Questions and Advice on Buying an Existing Coffee Shop

[iheartcoffeeshops]

Hi all,

I would like to make an offer on an established local coffee shop that's up for sale, and I could really use some advice since it's my first time doing this.

Backgrounds on the shop:
Been in business for almost 8 years, the owner is selling so she can either slow down a bit or potentially start her own bakery.
Product offerings: coffee, espresso drinks, tea, smoothies, baked goods and light sandwiches.
Average monthly financials: Revenue $20 k, COGS 55% of revenue, labor $6k, rent is $450/month (more details below), other expenses at $600/month, and profit to owner is $3k.
Asking price: $100k
The shop is located in a great neighborhood that's surrounded by numerous apartment complexes. The store itself is about 1100sf with high ceilings and another 1000 sf patio area overlooking a creek/walking trail, which in this area is rare. Best of all, there's not an independently-owned coffee shop within a 10-mile radius, and yet this is one of the biggest US cities.

Additional background: The shop wasn't profitable for the first 5 years, and the landlord which is the City, would like to help her sustain her business, so they kept dropping rent from $1800 to the current $450/month (similar rent in the area would be at least $2500 per month), where the shop is finally profitable. The business has a 4.5-star rating on Yelp, and have quite some regular customers.
Furthermore, the owner spends 40 hours in the shop every week, and she's not paying herself. The owner mentions that she's not a business person and doesn't understand why COG is so high at 55%. Revenue breakdown is 50/50 between food and drinks, and she makes half of the food herself at her separate commercial kitchen.

My observations and future plans: Without seeing the detail financials (the broker wouldn't disclose unless an offer has been accepted, which is a pain for me, but I am putting a lot of contingencies), I believe the business is mis-managed and COGS shouldn't be as high as 55%, especially if she makes the majority of the food in house. On the labor side, $6k / month I believe is a low number. From talking to the owner and seeing their staffing schedule, it should be running at least $8k/month. Regardless, I do believe the shop can run with only $6k/month labor consider many times I went, they were just way over staffed. The customers seemed to rave more about the baked goods (the owner is a great baker with impressive baking background), but not so much on the drinks. Their coffee is really disappointing.

My plan is to increase the coffee quality and slowly put more emphasis on the drinks which are a lot more profitable. The staff were trained at all in terms of focusing/guiding customer on certain product offering or providing any up-sale/recommendations. At the same time, there's a lot of marketing opportunists that they are not utilizing.

My background is business/finance and I am also a coffee enthusiast. I will also have an experience barista on my side to help me operate the store which give me additional confidence.

Now, my questions are as follows:

• If you include the owner's time (40-hr a week), with labor potentially averaging $8k/month, I believe there's not much profit if at all for the business. Thus, I don't think the business is worth anywhere close to $100k, but the question is, what do you think is a fair valuation?
• I understand with the exist of the existing owner, the food piece I would most likely have to find other bakeries to do this, and the margin wouldn't be that great. Thus I would like to slowing shifting the focusing to drinks (especially their coffee is really not great). How big of a risk do you think this is?
• Any additional comments/advice you can provide would be much appreciated.

Thank you for your time in advance.

 

[sidg]

My gut feeling is the shop is worth what you could buy the equipment for and the break you can get on the rent assuming the city will honor it for you.
If you looked at your cost to create the same kind of space with similar equipment you will have an idea of what the value is for you to purchase. Some people will disagree but I wouldn't put a lot of weight on existing sales numbers when the COG is so out of line. It could be that they are charging all their personal groceries on the company account to avoid taxes or simply have a huge waste issue but when that number is so high I would doubt the others as well.
Just my 2 cents.

 

[John P]

I agree with sidg.

There is no value to the "business" despite it seemingly Grossing $20K per month.

COGS should be around 22 to 23% max. High COGS may be due to the cost of keeping freshly baked goods.
It's obvious it's not really a coffee shop currently, but rather a bakery that serves coffee.

I wouldn't even bother unless it's great equipment and you can get it at about 30 cents on the dollar (or less). (And that is with documented maintenance)

And if you strike a good deal, I would make an overall change as you said -- including changing the current name. I would make it clear to everyone that it is a different concept. Also, don't make any promises or feel any obligation to current employees. I would dismiss everyone, and then re-interview and re-hire based on the skills that you are looking for. It's a business, and you need people who are passionate about coffee and demonstrate the motivation to learn new things. And if some are a great fit, maybe pay them a little more than before.

Close, remodel, and retrain. And re-open with the right push of press release and social media to get the ball rolling.

Or look for another space.

Leasing rule #1. Don't fall in love with something that can't love you back.

 

[Mr.Peaberry]

One more thought. You said the owner wanted to get out of this business to focus on opening a bakery...but that is what her customer base is raving about...so where exactly will she be opening her bakery? Betcha her existing clientele follows her to her new location. Also, check your math. COG at 55% means $11k on $20k revenue. Expenses are $7K, leaveing $2k for owner...not 3k.
So essentially you are looking at spending $100k for a 24k/yr job IF the rent stays the same AND your customers don't follow the former owner to her new bakery. Don't get sucked into the drama that she didn't have the skills to make this profitable...after 8 years anybody with a pulse could develop the knowledge and experience to turn this around IF turning it around were possible. The only thing that would stand in the way is laziness and lack of desire, neither of which it sounds like is the case. If you do this deal, have her agree to supply the baked goods for a given period of time. Have her sign a 5 year non compete clause, and find out how much her existing customers know of her future plans. Her regulars may already be aware and plan to follow to the new bakery. Just my 3 cents...

 

[Mr.Peaberry]

Leasing rule #1. Don't fall in love with something that can't love you back.

That ain't just a rule for leasing John...that's a rule for life!! Just sayin'....

 

[TrivixXx]

I wouldn't even bother unless it's great equipment and you can get it at about 30 cents on the dollar (or less). (And that is with documented maintenance)

 

[John P]

Um... Thanks for quoting me TrivixXx. Way to contribute! :roll:

 

[Mr.Peaberry]

Um... Thanks for quoting me TrivixXx. Way to contribute! :roll:

John, it was a "cut & paste", not a quote. I thought it was an echo. This tops the post he made on another thread suggesting that Daniel in Honduras use "special insulation" for his exhaust ducting cutout...pretty obvious he's just trying to rack up posts so that he can spam us with an offer we can't refuse...just sayin'....

 

[John P]

Mr. Peaberry ... to-may-to, to-mah-to.


I would think that the sarcastic nature of my response made what was not written very clear.
As you have clearly clarified my attempt at clarity, we're probably both clear on the matter.:coffee1:

 

[iheartcoffeeshops]

One more thought. You said the owner wanted to get out of this business to focus on opening a bakery...but that is what her customer base is raving about...so where exactly will she be opening her bakery? Betcha her existing clientele follows her to her new location. Also, check your math. COG at 55% means $11k on $20k revenue. Expenses are $7K, leaveing $2k for owner...not 3k.
So essentially you are looking at spending $100k for a 24k/yr job IF the rent stays the same AND your customers don't follow the former owner to her new bakery. Don't get sucked into the drama that she didn't have the skills to make this profitable...after 8 years anybody with a pulse could develop the knowledge and experience to turn this around IF turning it around were possible. The only thing that would stand in the way is laziness and lack of desire, neither of which it sounds like is the case. If you do this deal, have her agree to supply the baked goods for a given period of time. Have her sign a 5 year non compete clause, and find out how much her existing customers know of her future plans. Her regulars may already be aware and plan to follow to the new bakery. Just my 3 cents...

Thank you Mr. Peaberry for your comments. I submitted an offer at $50k (the asking is $100k), and including conditions as you mentioned: supplying her baked good for me, and a separate non-compete agreement within 15-minus radius of the shop.

However, I just heard back today that she's rejecting the offer, and not even willing to counter.

At this point I feel like I should let this one go. But at the same time, the cost to start and configure a new coffee shop would cost way more than even the asking price of $100k, and especially with me being a startup, the landlords aren't as willing to give out TIs and the rents would be significantly higher...

 

[Mr.Peaberry]

John P ... po-tay-to, po-tah-to :decaf:

The sarcastic nature of your response was clearly comprehended in its unwritten form. Clearly, my clarification confounded the case, for which I would like to come clean and clarify by claiming chronic confusion. Can we convince TrivixXx to contribute uncopied content?

 

[iheartcoffeeshops]

I agree with sidg.

There is no value to the "business" despite it seemingly Grossing $20K per month.

COGS should be around 22 to 23% max. High COGS may be due to the cost of keeping freshly baked goods.
It's obvious it's not really a coffee shop currently, but rather a bakery that serves coffee.

I wouldn't even bother unless it's great equipment and you can get it at about 30 cents on the dollar (or less). (And that is with documented maintenance)

And if you strike a good deal, I would make an overall change as you said -- including changing the current name. I would make it clear to everyone that it is a different concept. Also, don't make any promises or feel any obligation to current employees. I would dismiss everyone, and then re-interview and re-hire based on the skills that you are looking for. It's a business, and you need people who are passionate about coffee and demonstrate the motivation to learn new things. And if some are a great fit, maybe pay them a little more than before.

Close, remodel, and retrain. And re-open with the right push of press release and social media to get the ball rolling.

Or look for another space.

Leasing rule #1. Don't fall in love with something that can't love you back.

Thank you John for your comments. I submitted an offer at $50k (asking is $100k) but the seller is rejecting without counter.

I agree that with all the changes I would have to do to the existing space, i am better off starting from scratch...but it's just the cost of starting from scratch is going to be much higher than the $100k...

 

[Mr.Peaberry]

Thank you Mr. Peaberry for your comments. I submitted an offer at $50k (the asking is $100k), and including conditions as you mentioned: supplying her baked good for me, and a separate non-compete agreement within 15-minus radius of the shop.

However, I just heard back today that she's rejecting the offer, and not even willing to counter.

At this point I feel like I should let this one go. But at the same time, the cost to start and configure a new coffee shop would cost way more than even the asking price of $100k, and especially with me being a startup, the landlords aren't as willing to give out TIs and the rents would be significantly higher...

Assuming that her asking price is the capital she requires for opening a competing business nearby. It's hard to know if her refusal to counter is because you have uncovered her intentions, or if the combination of conditions and cutting her asking price in half was just too much and she's thinking that you're offer is not serious. Regardless of the investment, you cannot sustain that business if the rent increases to market value, she cannibalizes your (her) customers, and refuses to provide the baked goods that keep the existing clientele coming through the door. Do not put yourself in the position of funding her new business while getting stuck with the hollow shell of her current business. You need to ask her if there is something in between her asking price, and your offer that could ensure both of you an opportunity to succeed and listen to what she has to say.

Good luck.