Running a café may seem like a great sea change compared with your standard 9-5 office job from the outside, but like most other businesses out there, it’s mighty hard work even though it can be financially rewarding if things are done right. In order to increase the chances of success and a good return on investment, you need to know what to look for when buying a café. I’m a business broker and have also owned my own cafes and these are the things I look at when looking to buy a cafe
The vast majority of cafes in Australia are bought on the basis of a 2 week trial being offered after contracts are exchanged. It works by setting a minimum turnover which the business needs to meet in order for the sales contract to be deemed valid. It essentially works by setting a target turnover figure eg $20,000 over 2 weeks, if the condition is met then the buyer is obligated to the buy the business, however, if the business doesn’t meet the condition, the buyer has grounds to pull out and get his deposit back from the seller.
However, we have all heard stories of sellers manipulating the trial and as a business broker / consultant, I can confirm this does definitely happen to some degree although rare. This is the reason you need to check the figures prior to purchasing a business. It’s important when purchasing a café that you know what to look for as in my experience, traditional paperwork such as BAS statements, profit and tax returns isn’t a good way to determine whether aa café is actually profitable. This is because the large proportion of cash which comes through a café that isn’t declared, in addition, a lot of operators use cash to pay staff and invoices which also may not reflect on the paperwork which goes to the ATO. Unfortunately, this also means accountants won’t be very useful when it comes to working out whether a café is actually profitable. To do proper due diligence on a café, you will usually require the assistance of someone which has owned a café before or a café consultant.
One thing which I see purchasers frequently get caught out with is the staffing requirements and wages for the café they have purchased. It’s actually quite common for family and friends to work for free or help out during busy periods such as weekends without being included in the roster. While this is a great help to the business owner, it will also mean the purchaser will need to hire an additional person to replace the family member which is helping out the current owner if he/she takes over the business. This in most cases will reduce the forecasted profitability of a café due to additional wage costs.
You also need to account for the current owners wages (the vast majority of businesses for sale online don’t do this), for example, so if the current café operator works 50hrs per week, you will need to work out the cost to replace him and remove this amount from the advertised net profit to work out the true net profit. It’s also common for café owners to visit the markets for their fruits and vegetables on the weekend in an effort to keep the cost of good low, if you aren’t going to be doing this then you will need add a premium for having the goods delivered which again will effect your profitability.
It’s crucial to understand the lease before committing to buying a café as it will have a significant impact on the future value of the business and there is no guarantee the landlord will provide the same terms once the lease ends and it comes to the time for a renewal.
First thing to check is to see how long is left on the current term and whether there are any ‘options’ to renew the lease once the term is up. If there is an ‘option’ after the current term, you will also need to check whether there are any additional rental increases or market rent reviews which will take place once the option is exercised. For example, if a lease is 5×5, it’s not uncommon for a landlord to offer a significant discount in the first 5 years to get a tenant in there (since the tenant will also invest in a fitout for the shop) and then increase it back to the normal amount via a market review once the second term of 5 years is exercised.
Also, always check to see whether there is a demolition clause in the lease as it can significantly lower the value of the café since it means the landlord can ask you to vacate the property at any time if there was a need.
Always make sure all equipment in the business is included in the sale. If the current owner has equipment that is leased or financed, then you need to ensure the contract stipulates that it will be paid out before you acquire the business. In addition to having your solicitor do a PPSR search to ensure all equipment is unencumbered, you also want to verify all key items are included in the equipment list attached to the contract. I’ve seen purchasers get the shock of having someone come to repossess the equipment they originally thought was included in the sale and you definitely don’t want this to happen to you.
When buying a café, the current figures are obviously an important part of the decision but this isn’t something you should solely focus on. At times, depending on your confidence, skills and circumstances, it may be better to go for a run down business which you could work on to make it more valuable over time.
Additionally, when buying an existing cafe, you want to research the local area to see if there is anything which could possibly effect the turnover down the line. Eg. Are there any vacant properties or developments which have the potential to be turned into a café which will impact profitability of the business? Is the business located in a building or area with a few key tenants which may possibly move out in future?
To mitigate these risks, you can check local council development applications to ensure someone isn’t going to be opening a café in the immediate vicinity and if you are buying a lobby café then you should ask to speak with the building manger or managing agent to ensure the tenants above you will not be moving out in the short term.
At the end of the day, buying a café is like buying any other business and it’s impossible to completely eliminate all risk involved. However, you can significantly mitigate the vast majority of these risks by knowing what to look for and enlisting the help of a buyers agent as well as a good solicitor which is experience in business sales and retail leases.