Buying a closed coffee business

[sanjanu]

I have been contemplating the idea of owing a cafe. I came across one such about 15 miles from where I live. This was a Cafe and Wine Bar that was doing excellent (at least according to the facebook likes etc) back till August. Then it is closed. The current owner - told that the people who were running the coffee shop - had stopped paying rent in March and hence were kicked out in August. The place has most of the furniture intact, an espresso machine and few other sandwich related machines. I am tempted in taking over the assets and jump starting the cafe. I have barista training and am familiar with coffee business. I would love to hear from professional or forum advice from fellow coffee business owners. I do not know the financials of the previous cafe owners.

 

[John P]

How much experience, and in what caliber of shop. Specifics would be nice.
Managerial and/or business experience?

Do you have sufficient capital (maybe an extra $20-$30K on top of whatever it costs to open your doors.

What kind of machine... just because it's there does not mean it's worth having. It may or may not be.
Is it something you would have put in your top 3 to purchase? Grinder?

Remember used equipment from a closed shop has a value of about 15-30 cents on the dollar if it is part of the "deal". Keep that in mind. This depends on age, and condition (with maintenance records or clearly defined maintenance/cleaning protocols). Never trust "It was well maintained." They've gotta prove it.

Don't look at re-opening what they did. Think about it from scratch. As has been said many times, "You only have one chance to make a first impression." Make it YOUR impression, not a re-hashing of their impression.

 

[sanjanu]

John:
I appreciate you taking time - I have a few answers for you..

Experience - I just finished a 3 day Coffee/Espresso Course at Texas Coffee School - by profession I am a software geek - am running my own software firm - but interested in following my dream of owning a coffee shop - so maybe these qualify me as desiring enough. I have quit my day job to pursue this...
Capital approx - have it around what you are suggesting
The previous person who was running the shop is thrown out for not paying rent for 3+ months - so no records of foot traffic, revenues, machine maintenance etc.
I will get the machine name - it is a fancy Made in Italy one (pardon my ignorance).
He has spent ~120K to get the shop going and is offering it up to 3/4th the price for some one to take over the lease from him.
So the equation is:
1. Owner - wants to sell the shop for 80K
2. Retail landlord want the new owner to take over the lease as is
3. the owner is locked in for another 18 months of lease.

What do you think John?

 

[John P]

my thoughts...

$80K is way off the mark. There is ZERO value beyond the equipment/fixtures. And those are at a discount. This person has failed. They have no leverage. They are looking for a sucker to bail them out. Don't be that person.

They are on the hook for the lease. The lease has value. Taking that over counts as dollars.

Subtract value of lease from actual market value of their used equipment. The result, USED EQUIPMENT - LEASE VALUE = OFFER, is what you should pay.
A failed business that is not offering up financials has ZERO "blue sky" value.

And if you are not a skilled negotiator then I would strongly suggest hiring a professional business broker to handle the deal in a dispassionate, business-like manner.

Also, BEFORE signing anything, I would negotiate with the landlord a rate for a couple of 5 year options contingent on you making a deal with the current owner. You really can't build any business in less than 5 years. Without a lease option in writing, the deal at any price would be foolish.

 

[Zimmy]

Having a similar take over experience I have to strongly agree with John on this... ZERO excess value in the previous business... And it really doesn't matter too much what their investment was, their worth is what matters, and that is just in equipment assets... Why did they stop paying the rent? Were they actually successful or did it just seem that way? Request the books... How long was the previous shop open for?

There are many things that need extra consideration when taking over a previous shop...

Sorry in advance if my thoughts seem a little random...

Used equipment is just that, Used... You need to go over all of it with a fine toothed comb before valuing any of it... John's approximation is pretty accurate for well taken care of machinery, but if its been abused then its not even worth the 15-30% of original cost, if anything... I have just over 10 years of experience in the industry so I was able to ballpark these values myself, but you may want to find someone that can asses their value for you... Any issues come with upkeep/maintenance costs that should be deducted from their asking price...

From my experience you definitely want to start anew...

What do you want your image to be? Is that image right for the space/location?

You don't want any potential liability that the previous company may have riding on them currently... If you buy their business you are liable for anything that they have previously defaulted on... Ie past rent, loans, insurance issues...

My suggestion (the route I took)... Start a new business, buy the assets of the old business (if they are worth it) but not the actual entity, and renegotiate a new lease structure... We structured a 7 year lease with 3 5-year options... One thing to watch for is rent increase, market values can fluctuate drastically so I recommend agreeing on a standard percentage rate increase from the get go... Also make sure you know approximately where your utilities are going to fall and what of them if any are covered within your lease agreement... In your situation, not having a lot of experience in the industry you may want to negotiate a new lease at 3 years with 5-year options after that to give you that 3 year out if necessary (anything less than 3 years is pointless in my opinion)... The key is to leave yourself in the drivers seat and set things up so they are predictable... You can potentially use the 18 mos of existing lease to your advantage to come in with a lower lease rate...

--For example... The landlord can have the space empty for 18mos and have that renter default on the rent or he can sign a new lease with you guaranteeing x amount of years at maybe a slightly lower rate... This does require a cancelation of lease agreement between previous owner and landlord...

With how the events seem you are in the drivers seat currently... Tell them what you want and then come to a compromise that you are comfortable with if they don't accept your terms in the first place... Know what you can afford and stop there, everyone will try to stretch you for as much as they can get out of you so draw your line in the sand at a comfortable point... Remember, there are plenty of spaces that can support a coffee shop, so if the deal doesn't work out under your terms, go somewhere else... You don't want to put your blood sweat and tears into a business that doesn't have a completely stable foundation that you have set...

More into the specifics... Does he want 80k or 90k? (.75*120=90) Either way thats way too much...
I feel more information is needed on equipment to give a ballpark of worth...
How big is the space?
Where is it located? City, suburban, urban, stripmall?
Who owns the equipment? Is any of it under a lease agreement?, if so it has no worth to you...

There are a lot of pieces to this puzzle for an industry with such a small profit margin so you really need to be on top of everything...

Hopefully my rant has helped!

I wish you the best in your venture...

Cheers
Chris Zimmerman
Co-Owner/Operator Ellipsis Coffeehouse

 

[John P]

Fantastic first post, Zimmy!

 

[PinkRose]

Hi Zimmy

Wow! That was great.

Welcome to the Coffee Forums.

I hope you will visit us often!

Rose

 

[sanjanu]

Thanks Zimmy and John!!!

These are amazing responses to my question - you have absolutely helped me with my decision - I have decided not to go with taking over this business. Once again I appreciate your time in offering suggestions to the community. I will one day own one and get in touch with you all...till then ciao!!!

 

[John P]

Good decision. Save your money. Educate yourself. Make a plan. Move forward.