Purchasing a Business, Need Some Confirmation

Discussion in 'Starting a Business' started by Zach McBournie, Jun 20, 2016.

  1. Zach McBournie

    Zach McBournie
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    I am looking to purchase an existing up and running coffee shop, the owner was looking to partner with someone because he is unable to run it anymore. After finalizing a plan to make changes and improvements for me to join, he decided that he would rather just sell it to me fully and he would finance me. He has told me to come up with the fair purchase price and has even accepted my terms on a "ramp up" period for the first year, so I would pay very little at first and increase as time moves on. I have done my evaluation and have a number that I am going to offer but I am curious what others think.

    So the largest factor in this business is as it sits currently, there is not profit being made. For maths sake lets just say it is breaking even, although in reality it is losing some money. He has other businesses that have kept the shop afloat.
    - Business has been operational for since 2010.
    - Currently there is $80,000 in cash flow (with no profit) with a decent customer base.
    - Assets include $56,000 in equipment, furniture, and inventory.
    - The building is leased and I would take over his contract with building owner, rent would stay the same.
    - The owner claims he has spent about $150,000 since opening the business
    - He has made crucial tenant improvements including, water, air, electrical, plumbing, walls, storage, point of sale system, and cosmetics such as paint, flooring, lighting, and new bathrooms.

    We will iron out length of term and interest, but as far as official purchase price what should I offer? Thanks!

    P.S. I would be making major changes and improvements to the business as a whole once purchased. Currently no marketing or advertising being done at all, and currently half of the space is being used for a different business of his and would be moved out completely once purchased.
     
  2. CorporateViking

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    Hi Zach,

    Welcome to Business Advice Forums! This is a very interesting situation. You've approached something very complex so I'm going to break down some of the pieces that are important and ask some questions that I've found important to purchasing businesses in the past. I am familiar with the coffee shop industry.

    Assets:
    When you say 56k in equipment, furniture, and inventory (which I assume is product), is that the initial buy price of the objects or does that account for attrition? IE Equipment bought 6 years ago doesn't have the same market value as fresh unused equipment.
    How much do you intend to spend in improvements?

    My Operation Questions: What does it cost to run monthly?
    How many paid employees? What are their wages?
    Cleaning costs?
    Inventory costs?
    Marketing Costs?

    Income:
    When you say there is a cash flow of 80k is that the annual gross?

    Last Question:
    What is your end goal? Do you want to be king of your own coffee shop or are you hoping to sell it later for more money?
     
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  3. Zach McBournie

    Zach McBournie
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    Thank you so much for responding!

    - Almost all equipment was purchased 6 years ago
    - My business plan for "improvement" costs is $28,000, which I am finalizing funding for now, the goal which was the original plan of the current owner, and I will now continue forward on is to continue to serve coffee, and then purchasing necessary equipment for a kitchen to serve small plate "bistro" style food as well as a full service bar and then extend hours of operation to allow for full integration into the bar market. A very successful bar was recently closed down literally next door because of "legal issues" and the area is in need of one. The building is ready to go as far as space, plumbing, and electrical for those additions because that goal was kept in mind during renovations. That cost will also go towards rebranding the business, cosmetic changes, working capital, new inventory, and marketing and advertising as well.
    - As far as costs go, I am currently working with the accountant to get an itemized list of fixed costs, however the $80,000 (yes annual gross) just covers all operation costs, with no profit currently.
    - 4 employees making minimum wage (9.47 in WA) plus tips.

    -My end goal is not to sell it later, I would like to get it to the point where it can be fully operational with a general manager. So be the King of my own shop then! For now though it would be my full time commitment so wherever I can save labor costs I will.
     
  4. CorporateViking

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    The Good: You're the ideal operation manager in that you just want to run the thing to the best of your ability. Exit plans are super important though. How long is a great question. 10 years, 20 years? You're the most commonly sought out type of person from an investors standpoint because they always want someone that is going to stay involved and run the thing so they can just make money.

    The Bad: A business that doesn't make any money is dangerous because anything can happen. A random flood/hurricane structural damage has costs that even insurance doesn't cover.

    The Ugly: The reason why your type is the most commonly sought after essentially attributes to you doing all the work and not making the profit. You are the most likely person to work the hardest and be taken advantage of the most. This doesn't mean don't do it, it just means be aware that it's a likely situation especially if you know the person or are friends already.

    The business isn't very highly evaluated based on old equipment an no profit unless you are buying it for a consumer base or location. While evaluating the business the numbers I'm looking at really don't seem to add up well. You have 6.5-7k operation costs every month (really bad) on a business that makes the same a month (actually quite good for a coffee shop depending on State). If you lived in California that would be closer to right. On the other side can't see Washington State costing more than 2 grand a month (which is about twice what you want it to be. Your employees cost, if they are completely full time, 1500 a month- 2 grand tops. That means everything else inventory and all comes up to another 2,500.

    The reason this doesn't make any sense to me is the industry standard says the average margin is 85%. As in most total operation costs in coffee shops don't pass 15%. I had to double check myself because the numbers you are saying was so far off from the averages.

    In doing so I found this other website that is pretty right on the mark for things and might be worth a look at. http://brandongaille.com/25-coffee-shop-industry-statistics-and-trends/

    Some things to think about.
     
  5. Zach McBournie

    Zach McBournie
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    So in other words 6.5-7k per month in operating costs is way to high? I do know that rent is $3,100. I will take a close look at the fixed expenses when I get them. I would in a sense be purchasing a customer base. Not a very big one. So in your opinion what should the purchase price of the business be? I would even take a range based on different unknown factors at this point to make sure I'm on the right track. If I offer something I want to have sound reasoning for the offer, because I have a feeling it is going to be much less than he is expecting. The main thing I am struggling with is how to evaluate tenant improvements. I can figure out depreciation on the equipment and furniture, but all that factored in with virtually no profit.
     
  6. CorporateViking

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    When purchasing a retail business usually you purchase it for 1 year's worth of gross plus assets minus attrition. Less if it's not in the Black (which it doesn't sound like it.) Websites usually you purchase for 3 months of it's revenue. Businesses that you intend to explode our have synergy with another one of your businesses you might purchase for a 3x multiplier but that is usually when it's a successful business you are looking to take nationally with a proven successful model. Intellectual Property and all that.

    Entropy says your purchasing a failing business versus being able to actually just make your own for less than 100k.

    On your question, 7k Operating costs is the operating costs of a company that makes twice to 3 times that... so Yes.
     
  7. Zach McBournie

    Zach McBournie
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    I just got this for expenses from the current owners accountant.

    Average Monthly

    Building Lease $3168.90 no NNN

    Avista Electrical $550.00

    Sewer Water Garbage $170.00

    Employee Expense $4166.00

    Food Costs $2483.00

    Food Sales $5835.00
     
  8. CorporateViking

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    So your operating cost is $10,537.9 and the business grosses $5835. That means it looses 56,434 a year and your pretty much going to have to handle the operating cost of $126,454.8 annually out of pocket until renovations are made (ambitiously 3 months until you start making money.) Which when you do your customer base will find somewhere to get morning coffee.

    So by the end of your first year your total cost (including your renovations are about $160,000 and based on previous history you'll have made roughly 35,000. Considering like most businesses the average amount of time it takes to have a business in the black is 3 years. If you can afford 420,000 towards this project (which is close to a half a million dollar investment you'd be responsible for) and you have a proven business model, sounds awesome. I know for a fact for the same amount of money I could open up 5 of the things including having a manager in each one to run it so I don't have to.

    I encourage you to look around at commercial property. There might be something about your area I can't see from here but those numbers are crazy and not in a good way. Definitely compare the numbers you have with what the local realtors say.
     
  9. Zach McBournie

    Zach McBournie
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    I am working with commercial real estate agent to double check some numbers for me. So where would you say costs are to high specifically? Obviously sales needs to go up drastically and I think food costs are to high. But after getting a handle on that aspect what else could be changed? do you feel the rent is to high for a 2100 square foot building? It sits between two main one way streets with 17,000 cars per day on each. Fully renovated as far as plumbing, electrical, and cosmetics. As it stands there is a computer repair shop utilizing half of the space with temporary walls in place as a divider. The renovations would consist of taking down those walls, doing simple cosmetic upgrades like paint lighting and bring in furniture. The largest change is bringing in a small plate kitchen and full service bar. Coffee is not doing amazingly well at this location obviously, I think it can be drastically improved but adding the other elements to an area in need of a bar could yield great results. I uploaded an initial copy of the business plan I put together to get the conversation started with funding and the current owner and to start getting plans on paper. Some things have changed slightly like instead of a partnership I am buying it while financing through the owner and the business will be less built off of the success of Reboot because at the time I was unaware of the exact numbers and more building a new business from scratch utilizing the coffee equipment and building that reboot is in and really nothing else.
     

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  10. CorporateViking

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    Give me a bit to really dive into this business plan. It's really well put together.

    My envy at only 1k for a liquor license is rising. Many places in Florida they cost upwards of 50k.
     
  11. CorporateViking

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    First, Your smart for using insitgram, facebook and twitter. Your missing Yelp in your marketing as that is a huge bringer of people in the food and beverage industry.

    Second I actually like your plan for everything though you will really need something attractive (like a lunch special) to pull people from the street as they are driving buy. I recommend some uniquely made Panani's or drinks they can only get at your place. (I saw based on your equipment what you are selling.

    I might have missed it, but an important piece of information is "average spend". How much to intend on each customer spending on average?
     
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  12. Zach McBournie

    Zach McBournie
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    Yelp is a great idea. The company I will use is very versed on the different aspects of digital and the owner is good friend of mine. Oh I did create a mock up menu after that rendition of the plan. I attached it. I thought of it as how much each person would spend during specific times of the day, probably less during morning and lunch time and more after work and later at night. But overall I would say average would be $7-$8 considering that's about how much food would cost, and coffee being cheaper and alcohol being more, possibly more for those that get something to eat and drink. Would you say traffic numbers are accurate? I'm aiming low, but I would be doing this full time and still have bills to pay. The Buzz originally came from the commonality of the term people use for both coffee and alcohol. I have gone back and forth between incorporating a cool modern bee in logo, do you think that would be corny.

    And an update from the owner, I told him that I know he has put in over 150k, but his business is not worth that and he wouldnt get that from me or anyone else, he told me to come up with a comfortable payment that I could make to him based on projections, and I will pay him that for 5 years and thats it. Im thinking start off at $500 in the beginning to ensure sufficient cash flow while thins are getting started and ramp up to $1000-$1200. Totally around 60-70k. He is more concerned with the success of the business than the financial gain. I feel that puts me in a comfortable spot.
     

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    #12 Zach McBournie, Jun 23, 2016
    Last edited: Jun 23, 2016
  13. Zach McBournie

    Zach McBournie
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    Is there anything else you think I should know or check on before moving forward? Hoping to close funding in the next couple of days. Thanks so much for all your help!
     
  14. CorporateViking

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    One of the big analytics for storefront locations is Revenue per Square Foot of Space. I highly recommend mathing up multiple tiers of success based on average spend overhead costs. What is that number that puts you in the black and what what is that equal per square foot? It helps when you do those numbers in the future and you realize your still not at your $/SqFoot requirements.

    It also helps you compare your business to other ones nearby so you know who might have a superior layout or process.
     

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