I know the area well) but also meaning we need to sell our home and relocate.

I am a catering/hospitality Manager and have been for 12 years and my partner is a marketing manager who has recently set up as a sole trader lending her services as a contractor to large companies and also helping small businesses develop their customer base.

Before I start getting into the nitty gritty of creating a business plan and looking for a viable business (probably not in the current climate) I would like to know how best to approach the residential and commercial mortgage side of things.

For example we want to purchase a cafe and also need accommodation. (There is an option to live with family but would rather not!) If a prospective business is for sale for 40k without attached accommodation for the owners, and we have around 50k in savings.....(I’m assuming there will be substantial legal fees involved in a purchase?)

1. Should we plough all of that money into the cafe and look at renting living accommodation separately?
2. Without having a current business model to go off would it even be viable to afford to rent or is this one expense too far?
3. If we only invested some of the cash into the business and held some back and applied for a commercial mortgage to the fund the rest. Would the fact we would be renting be taken into consideration by the commercial mortgage lender and thus reduce how much would be lent to us?
4. Do we purchase living accommodation first using some of the cash as deposit? I believe we could still gain a residential mortgage based on my partners job which can be done remotely and she can continue to do up until we purchase the cafe.

I’m not sure which carries less risk and what is more appealing to mortgage lenders. All our cash into the business or split between that and living accommodation?

Any advice is appreciated,

Nicky

 

[Clinton]

I would advise against doing ANY of the above.

If they are asking for £40K, it's probably worth £0. So you need to get them down to that price first.

Get an accountant to work out their real profit (what it would be if the owners took a proper market wage). It'll probably not be profitable i.e. worth £0.

If you think you can improve the business, then hire a solicitor familiar with these things to check it all over and prepare the documentation.

Most deals collapse during this investigation process.

So dump it, find another cafe, start from scratch, pay lawyer again.

Once you've completed on a deal then consider making whatever long term changes to your residence.

The big problems are not the "business plan". They are

a) finding the right opportunity;
b) persuading the owner to accept a fair market price;
c) doing the due diligence - legal, financial, operational - and making sure everything is kosher.

Focus on those, not mortgages, business plans or the price of bacon.

 

[Cornishmaid]

Hi Clinton,

Would you mind explaining why you think a cafe that values itself at 40k may be worth nothing?

From what I’ve read, the value of a cafe is usually based on equipment and stock. Most of the cafes I’ve looked at in the county are valued between 25k and 75k with on average a 15k annual leasehold. Does this seem unreasonable to you?

Thank you for your advice

 

[Mr D]

Probably be a fire sale of businesses later in the year. Though whether with months away from cafes people will still use them to the same degree...

Places with attached accommodation - are they as attractive when you come time to sell?
Don't just think of what suits you, think of what you may need to do later.

 

[Cornishmaid]

That’s a fair point Mr D, it’s hard to think about what the end of the business will look like when you’re trying to establish the beginning of it but it’s something I need to consider thank you

 

[Clinton]

Most of the cafes I’ve looked at in the county are valued between 25k and 75k...

Valued at?

You've seen their valuations?

Do not confuse their asking prices with value.

And if it's a self valuation, put it straight in the bin.

Find a cafe that's been on the market for a year at their own valuation and you've found a cafe where you are more likely to convince the owner his/her business is worth nothing.

Tell them that you'll do them the favour of taking the business off their hands, and taking responsibility for the lease, if they give you all the equipment and stock for nothing (subject to DD and subject to contract).

Sometimes it takes a while to get them down from £40K to £0 ... and there are ways to do that

£0. On cafes that's the kind of deal for which you need to be aiming as they are 9 times out of 10, distressed businesses generating just minimum wage for the owners.

And even the £0 deals are dangerous (because you could end up losing a ton of money once you take the business over!)

If the owner is working full time in the business then it's not really a business, it's a job.

That's fine if you want to buy yourself a job, but don't pay like you're buying a business. You're not. You're buying all the headaches and responsibility of a business but you're not buying a business.

I'll leave you to it now. Good luck.

 

[Cornishmaid]

This is really interesting advice and something I haven’t heard before so thank you for giving me lots to think about before purchasing

 

[Lynn10]

Hi,

I'm no expert on this, but I did nearly buy a cafe a couple of years ago. Before I did so, I worked in a local cafe for a few months to see if I liked it and what was involved. That cafe has now gone out of business. I think it's very difficult to be a successful cafe now that the big chains are around. You have to be able to offer something they don't. One of the comments about the cafe where I worked was that the coffee never tasted the same, people like consistency which is what they get from the chains.

The cafe I nearly went on to buy, was valued at £17k and was in a council owned building with a great lease and low rent. The valuation of the business may have been for the equipment and stock, but when I added this up using a used catering equipment website for reference, it came to about £1500, not £17,000. Also, the business wasn't making any money and the owner wasn't able to take much of a wage. I'm so glad that I got an accountant to check the figures for me, some people use creative accounting to make it seem that they have a profitable business. By the time I decided against buying it, I had spent money on a solicitor. I don't regret it as it was part of a learning curve, but please don't spend money until you are sure it's a good deal. Definitely ask an accountant first. Good luck

 

[Cornishmaid]

Hi Lynn10,

Thank you so much for sharing your experience, I’m really glad I asked on here! I’m quite surprised at how much a business can over value themselves. It seems almost the norm though to inflate the sale price.

I naively thought it would be valued in a similarly professional manner as the sale of a house for example which I have often found true to the market value. For cafes however it’s like they’re just plucking a number out of the air with the hope someone will pay it. There must be some genuine businesses for sale though surely? Did you end up investing in another business after you cleverly avoided that one?

 

[Lynn10]

Hi Lynn10,

Thank you so much for sharing your experience, I’m really glad I asked on here! I’m quite surprised at how much a business can over value themselves. It seems almost the norm though to inflate the sale price.

I naively thought it would be valued in a similarly professional manner as the sale of a house for example which I have often found true to the market value. For cafes however it’s like they’re just plucking a number out of the air with the hope someone will pay it. There must be some genuine businesses for sale though surely? Did you end up investing in another business after you cleverly avoided that one?

It's strange how some people believe their business is worth so much money. The cafe owner wouldn't lower the price even though she knew she wasn't making any money. She wanted what she thought she deserved. The other cafe I worked in briefly was for sale for £75k and it was taking about £100 a day, not even enough to pay the staff. Neither of these businesses sold for anything. I can't understand why they didn't lower the price to at least get a bit back. I think if it's a small business, the owner takes the sale very personally and not objectively. I didn't buy a cafe in the end, I bought a small online gift business which I run from home but I still have a job too. I'm also looking into investing in rental property in the near future. I'm always trying something!

 

[Cornishmaid]

That’s crazy! I’m glad you didn’t get duped. It’s hard to know when and where to invest! I will tread carefully thank you

 

[Mr D]

Hi Lynn10,

Thank you so much for sharing your experience, I’m really glad I asked on here! I’m quite surprised at how much a business can over value themselves. It seems almost the norm though to inflate the sale price.

I naively thought it would be valued in a similarly professional manner as the sale of a house for example which I have often found true to the market value. For cafes however it’s like they’re just plucking a number out of the air with the hope someone will pay it. There must be some genuine businesses for sale though surely? Did you end up investing in another business after you cleverly avoided that one?

Bit like selling a house, the valuer comes up with a figure and the householder decides on the highest one.
The actual value is what someone is willing to pay. That can be a small fraction of what the seller believes it to be worth or what someone talks them into believing.

And what the business owns can have an impact too - valuable intellectual property owned by the business or merely licensed to it? Owns its buildings or paying extortionate rent?

 

[Cornishmaid]

And Mr D does the net profit of the business come into consideration at all? I read that a business will value itself on average of 3-4 times its net profit? Is that something else entirely or is that part of how they come to the sale figure of the business?

 

[Darren_Ssc]

My office is located in a small market town which is basically just hairdressers and cafes - all closed now of course.

I'm thinking most will be either for sale or just go out of business in the near future. Some will have unrealistic expectations regarding value based purely on emotions and past numbers. I think the ones to look out for are those who are realistic and just want out of current commitments rather than to salvage some profit.

The problem where a single individual or couple owns a business is that they have a lot of time and effort invested into it and it is hard to stand back and be objective when that time and investment has come to nought.

 

[Cornishmaid]

I can totally see now how they can skew the value of their own business. Does that however mean that no cafe is worth little more than the value of their second hand equipment? How do people sell their business to turn a profit if this is the case? (Not that it’s my intention to have a short term goal like that)

 

[Mark T Jones]

I can totally see now how they can skew the value of their own business. Does that however mean that no cafe is worth little more than the value of their second hand equipment? How do people sell their business to turn a profit if this is the case? (Not that it’s my intention to have a short term goal like that)

What you are talking about is basically goodwill, in other words, to what extent existing customers are likely to return

Assessing this is probably the least reliable art n business. Every business owner in the history of business will over- value their own goodwill.

A MacDonald’s for example will have a fair amount of goodwill because most of their clients go there because it is a macdonalds plus they will have put a lot of work to not selecting the right location. Additionally there is a lot of historic precedent

In independent on the other hand will have no precedent - the extent to which customers will return will depend on many factors. If they go because they like the owners, or the chef is brilliant then it is highly vulnerable. If they go because the location is unique and 5he food is OK and consistent it should be far more reliable - these are just examples of the kind of things you want to understand

 

[Cornishmaid]

Thanks Mark, I’ve heard goodwill mentioned a few times but haven’t read up on it yet. I’m wondering at this point if it is in fact simpler to start from scratch (albeit more expensive)

 

[Mark T Jones]

Thanks Mark, I’ve heard goodwill mentioned a few times but haven’t read up on it yet. I’m wondering at this point if it is in fact simpler to start from scratch (albeit more expensive)

There are any number of variable. It can be far more cost effective to buy an ongoing business if you do your homework, however if you buy from scratch you have less area for doubt


Not an exhaustive list (others may add to it) but considerations might be

Location
Repeat business / reputation (as above)
Equipment - fit for purpose / age and condition / service history / outstanding finance
Staff - TUPE
Premises - lease terms, condition, layout, fit for purpose

 

[The Byre]

1. The smaller the business the higher the risk!

2. Take the cost of a proper wage for the owner-operators into account when calculating profit.

3. Goodwill is not equity. It's just a hope that things will stay the same (they never do!)

4. Stock and equipment must always be valued at the current used price NOT replacement price.

5. Ask why they are selling. No! Don't ask them, ask yourself! Tip - you won't like the answer!

6. A lease is a liability! Staff are a liability! They should pay you for taking on their liabilities!

7. A microbusiness is worth its equity and nothing else.

8. Equity includes receivables, stock if saleable, equipment, cash and above all THE BUILDING.

9. Due diligence is important and includes a history and credit check for everyone involved.

10. There will be a firesale of business premises soon. Keep your powder dry for that opportunity!

And finally read this lot - https://blogs.imf.org/2020/03/30/europes-covid-19-crisis-and-the-funds-response/

 

[ecommerce84]

Do you watch Dragons Den? People on their vastly over value their businesses almost every time.

Also a lot of the business sales agents at the lower end seem to pluck a number out of the air when it comes to valuations, and will usually go high to get the client ok their books.

Most people want to believe that what they’ve worked hard at for years (despite earning less than minimum wage for most of it) is worth something so when someone in a suit that talks the talk tells you it’s worth £17k you cling on to that in the hope that someone else will believe it is too. And of course that fuzzy feeling of your hard work being worth £17k is hard to let go of.

 

[JEREMY HAWKE]

@Cornishmaid I am assuming that your looking at a start up in Cornwall .
You should really take note of what @Clinton is saying it is the best free advice you will get and he is somebody I have been taking note of on these subjects for over a decade

If you are in Cornwall I have good local knowledge and many customers there . In addition to this family and my names is Cornish !

Knowing what I know. I would forget about the site you have in mind I would get a business plan with the unusual view of not knowing the location if possible ! With the funding you are talking about you could start up in some of the more popular footfall locations .
When this madness ends there is a good chance that existing businesses may just have packed up and you would be in a better position to way up what is available .
I would be looking at a see front or harbour location as it could well be a couple of boom years for tourist operators here as customers decide against going abroad

 

[Alison Moore]

£40k seems like an awfully high valuation for a cafe. Work out how much you'd need to make (i.e. profit after you've taken out cost of the food and supplies) in order to cover realistic wages, rent, rates, utilities etc and then see how much money is left over to be able to 'pay back' the £40k. It will give you an idea as to how much you'd need to sell every hour you are open. There are so many empty premises at the mo (and will be loads more by the end of this) you'll more than likely be able to find an empty cafe that you can move into, without having to pay £40k.

 

[BusterBloodvessel]

It's refreshing to actually see a poster on here being receptive and taking on board what is actually being said to them!

Along with the questions mentioned above (e.g. ask yourselves why they are selling)....one thing I've always said is ask yourself "what could I do it for?".

We looked into buying a cafe near us - it was taking an average of £200 - £250 a day, £300 - £350 was a good day. The owner cheerfully told us it was on the market for £50k but she would take £40k for a quick sale. Yes, she had done the usual of a quick valuation on Daltons or similar!

Back to my "what could I do it for" - well if we got a similar size shop in the same row we could buy the similar second hand equipment that she had, and renovate the shop ready to open for around £10k. SO...what are we paying £30k for? Quick with no hassle - sure, but a shop can be turned round ready to go in 4 weeks as long as you're prepared. A customer base? Yep, of course - but in that line of work that £30K is A LOT of money to use for marketing. Hell, £5k in that line of work would be considered a lot whether it's leaflet drops, free meal giveaways, discount vouchers, BOGOF, "any sandwich for £1" etc etc etc - just to get people through the door and aware that you're there.

So - I could probably get a similar shop, similar equipment, and grow a customer based pretty quickly for £15k.....so what's that remaining £25k for?

N.b. - The particular cafe we looked at didn't get a quick sale....they eventually got a sale for a rather disappointing (for them) £8k paid over 12 months.

 

[Financial-Modeller]

A couple of thoughts to supplement the excellent information already provided...

You haven't mentioned where the cafe is, but if its on the coast, and will appeal to tourists, remember that you also need to operate profitably for the 8/9 months of the year when tourists will be absent. A queue of customers ordering frappacinos over August Bank Holiday weekend is different to trying to coax locals in on a wet Wednesday afternoon in February!

...I’m quite surprised at how much a business can over value themselves. It seems almost the norm though to inflate the sale price.

I naively thought it would be valued in a similarly professional manner as the sale of a house for example which I have often found true to the market value. ...

Valuation is a huge subject but in this instance it will come down to you persuading the vendor that its worth less than they say it is, the vendor persuading you that its worth more than you think it is. If there is an overlap, you can agree terms. If not, you won't.

As a valuation analogy, buyers and sellers buy millions of identical shares in Apple and HSBC every second, placing an order to transact at a given price. With so much liquidity, the price is set to the cent/penny, and is publicly visible. The large property websites, will show several similar houses for sale in a housing estate at the same time, with historical prices publicly available. Buyers can quickly and easily agree an approximate value and are likely to make offers within a couple of thousand pounds of it. A unique cafe in a unique location is harder to place a precise value upon. Various methods will produce a range of values, but in the end it comes down to whether you want to buy it more than the vendor wants to sell it.

Finally, if you aspire to own a home, and are considering investing 100% of your savings into the cafe, calculate how much greater your net income will be from owning the cafe than simply working for somebody else (in a cafe perhaps), and how that will affect your ability to save a deposit for a home and service a mortgage.

As simplified examples, buying the cafe for £40k, and making £80k per year more than your alternative earned income, would enable you to recoup the £40k in six months, and service a higher mortgage. Buying the cafe for £40k and earning £1k more could keep you renting for at least 40 years!

 

[DontAsk]

Back to my "what could I do it for" - well if we got a similar size shop in the same row we could buy the similar second hand equipment that she had, and renovate the shop ready to open for around £10k. SO...what are we paying £30k for?

What if the planners will not grant change of use for another cafe? How much is that worth?