Buying a cafe: a buyers’ checklist for those looking to buy their first café
The café business is a popular choice for many people buying their first business. The margins on each cup are high, trade is reasonably consistent throughout the day and competition is less of an issue than in other businesses. Behind the apparent simplicity of this business model lies an exacting industry with high standards. Without thorough planning, new café owners can run the risk of landing themselves in hot water.
To make sure that you invest in a café that works for you, use this checklist for buying a café to help you get a sense of how the business is run, where its potential lies and what you will need to budget for.
Location: proximity to high-footfall areas
The basic principles of good retail locations apply when buying a café. Your café needs to be in a high footfall area with a clearly visible shop front; without this, you won’t be able to rely on a reasonable level of walk-in trade.
If the café you’re thinking of buying doesn’t occupy a ‘high street’ location, don’t discount it straight away; it might still be a ‘high footfall’ location. If the café for sale is located close to municipal areas such as a public park, bus terminal or train station, for instance, it could enjoy a surprisingly high level of walk-in trade. Business and Industrial parks can also prove surprisingly successful locations for a café business.
One of the most important elements of any retail location is its frontage, in other words its visibility from the street. If the café you want to buy is in a popular high-footfall area but isn’t immediately visible from the main flow of people (perhaps on a side-street off the main high street, or tucked in beneath the arches of the local train station), you need to know how you are going to make it easy and appealing for customers to find you and buy from you. The current owner may have temporary signage in place, or they might run a special deal for regular customers. The premises you work from is the biggest determinant of how much your café can earn, so it’s worth taking your time researching the location thoroughly.
Premises: size and set-up of the café for sale
The beauty of the coffee business is that it can work well in a variety of settings, from 100-cover restaurants to mobile catering vans. If you want to add your own personal stamp to a cafe business, whether it be office catering, gourmet coffee retail or a small local gallery, you need to make sure that the premises will enable you to pursue your ideas. If you are looking at a lock-up coffee kiosk surrounded by offices, for instance, the takeaway earnings might be strong, but you will struggle to launch a commercial catering service without adequate food preparation space. Similarly, if you’re operating from a restaurant premises in a quiet end of town, then you can’t expect to depend on takeaway coffee sales - you will need to sell some food items to appeal to dine-in customers.
Catering equipment: quality and quantity
When preparing the business case for buying a café, list out all of the equipment included in the sale. In a café business, the equipment (espresso machine, coffee grinder, griddle, dishwasher and so on) has a direct impact on your ability to make money, and it can be surprisingly expensive to replace. For instance, a new retail-class professional espresso machine can cost you more than a good second-hand commercial van. You need to know how many years you can reasonably expect to get out of the assets, and ideally set aside some contingency in the budget every quarter in preparation for any problems that might arise
You need to know how old the equipment is, but it’s equally important to know the ownership status of the equipment. Is the equipment owned on a HPA (hire purchase agreement) basis, or is it owned outright? Does it need to be insured? If so, for how much per annum and what is the nature of the cover? All of these items are things that you need to understand before you proceed.
The vast majority (86%) of cafes for sale on Daltonsbusiness.com are offered on a leasehold basis. In other words, the café owner is renting the premises from which they operate, and when they sell their business, they’re selling you the right to lease that premises, rather than the premises itself.
A commercial lease tends to be issued for a 10-15 year period, and if you buy the business, you buy the time remaining on that lease, also known as the term. If the remaining lease term is very short, you may find it hard to borrow money to purchase the café, as it’s harder to prove to the lender that you are capable of operating the business for the duration of the loan. If you’re trying to buy a business with a short lease and finance is a problem, you can ask the landlord to extend the lease, or you can ask the landlord to cancel the lease and draw up a fresh one. Both options are costly, and not necessarily in the interests of the landlord, who will need to agree to any changes.
Property leases are complex legal documents, so always ensure that you seek independent legal advice from a qualified professional before you commit to a purchase.
Financial Performance of the business
When advertising a café for sale, the seller will often state a profit and turnover amount on their listing. This information might be based on the last available monthly or quarterly accounts, or it could be a ‘top of the head’ figure based on numbers that the seller knows by heart. You can rely on these figures for general browsing purposes, but when it gets to the purchasing stage, you need to examine at least three years’ worth of accounts before signing on the dotted line.
If you’re concerned about the authenticity of the numbers being presented to you, a good informal ‘common sense’ way of testing the figures is to ask the seller some questions that reveal the kind of trade they are doing. One good question to ask is whether or not the business is VAT registered. By law, if a business has a VAT taxable turnover in excess of a certain limit (currently £81,000 as of January 2015) then the business should be VAT registered (please see https://www.gov.uk/vat-registration-thresholds for more information) – if you’re told that the turnover is higher than the VAT registration threshold, but that the business isn’t VAT registered, you’ll need to probe further. Another question to ask the seller, if in doubt, is how many kilos of coffee beans and how many pints of milk, they buy in a given month. These two numbers should imply a level of coffee sales that roughly tie in with the reported earnings.
If you want more formal indication of how the business is doing, if the café you want to buy is trading as a limited company, you can buy the latest set of accounts from Companies House for a nominal fee. If you have shown that you are genuinely interested in buying the business, then a truthful seller who has built a business that they’re proud of will have no issue introducing you to their accountant.
You should always bear in mind that the past performance of a business is no guarantee of its future earnings; the moment you take the reins, you will become solely responsible for the success or failure of your new business.
Licences and Permissions
As soon as you become the owner of the business, you will become responsible for the legal compliance and licensing aspects of the café. From a local planning perspective, the premises you operate from needs to be A3 registered if you plan on selling hot food, and you will need to comply with food labelling legislation regarding use-by dates and allergy advice. The FSA are the public body responsible for food hygiene and food safety, and can advise you further in this area. If in doubt, contact your local council who will be able to give you advice on what you need to do to keep your business operating within the law at all times.
Other links related to buying a cafe:
Running a café of your own can be one of the most rewarding experiences of your life – it’s also a large investment of your time and money, so it’s vital that you buy the café that’s best for you. Use this list as a guide, ask lots of questions and make sure that you take professional advice before signing on the dotted line.
By Sam Haythornthwaite at DaltonsBusiness.com