Posts Tagged ‘buying a coffee shop business’
Buying a coffee shop business may sound like a dream come true. After all, what can be more rewarding of owning a profitable and established business? The advantages are many.
Advantages of buying a coffee shop
No 1: The coffee shop has an established customer base
If it is in an excellent location and has been operating for a few years, the customer base there is also abundant. It may have many repeat customers making it attractive for buying a coffee shop.
2. No new investment in renovation or equipments
If there are still some warranties left on the existing coffee equipments, you can still operate them after buying a coffee shop. The best news is that there is no further cash outlays for renovations or coffee equipments.
No 3: May get seller financing
In some cases, the owners are retiring from the day to day operations. So, cash is not really the greatest consideration. He may be willing to accept some form of notes until your business turn profitable. So, this makes it feasible for buying a coffee shop.
Potential Pitfalls of buying a coffee shop
However, not everything is a bed of roses as there are a few pitfalls you need to consider before buying a coffee shop. Most owners put the store up for sale when they need the cash. This can be caused by various reasons like divorce, default on debts, lack of motivation and lastly poor sales.
1. Inherit all the negative stigmas of the last owner
Find out the reputation in the marketplace first before committing yourself in buying a coffee shop. You do not want to be associated with any negative stigmas or else your business may not take off.
2. Risk or paying too much
One of the most pressing issue is that most owners think their shop is worth two or three times more than it actually is. The reason for this phenomenon is that he becomes emotionally attached to our stores. So, you need to come out with an objective valuation. When buying a coffee shop, it takes a long time to recoup this investment.
3. Lease may run out soon
Make sure that there is sufficient time left on the lease before buying a coffee shop because you do not want to be caught bare footed is only one year of lease is left. If the landlord decided for whatever reason to not renew it, then you are in trouble! It is crucial to have renewal options on the lease. If the lease is about up, renegotiating it or signing a new one in your favor may be an option for you if the cash flow is worth it.
Steps involved in buying a coffee shop business
Step 1: Ask for all records
The first step in buying a coffee shop is to get all the financial information from the owner or the broker to get an accurate valuation. You need to know the figures to get a grasp of the operations. Ask them relevant questions like why sales have been going up and down in certain months. Or why certain expenses are so high compared to others. Also ask for tax returns to see if the business owns any tax to the authorities.
Step 2: Make observations on the operations
Before buying a coffee shop, You must make the effort of going to the coffee shop during peak hour and non peak hours. Be observant and make a few visits. Count the customers daily and vehicle traffic over at least a month’s time. This will also give you the opportunity to not only see the customer flow but also get an approximate of what the actual sales are. Sit close enough to hear what customers order and keep a generic tally. This simple observation will tell you a lot. Then, see if you can add any value if you are buying a coffee shop.
Step 3: Calculate a range of valuations
A good rule of thumb is that 50% of the yearly gross is the approximate worth of a business. Of course the only way to actually find the fair market value is a valuation done by a business valuator but sometimes these are not accurate either. But that is the seller’s responsibility for buying a coffee shop.
I like the following method. It is usually the best way to valuate a coffee shop:
Figure out what the seller’s true discretionary cash flow is: Take the owner’s salary, add back anything a new owner may not spend on yearly (these are called add backs) like a car lease, a lawsuit, use of a big CPA firm, health insurance for the owner and his kid etc. That resulting number is the true cash flow of the business. That number can be multiplied from 1 through 6 times to get your asking price or value of the business. The scale of 1-6 is mostly proportionate to the age of business and the time left on premises lease. If the business is only two years old, then the price should reflect the lower end of the spectrum and vice versa.
Conclusion for buying a coffee shop
If this truly interests you, work with a business broker. However, be sure you know what you are getting into by buying a coffee shop business. Have a coffee shop business plan in either case to plan your course for success.
Find out how you can start your own coffee shop using less than $25,000 or less and none from your own pocket. Check out this book on starting a coffee shop. You may decide not buying a coffee shop.
