Do you want to buy a cafe? You like to get up early, you love great coffee and you want to work for yourself?
You might find a cafe that’s tired but has been running for a long time and think you can make a go of it. A lot of people think about this and I have to admit that we’ve thrown the idea around when we’ve been out having breakfast on a lovely morning, in a beautiful spot when you can’t imagine a better place to be! So if you’re thinking about it let’s take a look at the funding side of things.
Useful Tips from Other Cafe Owners
I’ve had some input from small business owners in this sector and they highlight a number of things to think about as a first time cafe buyer:
- The lease is the number one consideration because if your cafe doesn’t make enough money from day 1 your rent payments will be the first thing that you fall behind on.
- When was the last health inspection done and are there any outstanding issues?
- What equipment is leased (usually coffee machines and grinders belong to the coffee brand being used rather than the cafe owner). What stage is the equipment lease at, and is there a payout figure for the transfer?
- Ensure you have a good lawyer to check through the business paperwork
- Tell the vendor that you want to spend a month in the business working with them before committing so you know exactly how it currently runs, and how much goodwill (existing clients) you’re actually getting.
- Sit over the road for a couple of days before you work there to check how many clients go in and out and at what time.
What Do Lenders Look At? It’s all about risk
The challenge from a lenders point of view is that they don’t have a building or a piece of land that they can sell if your business gets into trouble. This is what is called an unsecured loan, since it doesn’t have a saleable asset to borrow money against. This makes it more risky for the lender so they expect you to put some of your own money into buying the business, or to offer some other security such as your home or an investment property.
The lender will want to look at the financial records of the business for the last two years, and then they will use these figures to assess whether you will be able to meet the loan repayments.
Now if you are starting a new business or buying a run down business with plans to improve the cash flow, the lender will need to use projected income. Of course, if improvements include things like replacing the furniture, upgrading the equipment, etc you will need to show how you will afford that and give a projection of the increased earnings that will result. A cash flow projection generally needs to be prepared by an accountant and it will show any assumptions that have been made in the calculations. This is where it’s important to explain your ideas and the reasoning behind them. Assume that the lender doesn’t know the area and the business as well as you do so if there are changes taking place in the local area that will increase the number of customers to your business that needs to be included. Maybe the streetscape is being upgraded and you have the option of using outdoor seating, perhaps there is a big apartment building going up next door and those people will walk past your cafe to get to the bus stop. If there are factors that you consider important to the success of your business, make sure they are conveyed in the loan application.
Previous Experience Is a Big Advantage
This is where your previous business experience will be important. If you have plenty of experience in the hospitality industry and have previously run a successful cafe they can be confident that you have the skills to run the business. You understand how the business works, how to deal with staff, ordering, storage of food, marketing, hygiene, etc and that will help you get the loan.
If you have always had an office job but dreamed of running a cafe they will need more reassurance that your business is going to succeed. Like most things, getting started is the hard part. Once you have run a successful cafe it will be much easier to get funding for a second one!
Maybe a Franchise
If you are going into business for the first time, a franchise can be a good option because there are lenders who specialise in franchise lending. They have particular franchises that they are very familiar with and so there is less risk to the lender. They will get financial details and projections from the Master Franchisor, and provided you can afford to buy into the franchise, there should be no need for any additional security. Not all franchise systems are highly regarded by lenders, which means the amount of money they will lend against them varies greatly. As an example, they may lend up to 70% of the purchase price for a trusted franchise, but only 30% for one that they are not so confident with. This can make an ENORMOUS difference to how much money you need to have available to get started.
So before you get too excited about doing your barista course, take some time to think about what you have to offer a lender if you are asking them for a loan to purchase a cafe:
- What experience do you have?
- How much money can you contribute to the purchase?
- Do you have assets that you can offer as security against the loan?
- How do the financials of the business look?
- Should you get cash flow projections prepared?
- Are there local factors that will affect your business performance?
- Is a franchise a good option for you?
Buying a business is exciting and by taking the right steps at the beginning you can give yourself the best possible start!
Have you bought a business before? Have you run a cafe? Do you have any questions about business loans or lending in general? Please share your experiences and thoughts so we can all benefit.