Acquiring an existing coffee shop can be a strategic way to enter the industry or expand your business. However, determining whether a deal is good requires more than just evaluating the equipment and assets. In this episode, we walk you through the key factors to consider when purchasing a coffee shop, ensuring that you make a well-informed decision.
1. Understand the Value Beyond Equipment
While equipment is a significant part of any coffee shop acquisition, it's not the only factor to consider. We look over a seller who includes build-out costs in their asking price, even if those improvements were made to a landlord’s property. For instance, expenses like electrical and plumbing upgrades, flooring, and even decor might be passed on to you. However, these improvements typically stay with the building, not with your business, if you ever relocate.
When evaluating these costs, ask yourself:
- Are these improvements critical to the operation? If they are, then they may add value to the purchase. However, if they're aesthetic or general upgrades, you may not want to pay a premium for them.
- What is the depreciation on these assets? Improvements made several years ago may not hold the same value today.
- Does the lease support your long-term goals? Understanding the terms of the lease is crucial. A great location with low rent can be enticing, but if the lease is up soon or includes unfavorable renewal terms, it could be a risk.
2. Evaluate the Financial Health
The financial health of the business is paramount. Request a Profit and Loss (P&L) statement to get a clear picture of the shop’s profitability. Key areas to scrutinize include:
- Net income: Multiply this by 2-3 years (or whatever you choose as your multiplier, this often varies) to get a rough estimate of the business's worth.
- Revenue and Daily Transactions: Do the metrics show that this location is in a profitable area where guests are coming through the door
- Cost of goods sold (COGS): How much does it cost to produce each cup of coffee? A high COGS might indicate inefficient operations or overpriced suppliers.
3. Assess the Intangibles
Intangible assets like brand reputation, customer loyalty, and employee culture can significantly impact the business's value. Ask yourself:
- Does the shop have a strong local following? A loyal customer base can provide a stable income stream and make marketing efforts more effective.
- What is the employee turnover rate? High turnover can be a red flag, indicating potential issues with management or workplace culture.
- How does the community perceive the brand? A well-regarded brand can give you a head start, whereas a tarnished reputation might require significant investment to rebuild.
4. Consider the Market Position
Understanding the shop’s position in the local market is essential. Is it one of many coffee shops in the area, or does it offer something unique that sets it apart?
- Market saturation: If the area is crowded with coffee shops, you'll need to assess whether this shop has a competitive advantage.
- Unique selling proposition (USP): What makes this shop stand out? Is it the coffee, the ambiance, or perhaps the customer service?
5. Think About Future Potential
Finally, consider the growth potential. Are there opportunities to expand the menu, increase foot traffic, or add new services like catering or wholesale?
- Scalability: Does the shop have room to grow, or is it limited by space, location, or market conditions?
- Innovation: Can you introduce new products or services that align with current coffee trends, such as specialty drinks or a subscription service?
Conclusion
Buying a coffee shop is a significant investment that requires careful consideration. Beyond just the equipment and assets, understanding the financial health, market position, and intangible assets will help you make an informed decision. Remember, a lower asking price doesn't always mean a better deal—it's about the long-term potential and sustainability of the business.
