Purchasing an Existing Coffee Shop

[phlgirl]

Greetings!

I am new here and seriously considering making an offer on an existing coffee shop. The business has been in operation just over 5 years and is privately owned (not a franchise).

I am trying to understand what types of red flags I should be looking for in the financials. For example, does anyone know what the industry standard is when it comes to labor, as a % of Sales? How about COGS?

I have read that the labor should be around 35% and this business claims to be getting the job done with just over 20%. Is this possible?

Finally, I have also read that Net Income (cash flow) tends to be 20-25% of Gross Sales. This business is claiming to be at more like 35%. Is this realistic?

Thanks in advance for your assistance. Trying to learn as much as I can. If these types of questions have been asked elsewhere, my apologies. Please feel free to direct me to another location.

 

[ElPugDiablo]

There is really no standard COGS. It all depends on how much this shop pays a pound of coffee and how much this shop's menu pricing strategy is. And how much waste this shop is incurring.

Do the owners work quite a bit behind the counter, thus needing fewer helps thus having low labor cost of 20%? You can see the operation yourself and figure out how many people you need per hour and multiply that by how many hours they are open and multiply that by the going wage rate. Multiply that number by 1.07 and that is your roughly per day wage and employer contribution expenditure. Divide that by the average revenues per day and you will have a labor cost figure. Assuming similar menu price as Starbucks, it is possible for a very busy, highly efficient and high margin shop to have 20% labor cost. But if they don't do more than 600,000 a year, it is pretty hard to have labor cost that low.

The net income is a function of COGS, labor cost, rent, utilities, insurance, taxes, maintenance and repair and theft. I have seem shops that are close to 30%, but none at 35%. Also, at such high profit margin, you will most likely see competition coming in, and thus reduce the % down to the normal rate.

When evaluate a business, always ask for tax returns and put revenues each years in a spreadsheet. If the revenues increase each year, not due to increase menu prices and not due to heavy discounts, then more likely it is a good business. For a shop in its fifth year, you would hope a small percentage increase (5%?) due to increase customer traffic.

There are many discussions on this subject. You can use the search function the forum provided.

 

[phlgirl]

Many thanks, ElPugDiablo, for your response! Very helpful information.

The site claims to use 1 employee to open, 1 to close, 2 baristas at any other given time, with some overlap at lunch, if necessary (so lunch hour could be up to 3 people). Site is open 13 hours daily. Pay is 8-10hr so I am coming up with approx $300 per day, on high end.

The owners are rarely, if ever, on site. They do perform administrative functions off-site.

The site is located in a major city center and has plenty of competition already - including a Starbucks and another popular chain. However, the coffee served in this location is specialized - higher quality - so it tends to attract a different type of customer. They claim approx. 500k in gross sales (I am waiting for tax returns).

I will spend some time testing out the search functionality. : ) Again, thanks so much for the feedback.

 

[Coffee Guy]

El P.D. is correct for the most part. Is this location located in a mall or strip mall? You mentioned Starbucks and another coffee shop also in your same area? If this shop has been in the same location for 5 years with that competition chances are that this shop may not have any further growth potential. Other things you may consider before making the jump is why do you want this location? Are there other locations with less competition? Also expect for sales to dip for a little while if you do take over. If this spot has a loyal customer base make sure that the existing owners work with you and their customer base to make a smooth transistion. Also consider what price they are selling for and what is their reason for selling after 5 years. Those are just a few things to consider before commiting to a purchase.