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Purchasing an already running cafe

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  • Purchasing an already running cafe

    Hi All,

    Looking for some pointers from current cafe owners or small business savvy members.

    A long running but tired cafe is up for sale in my local area. Seats about 35, the decor is pretty awful but the location is very good. It's been a constant dream of mine for a few years to run my own cafe and this is looking like, without yet committing much time/resources, to tick a few of the boxes.

    My question is this, I'm going to pick up their financial statements today to see if it's even a viable purchase and wondered what things, cafe specific, to look for. I'll be reviewing these with a few personal friends (accountants and one very successful entrepreneur) some of who are in the service industry, but none are cafe/restaurant specific.

    Any heads up on particular things or anomalies you think I should look for would be appreciated. I know my post count isn't high here, I'm a reader not a poster, just hadn't had much to contribute here yet - just want to assure you I'm not a clueless idiot who thinks that cos Pachino likes Vittoria it must be great so now I need a 6 'head' synesso like St Ali to make cup-of-cheenos.

    Me looking at their financials is simply an "ok, is this even possible for me to think about?" .

    Appreciate your time and help.

  • #2
    prlorling, I have absolutely no idea what to look for, but I am sure interested in how it goes! Keep posting as things progress!


    • #3
      I have been in the industry (chef) for 20 years now and have owned 3 bussiness. My wife and I have just bought a small run down cafe/ milkbar to build up. I can tell you of the many pitfalls first time owners get caught out with. Ok the lease is number 1 what are the terms? Rent will be one of your biggest outgings and will be the first thing you fall behind in if your not makeing money. Are you going to serve food? Heath inspections when was the last one done are there any out standing issues is there a food safty program is there a food safety superviser? If you are serving food you might need a grease trap you will need to know if there is one if not you could be up for big $$$$ depending on local laws. Equipment who owns what is anything leased usualy coffee meachines and grinders belong to the coffee brand being used not the cafe owner. if any equipment is leased there will be pay out figurs which are usualy over priced and not worth owning. Staff If you are taking over a cafe with exisiting staff and you have no experince beware these guys will know your green and walk all over you. You will come up agenst thing like "we've never done it this way before" generaly it's cheaper and easier to start from scatch with staff. You will need a good lawyer he or she will be more of a guide to the take over and make sure you don't loose your shirt. If you would like to have a chat please PM me your phone number and I can go into detail on more points you might find help full


      • #4
        As mentioned in a similar thread, tell the vendor you want to spend a month in the business working along side him or her before committing. That way you know what you're in for. Many people do this before buying an existing business.


        • #5
          Existing / running cafe = you will be paying good will.

          To pay the good will, the business the vendor says is there, has to be there.

          If they wont let you work in there for atleast a couple of weeks BEFORE settlement walk away. Anyone that wont let you in until after settlement has something to hide.

          Sit across the road for a few days before they let you in and check the number of clients coming and going.

          Keep your wits about you. I know some people that worked in cafes beforehand and still got done big time to a point where I believe they would have had a case for a legal challenge. Meaning they were working in there but not looking at the details they should have been checking. Its not hard....check simple stuff like weekly invoices for coffee against cup sales turnover. Regular checks of the stock room, noting daily stock movement.

          2 of the oldest trricks in the world that newcomers still get caught on:
          A) Vendor buys a lot more coffee supply than the cafe uses, and syphons it "out the back door" through the week making it look like the turnover is higher than it is
          B) Vendor places cash INTO the til before counting the takings at end of each day.

          These are a little harder to do in cafes that have computerised systems in place but easy to do in those that dont. Amd also in cafes that use computerised systems, you have to be savvy enough to check what the figures will tell you and not just "work" in there to look the place over. You need to look at the figures daily.

          PAY professionals for advice on the figures please.

          And dont pay big bucks to someone that may be ripping you off. By all means pay big bucks, but pay it for genuine business.

          Lastly. Make sure you really really really want to do this. Look at the hours, extra hours to admin, how flexible will it be for you (how tied to it will you be), is the return worth it etc etc etc etc etc/. Its not your "private club" as some people seem to think, you have to work it so it can take care of you.


          • #6
            Purchasing an already running cafe

            Originally posted by Fresh_Coffee View Post

            2 of the oldest trricks in the world that newcomers still get caught on:
            A) Vendor buys a lot more coffee supply than the cafe uses, and syphons it "out the back door" through the week making it look like the turnover is higher than it is
            B) Vendor places cash INTO the til before counting the takings at end of each day.
            Putting money into the till is such a cheap way of inflating the value of a business. Let's say I own a cafe that makes a genuine $80k profit each year. But each day I top up the till with $100 of my own cash. Now I have a cafe that makes about $113k net profit, after paying gst on the $100.

            To keep the unsuspecting purchaser in the dark on my scheme, I fully declare the takings on my BAS, which means I have to pay tax on the $33k I put through the business. But as I paid for professional advice at the start, my accountant got me to set up the cafe through a trust, so that $33k profit is distributed to my wife who doesn't work, so she pays about $3k tax.

            All up, including the gst I paid, there's a net cost to me of about $6k in cash, to inflate the value of my business by how much?

            Unless you're a very experienced cafe owner, you won't spot this by looking at coffee and other purchases. But you can get professional advice from others who might. Alternatively you can camp inside and outside the cafe for days on end to monitor their sales. Or indeed do both.


            • #7
              Fair enough Jonathon, but why wasn't your wife taking a distribution from the trust out of your genuine $80k profit in the first place? In which case your net cash cost is a little generous.....but overall point taken.

              Many years ago I worked for a 'survey consulting' firm. A fair bit of our business involved gathering data on retail outlets *before* a prospective buyer spoke to the vendor. We'd have people with clickers counting footfall going past, and into the premises in question, and also at nearby competitors (if relevant). In the case of cafes, we'd do this during the morning rush and at lunch. Gives the prospective buyer a bit of a BS filter in advance.


              • #8
                Well, the point of it is, people that dont do their *due diligence* can get taken to the cleaners big time, and I've seen it done big time to newcomers buying into a cafe, that have come from an unrelated background. And when they go down they take their suppliers with them in one way or another.


                • #9
                  I once knew someone who had started and sold several businesses. He claimed that he kept three sets of financial records. One set for himself, one for the Tax Department and one for prospective buyers of the business. What you could call creative accountancy.



                  • #10
                    Thanks for all your responses - much appreciated.

                    I have already planned to do a foot traffic stake out and have certainly planned on working there with them before settlement.
                    I've picked up the financials now and it doesn't make much! "Surprise surprise", "welcome to the cafe industry" I hear you say, point taken, but then when I look at food/service/atmosphere/opening times there's a reason its not a high achiever and I would plan to change a lot of that from day 1.

                    If they are fiddling the books they're not making it look very good, but I guess they could be taking if from red to black...
                    I still need to understand the business setup (ie. whether he's collecting the profits or if he's included in the payrol) and which if the workers are family and working for "free"
                    The rent is costs are good, as confirmed by a commercial estate agent friend, but I don't know the lease terms yet.

                    As for the commitment, I already work my butt off, so doing it for something that's my own would be all the more worth it. I don't want to change the cafe world or be a millionaire (wouldn't hurt though..), I just want to serve great simple food, great coffee with good honest service in an environment people want to be in.


                    • #11
                      From an economics point of view you are buying the future income stream from the business.

                      what sort of return you think is reasonable for your investment is a personal thing.

                      but if you can get 5% by having your money in the bank with virtually no risk you would need to make more to allow for the fact there would be some risk.

                      do you have the skills to run the business?

                      I don't know but making coffee and simple meals will only be some of the skills you need.

                      if you are thinking of changing things goodwill may be worth very little as the present customers may not like the changes you implement.

                      there will be non-monetary rewards from running a business these can be very personal and hard to put a value on.


                      • #12
                        Hi Prioring,
                        With regards to the business.....
                        "I still need to understand the business setup (ie. whether he's collecting the profits or if he's included in the payrol) and which if the workers are family and working for "free""..... I could be wrong but the owner/partners of a small business enterprise do not usually take a wage out of their profits, they usually receive profits and/or equity after all is said and done on the income statement. If the owner takes a wage they are adding a fare sum as percentage of COGS which will make the profitability on their goods lower as a percentage. It is also, I believe, more tax effective not to take a wage and then profits as accountant with small business experiemce reading this may know the answers.

                        Legally, the only people who work for "free" in a small business are the owners......before they collect profits of course. Someone who actually does this for a living may be able to shed more light on this though. Although, I'm sure family members would work in most businesses for their supper so to speak.

                        Good luck in your potential venture.
                        Regards, Mariner.


                        • #13
                          Re: Purchasing an already running cafe

                          Dont think that is correct. Some small business owners pay themselves a wage. It may depend on the type of enterprise it is?


                          • #14
                            Purchasing an already running cafe

                            Some may do. I don't know. I have only previously worked in larger organisations. As I said, an accountant who specialises or someone who works in the industry would know better.

                            My accountant advised me not to include wages in my COGS as it would be far more effective to take income out of net profits not gross - in essence out of what was left over. However, this is easier said than done, the business owner must be in a position where they have another income source, or sufficient capital/overdraft to keep them personally afloat while the business is still in a start up or take over position with heaps of outlay (i think it is safe to say that even with an already ongoing concern there will still be large initial outlays on PPE) and not much income otherwise they may have no choice but to take a wage to pay their personal bills and expenses etc.

                            Thank you Mr Jack for your expert commentary. It all adds to the mix to inform the person seeking advice. We have a heap of sponsors here who may be able to assist.....

                            My main advice it look at the books, P&L statements, Balance Sheet. But most importantly the CF statement. Cash is king and it is hard to fudge cash. But even more importantly take the book figures to your accountant and if you can't or it doesn't look quite right walk away. People don't sell gold mines that are full of gold!!

                            Good luck.
                            Regards, Mariner.


                            • #15
                              Re: Purchasing an already running cafe

                              Not an expert at all; I simply know of at least one business where the owner pays himself a wage.