Buying and existing business

coffeemill

New member
Oct 25, 2007
2
0
DE
Hello Everyone! I am new to this forum and also new to this business. I am looking at possibly buying an existing coffee shop and wanted to get some feedback from the pros here.

Shop background: located at a beach resort area but open all year, a coffee shop has been at this same location for 10 years and the current owners purchased it in 2004.

Sales of 300k with COGS at 40.7% with a net of 15k. They have 87k in equipment of which is about 4+yrs old. They are asking 125k.

They have invested 199k in the business and have only paid back 4k of the loan. The biggest expenses are payroll being 25% of sales which only includes a small salary for one owner (not at shop full time). I don''t think the current owners really know how to operate a business and this is why they are selling before they loose any more money.

Having never been in this business before I question the cogs and payroll. I was trying to gather info from this site to determine what the COGS should be. I am thinking 30-35% if you have food which they do, light breakfast and lunch. Can someone tell me what % of sales payroll typically runs and am I off on the COGS?

Any comments or suggestions or just tell me I am crazy for looking at this would greatly assist me in making the right decision.

Thanks :)
 

davidwhatley

New member
Oct 9, 2007
19
0
DFW
Too Much

The COGS with food items seems about right, but way to much for Coffee. The 87 in equipment is only worth 20K and using thier 15K profit, the business is worth 45-75K os they are at least 50K too high. Rule of thunb, a busines is worth 3-5 times EBITDA with 5 times if ther eis a good upside for increased business.
IMHO
David
 

kc1

New member
Aug 26, 2006
24
0
That COGS looks high but could be poor pricing or high wastage/pilferage. My business is food led with a very small proportion of coffee sales and still runs at sub 37% COGS. If sales are mostly in coffee, COGS should be around the 20% mark. Payroll costs % are about right. Ignore the cost of the equipment when valuing a business like this - it is as good as worthless for resale purposes and the value is all in the cash generation. I'm not sure about 5x EBITDA for valuation - 12x is current EBITDA multiple for exit transactions in UK. More importantly, what are you going to do to 'fix' this poor performing business. How are you are going to increase sales? What are the main challenges? How are you going to run a specialist business with no prev experience - are you going to buy this in? etc. etc. This business is certainly is not worth asking price.
 

crema123

New member
Mar 10, 2007
31
0
Cook Islands
Asking price is way high for the reasons said above. Basically people think their business is worth more than it is for a number of reasons: they put a lot of time into it and think that should account for something, they think they are special when they are not, they have inflated egos. Many times a business will be advertised for double what it's worth, and if they are in one of the above categories, they'll tell you to get lost - which you should.

If you get a good price on it and feel like you can buy yourself a cool job on the beach, and that's the lifestyle you want - then why not??? Just don't expect to be a turn-around specialist and make a lot of money.
 

John P

New member
Jan 5, 2007
1,045
0
Salt Lake City
I would say $40-$45 K max, and that's being generous.

Owners who vastly overestimate worth also tend to fudge the numbers a bit.

Keep looking.
 
OP
C

coffeemill

New member
Oct 25, 2007
2
0
DE
  • Thread Starter
  • Thread starter
  • #6
Thanks for all the great input! I am meeting the owner this Sat to go over everything and I have lots of questions. I agree the asking price is way out of line and should be more in the range of 40-70k depending on what additional business might be there. The shop has been at it's same location for 10 years and I believe by looking at their books that the current owners really don't know how to run a business.

I will post what I learn after a visit and of course be asking for more advice.

I am so glad I found this forum it has been very informative and I for one appreciate the help from those that have already traveled the road. :)
 
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