how to buy a cafe

Coffee culture is thriving in Australia so it’s no surprise many people aspire to run their own café. However, purchasing a café is a significant commitment, so it’s important you are aware of what to expect and how to proceed.

As a business broker who has previously owned my own cafes, I’m going to share a few tips to help you avoid pitfalls when buying a cafe business.

Is Buying a cafe a good idea right now?

With the issues surrounding Covid-19, it’s not uncommon for the average person to think cafes are doing it tough right now. Surprising, this couldn’t be further from the truth. There are segments in the cafe industry which are absolutely BOOMING right now.

We recently did a survey of 60 cafe businesses in NSW, the sample included cafes spread throughout the North, South, East and West of Sydney as well as the CBD to establish how the cafe industry was going post Covid. Here are the results –

So according to the survey we did –

20% of cafes surveyed reported a 20%+ increase in revenue
45% of cafes surveyed reported a 10% increase in revenue
5% of cafes reported no change in revenue
13% of cafes surveyed reported a 10% decrease in revenue
17% of cafes surveyed reported a 20%+ decrease in revenue

Key takeaways we noticed during the survey –

Cafes which traditionally relied on the working population (industrial cafes & corporate cafes) dropped in revenue and made up the majority of those businesses who reported a revenue drop of 20%+
Local cafes in residential suburbs were the big winners post covid with many increasing revenue by over 20%

Tips for Buying a Cafe - Performing Due Diligence

Running a coffee shop may appear to be a great lifestyle choice, but the reality is that running a cafe business successfully is hard work and a failing cafe quickly becomes a liability which nobody wants, so knowing how to do proper due diligence and avoid the pitfalls are crucial when buying a cafe –

Checking Financials – the way you do due diligence on a cafe is VERY different from other types of businesses. This is due to the lack of financials that can be provided since the vast majority of cafes have undeclared cash revenue which don’t show up on official tax documents. This is the reason cafe are usually sold with a 2 week trial to verify the revenue, unfortunately, this also means taking the documents to your accountant is almost always a waste of time since an accountant would be uncomfortable with providing advice based off information which is NOT from official tax documents.
Despite the lack of official financial documentation, there are ways to conduct proper due diligence on a cafe by rebuilding the profit and loss yourself by asking for the following documentation –

Copy of the Bank Statements for 12 months
Z readings for 12 months (cash register reports)
Coffee Invoices for 12 months
Supplier Invoices for 12 months
Rental receipts for 12 months
Copy of the Roster (including pay rates for staff)

Checking the Lease – The goodwill of a cafe or restaurant business is highly dependent on the lease so you should thoroughly check the terms of the lease before making an offer. The important factors of the lease include –

How many years is left on the lease?
What are the yearly increases?
Is there a market rent review coming up?
How much is the bond?
Are there any terms which will negatively effect the value of the business? ie: demolition clause

Buying a Cafe With No Experience

The most likely issue first time cafe buyers are likely to face is with the landlord approval process since the vast majority of landlords aren’t comfortable with approving a first time buyer. In this situation, it’s not uncommon for landlords to turn down the buyer (yes, it’s legal for them to do this). Getting a first time buyer over the line is usually more work for all parties involved in the sale, it’s likely the landlord will ask for a business plan and a larger rental bond or rental increase to cover the additional risk which comes with an inexperienced operator.

If you are looking to buy a cafe for the first time, my recommendation would be to hire a consultant or business buyers agent who has experience with owning hospitality businesses to represent you and help you navigate and reduce your exposure to risk.

Steven Ung

I'm the owner of Business Brokers Sydney and have many years experience in the hospitality industry having owned cafes before becoming a business broker.
Feel free to call me for a free consultation if you are looking to buy a cafe or have already found one and looking for help with the due diligence process