Buying a cafe & due diligence

There is a cafe that i regularly use. It is always busy and the food etc is great.The owners want to retire and have put the business on the market for $395K. Apart from the obvious questions like why are you selling? and for how much? and getting my accountant to look at the books, what other questions should i be asking?. my two sons, 23 & 18yrs are begging me to set them up in this business and i would have to get a business loan to make it happen. (there goes my next investment property!) All feedback greatly appreciated.

Is this in Albany WA?
Is the building included as well?
$395K sounds expensive
Cheers

Hi Bill,
yes it's Albany W.A. and no, the building is not included.Yes it sounds expensive but i guess this is based on past and projected turnover. A friend of mine suggested that i talk to some of the staff on the quiet to get an idea if there are any underlying problems like faulty plant & equipment etc.

So you get a coffee reguarly... may it be worth going at different times each day and sampling the product you would buying...

the coffee shop in our building is packed in the morning, but come afternoon the place is deserted. Why? because the bloke who makes them in the morning is fantastic, the bloke in the after ALWAYS burns the milk and id prefer to drink instant than that... People will get an afternoon coffee from ground level instead (and the morning shop you could by in pre tax $s so it shows how much it sucked if people are willing to pay doubt for a coffee)..

so yeah, i wouldnt be worried about workers, id be worried about your customers...

Do you have access to turn over or financial figures. Id imagine it would be a fairly high margin in general. If you sell 500 coffees a day @ $3 each its $7500 a week or $375k pa (based on 50 weeks) at a margin of 30% you could be looking at 100k profit per year. 4 years p/e i would though would be reasonable, but again im not a business valuer...

Bluegum

I have relatives who are in similar businesses.
I would be reluctant to buy an expensive business because it could mean a lot of work and/or it has already maxed out on it's profitability and it can only go 1 way from there... down...

Important things are the lease you will get, the turnover, what type of customers you have, if they are permanent in the area and if they work in 1 company or in various companies etc.
You don't want to buy it and later find out that the main company in the suburb is closing down or moving.
Is the business in a shopping center?
Is there possibility that another similar shop will open up nearby?

Also, as Dave said, the coffee could be great now but if someone else makes it could make a big difference and all of a sudden the customers drink their coffee across the road.

Coffee revenue is ok but it should not be the only product.
You should also consider wages and the number of staff required to run the business. You don't want to find out that all your money goes on paying wages. Ok your kids will be working there but could they be making the same money and more elsewhere and without doing 12 hour days?

Cheers

Don't forget to figure in the cost of labour. For example, on the face of it a $395k investment might yield $100k profit per annum. Sounds great, eh? But run the numbers assuming you are hiring people to work in the shop (rather than working in it yourself or letting relatives work in it). Imagine paying two and a half employees $35k p/a. Suddenly that $100k "return" doesn't look so good. Then add super, workers comp, temp wages to cover annual leave absences, etc. Small retailers frequently completely omit wages when it comes to themselves. It completely skews the investment proposition.

Quick numbers (assuming a 500ml coffee)

Sale $3
Less expenses
Coffee (2 shots @ 20 cents each)
Milk 50 cents a coffee (3 L is $3.10 at woolworths so factoring a little bulk buy discount)
Machine depreciation per coffee 32 cents per coffee (assuming 40k per year and 125k cups year)
Gross costs $1.22 per cup (59%)

Other costs
rent 56 cents(rent @ 70k per year)
wages 40 cents per coffee (Barrister being paid 50k per year)
support wages 28 cents (35k per year, just above min wages)
utilities 8 cents (10k per year)
other costs 8 cents (estimated at 10k per year)
Total - 140 cents

Total costs 262 cents

Net Profit 38 cents per cup (net profit of $47,500 or 12% return on investment)
Net Margin of 12.6%

obversily very rough numbers but its just to get an idea of how you should factor it... as you can see your estimated coffee numbers is a key variable and a sensitivity anaylsis would really need to be factored in around if this is reasonable...

Do you get your coffee in a bucket !!!! 190ml is good, 250ml is regular

yeah its the only way i can stay awake in busy season....

ok maybe its a tad to much but the only variable which relates to size is the milk, so maybe we can just adjust to reflect...

Hi Bluegum,

No expert, but my comments are as follows:

My advice would be do not put much weight on any figures that are presented to you, the Profit and Loss statements can be modified quite significantly and still be legal. In particular, pay close attention to where in the books employees and owners have been paid from. You should ask for a copy of their ATO lodgements to verify claimed saleries and owner drawings.

A business is also a LOT of responsibility for an 18 year old and a 23 year old. If they are serious I would be making them do the due diligence so they start to understand the KPIs up front (and get them used to talking to accountants etc), and also discuss with them what exit strategies would be. How long would they commit to working business if they don't end up liking it? Who would manage it if your sons wanted out?

Hope it all works out well for you.