Strategies for Buying

 

Before contacting sellers, potential buyers should prepare a document that outlines for themselves their desired sales price, terms, and conditions. 

You also will need to consider the shop’s investment yield, taxes, and the effect the business will have on your personal life. Basically, buyers should be looking for establishments that will meet their numbers and ones that they are going to be happy working at 12 to 14 hours a day. 

Buyers should prioritize their objectives and consider the trade-offs that must be made to attain them. Buyers generally want to accomplish the flowing objectives:

• • Best possible sales price. Serious buyers and sellers compromise on the sales price, terms, and conditions in order to reach a mutually satisfying end. Buyers are usually willing to trade price for terms and conditions. Most buyers will draw the line at a sales price that exceeds the shop’s replacement cost. 
• • Reasonable down payment. Most serious buyers are willing to maintain a 1:1 debt-to-equity ratio. Many buyers want to lower their down payments to reduce risk, and unfortunately, find themselves with businesses that cannot support their debt load. 
• • Reasonable initial investment. Serious buyers are willing to match dollars of debt equally with dollars of personal equity. Buyers do want most of their equity to go towards the down payment. 
• • Maximum future profits. Buyers are buying a shop’s current financial performance but always are looking for the highest potential revenuegenerating business. 
• • Reduced possibility of failure. Only one out of five established businesses that are purchased go under. That is much better than the four-out-of-five failure rate of new businesses. 
• • Enhancement of borrowing power. Most lenders prefer financing an existing, profitable operation to a new venture. 
• • Minimizing tax liabilities. Buyers need to be aware of the tax consequences of the shop they are buying. Both buyer and seller should work at minimizing taxes. The only way to ensure that this happens is for both parties to hire accountants.

Buyers, too, should develop a purchase plan that lists potential sellers, analyzes their motivations for selling, analyzes the businesses, and develops planned responses to counteroffers. Research into a seller’s motivation is crucial here and can serve the buyer in a number of ways. The following is a list of major seller motivations:

• • Owners who want to retire 
• • Disillusioned owners who do not know how to remedy their problems 
• • Owners with tax problems 
• • Owners with other investment opportunities 
• • Owners with di stressed properties and insufficient cash flow to fund remodeling 
• • Distressed owners with profitable operations, but troubled personal relationships

Once a buyer has responded to a sales solicitation, he or she will receive enough information to determine if the shop meets or exceeds investment requirements. The buyer should do more preliminary work to find out further specifics about whether a shop is a good business opportunity. One of the best indications is the shop’s real property lease payment. If it is less than or equal to 6 percent of the shop’s total sales volume, it is probably worth further investigation. 

When a buyer decides to pursue more research, he or she should tour the facility, learn the lease highlights and other purchase options, and evaluate the neighborhood, competition, customer viewpoint, history of ownership, and the owner’s reason for selling. After doing a deeper analysis of the shop, the buyer must once again determine if it meets his or her investment requirements. If so, an earnest money deposit and offer should be delivered to the seller in return for detailed information on the shop.

Determining Price from a Buyer’s Perspective

Potential buyers must do a thorough financial analysis of the shop. They should study its current profitability carefully and use this information to determine its potential capacity for generating revenue. There is a very close relationship between a shop’s current profitability and its likely sales price. Understandably, sellers are not particularly eager to divulge their financial records to buyers. 

However, if a seller is forthcoming with this information, it can signal to the buyer that he or she has nothing to hide. It is a good idea for the buyer to hire an accountant to assist in this financial analysis. This will help determine whether the deal meets the buyer’s investment requirements. Buyers also should consider hiring other specialists to work with contracts, unemployment compensation, insurance, and banking. Small Business Development Centers (SBDC) throughout the country offer free consulting services to businesses with fewer than 500 employees. 

The buyers also should complete at least a rough market and competition survey before performing a financial evaluation. This will ensure the buyer’s familiarity with the shop’s location and will help when estimating future revenues and expenses. If the buyer is unfamiliar with the area, an independent consulting service can be hired to provide a useful survey. A seller expects a written offer with price, terms, conditions, and an earnest money deposit before allowing a potential buyer to review confidential financial information. It must be agreed that the buyer can withdraw if he or she is unhappy with the financial records. This is because the earnest deposit is at risk unless the right to retract the offer is in place. When reviewing the seller’s financial records, the buyer should expect that an independent CPA has never audited them. 

Auditing is a costly process, and most small coffee and tea shops do  not do it unless they absolutely have to. A lucky buyer is one who is given audited financial statements. Buyers need to reconstruct historical financial statements to show what they could have been, had the buyer been operating the business. This is usually done from only the previous year’s statement. Patience is important here; this is a time-consuming process. If errors are made, the estimate of the business’ sales price may be inaccurate. Sellers will tend to overestimate customer counts and check averages and underestimate utilities and other expenses. The inexperienced buyer should be wary when evaluating these numbers and may want to hire professional counsel. 

Also, it is important to be aware that sellers usually will include only the financial details they initially want to reveal. Buyers should evaluate this information carefully, with special attention to the apparent net cash flow, before spending a lot of time and money on detailed analysis. During this analysis, it is important to note that the typical beverage outlet purchase will not appear to generate enough money to provide sufficient cash flow, give the buyer an appropriate salary and ensure a return on the initial investment. Do not be put off too quickly, however. Solid analysis often reveals that a change in ownership can enhance an operation’s profitability considerably. This analysis should examine all relevant tax filings to determine the most likely annual sales volume that the shop will generate. 

The profit figures included in these filings will be used to determine an accurate sales price. Personnel records are crucial in determining if there have been any Department of Labor judgments against the current owner, or if there are any pending judgments that could impede the transfer of ownership. It is a good idea to meet with a Department of Labor representative to find out if the shop is currently under investigation. Cost of equipment, beverages, food, and miscellaneous supplies are a specialty beverage business’s biggest expenses. 

The potential buyer should take a random sample of cancelled invoices and check their consistency with the cost of goods sold and direct operating supplies expenses listed on the current income statement. Cancelled invoices are a good test of the current owner’s purchasing skills. Potential buyers also should analyze balance sheets and income statements carefully. Balance sheets can reveal the anxiety level of a seller. As a buyer, it is important that you keep in mind that you are basing your price on current income, but purchasing the operation’s future revenue-making ability; this is one of the most critical tasks the buyer will perform.

Lease vs Own for Coffee Shop

 

You may want to consider leasing rather than buying a location for your restaurant. You may be able to lease a building with less money up front. It will be easier to start your new restaurant, and there may be certain tax advantages to leasing. Additionally, if the time ever comes when you want to move, you would not have all the costs associated with selling the building. 

You should look at the following items in a commercial lease:

• • Length of lease. Many commercial leases go for five or ten years, rather than a single year. 
• • Rent rate and timing of rent increases 
• • Whether the rent includes insurance, property taxes, and maintenance costs (called a gross lease), or whether you will be charged for these items separately (called a net lease). 
• • The amount of the security deposit and conditions for its return 
• • The square footage of the space you are renting 
• • How improvements and modifications will be handled and who will pay for them. Pay specific attention to sign specifications. 
• • Who will maintain and repair the premises?
• • Whether there is an option to renew the lease or expand the space 
• • How the lease may be terminated, including notice requirements, and penalties for early termination

Commercial leases are different from residential leases. If you have rented an apartment, that does not mean you know what you are getting into. Commercial leases do not fall under most consumer protection laws. For example, there are no caps on security deposits or rules protecting a tenant’s privacy. Commercial leases usually are customized to the landlord’s needs, but they can be subject to more negotiation between the business owner and the landlord. Because there is no standard lease form, you must be sure to read each lease agreement you look at carefully. It probably would be wise to have your lawyer look at the lease as well.

• • Lease breaking. Unlike a residential lease where if you break the lease, you simply forfeit your security deposit, commercial leases are contracts, and if you break it, more than your security deposit may be at stake. Pay close attention to these terms in the lease agreement. 
• • Future growth. Think before you enter into a lease agreement, and make sure it fits your current and future business needs. Especially consider where you think your business will be in the future if you are entering into a long term lease agreement. Make sure the lease covers your ability to make the necessary modifications your building may need now or five years down the road. 
• • Signs and competition. Also, make sure you are able to put up a sign. If you lease in a large commercial complex, make sure the lease includes some competition safeguards for you. You do not want to open your coffee shop and see the landlord rent the space next door to another coffee shop two months later! 
• • Leasing broker. You may want to engage a leasing broker to help you locate business leases. A leasing broker works much the same way as a real estate broker: they will do a great deal of the legwork for a fee.

: The Basics of Buying a Coffee, Espresso & Tea Shop

As mentioned in the introduction to this manual on How to Open a Financially Successful Coffee, Espresso & Tea Shop, the consumption of specialty coffees and teas outside the home is at an all-time high, with new European-style coffee and tea shops opening daily across the United States. 

But, as competition is cutthroat in this growing segment of the beverage industry, it is doubly important that you choose a site that offers long-term potential for building your profit margins and staying ahead of the competition.

Choosing the Best Location 

Your choice of location will depend on a number of practical considerations, including available budget and findings from your market research about potential customer profiles, demographics, local competition and traffic patterns. Other, more subjective factors, such as your “vision” and perceived image of your establishment, will also play a part in your final decision. 

One of the most important (and often overlooked) factors to have in mind when selecting the ideal location for your coffee, espresso, and tea shop is the volume of foot traffic that passes by your shop. Retail coffee and tea outlets depend on impulse, “walk-in” trade for their day-to-day survival. Available flow of foot traffic should, therefore, be central to your decision about where to locate your shop. Here are a few possible sites that are likely to generate foot traffic and, thus, potential customers for your coffee, espresso, and tea shop: 

• University campus 

• Shopping mall 

• Supermarket 

• Service station 

• Large office block 

• Hospital or medical center 

• Municipal building  

• Bookstore 

• Transit center 

• Bus stop 

• Train station 

• Airport 

• Busy sidewalk 

• Library 

• Gym or fitness center 

• Concert hall 

• Theater 

• Art gallery 

• Convention center 

Before you start looking at specific sites, you will want to consider what type of operation you want.

Business Logo and Business Cards of Coffee Shop

Once you have come up with a name for your coffee shop, you will want to develop a logo. A logo should include your store’s name and an image that represents it. Many shop owners use a sketch, drawing, or photo of the store itself. 

You will need to consider the font or typeface for the lettering and colors. Because this will be such an integral piece of your marketing, do not scrimp. Look into hiring a professional to design your logo. You will probably put the logo on every single piece of your marketing items, so you want this to look good!

Business Cards

Long before you open, you will want to design and produce your business cards. These can be a fairly inexpensive and convenient way to market your new shop. There are many good design programs out now so that you could try to design these by yourself. You do want to make sure these look professional, though, so even if you do most of the work yourself, you may want to employ a graphic design for artistic input. 

Whether you use a designer only as a consultant or for the whole project, there are many sources for finding these artistic individuals. If you have an area college with an art program, you might try contacting the school to see if anyone is interested in bulking up his or her portfolio. Many of these students are entirely capable of producing professional designs even though they have not had much on-the-job experience. 

Many designers also do freelance work. Contact one of the professional design organizations, such as the American Institute of Graphic Arts (AIGA), to see if they can provide you with a directory of freelancers. The AIGA can be contacted at: AIGA, 164 Fifth Avenue New York, NY 10010, 212-807-1990, www.aiga.org. Also, look at www.sologig.com for freelancers. If you are designing your own business card, be sure to keep the following design principles in mind:

• Alignment 

• Contrast 

• Repetition 

• Proximit

Contrast needs to be obvious or it might look like a mistake. For instance, you can bold all your headers in a brochure and keep all the other text as regular text. You also can unify a design and create contrast with repeating graphic elements. Think about using bullet lists, for example. 

Alignment communicates connection between the elements of your design. When designing a business card or brochure (or any other promotional piece), think about the paper as a grid and place your elements on the grid, trying to balance them and create a pleasing design for the eye. Do not be too constricted by the grid; be bold and place some elements outside of it (angle a picture of your shop, for example) to create visual interest. Proximity creates a focus for your business card by creating relationships between elements. After you have designed a card, try the squint test. Hold the piece at about arm’s length. 

If all you see is gray, you need to work on proximity. Try to use these elements in all your graphic designs. Also, think about color. Two and four-color jobs are more expensive to print, while a nice, clean black and white design might serve just as well. Because a business card is so small, you want to make sure you do not try to include too much information, and it is very important for it to be eye-catching (otherwise the person you hand your card to is just going to throw it to the back of their desk drawer with all the other business cards in there). 

Remember, simplicity is often best. Use an image for the focal point of your card and make sure to include pertinent information such as the store’s name, address, phone numbers, website, and email addresses. Once you get all this information on the card, there is little room for anything else. While many people prefer the simplicity of a 1- by 2-inch card because it fits easily into cardholders, others prefer a folded card because it draws people’s attention and seems a little more sophisticated.

Ordering China, Glassware, Flatware,Utensils, and Miscellaneous Items

 

As a general guideline, you are likely to need 8-, 12- and 16-ounce sizes of coffee mugs; 8-ounce cappuccino cups with saucers; espresso cups and saucers; double espresso cups with plates; demitasse cups and saucers; other specialty coffee cups; bone china tea cups and saucers for serving tea; plus a range of different sized glasses for cold drinks and juices. 

If you also sell alcoholic beverages, you will need to serve them using the appropriate glassware, such as brandy and liqueur glasses and 0.5-, 1- and 1.5-ounce shot glasses. Additionally, you will need to purchase a range of matching china plates and bowls and silverware, in line with your side-snacks and dessert menus. 

Pay particular attention when choosing the design of the dessert plates, dishes, and parfait glasses. Remember, presentation often will result in impulse orders for an extra portion of dessert, so it pays not to scrimp on the purchase of eye-catching dessert-ware. Bear in mind that breakages will be highest for key items of chinaware, such as espresso cups and dessert plates; order extra stock accordingly. 

Also, keep in mind that dishwashers and other machines all work at different speeds and that not maintaining enough stock will slow down service. Too much stock, however, will cause you to store items in the shop, tying up cash. 

Figures will need to be adjusted depending on the menu and how many uses you can have for the same piece of China or flatware. Apart from standard flatware for serving snacks and desserts, you also will need to stock up on specialty flatware such as small espresso spoons, long latté spoons and large spoons for scooping foam. 

Do not overlook the importance of attractive containers for your countertop or refrigerated food displays. For example, if you are trying to promote your signature “hand-baked” pastries and muffins, you will need to invest in attractive 49 display chinaware, cake plates, or baskets. Other miscellaneous items and utensils you may need to purchase before opening your coffee, espresso, and tea shop include:

• Knockbox for used coffee grounds 

• Multi-level rack for syrups 

• Cinnamon and nutmeg shakers 

• Honey dispensers 

• Baskets for individual creams and sugars 

• Steam milk thermometers 

• Espresso pourers 

• Steaming pitchers (32- to 48-oz.) 

• Cream thermos 

• Muffin tongs 

• Dessert or cake servers 

• Cutting boards 

• Dry and wet measuring cups 

• Measuring spoons 

• Prep knives 

• Cookie flippers 

• Ice cream scoops 

• Chocolate graters 

• Plastic sealable containers 

• Bean blending containers 

• Steel scoops for green coffee 

• Individual teapots and tea cozies 

• Whipped cream dispenser (with extra chargers)

Worksheets 

The following worksheets, provided courtesy of the Small Business Administration, will aid the coffee and tea shop manager greatly in estimating start-up costs and expenses. 

How Much Money Do You Need? 

To help you estimate the amount of financing you will need to get your venture off the ground, use the following checklist. Keep in mind, however, that not every category applies to your specific business. Estimate monthly amount.

Installation of Coffee- and Tea-Making and Related Equipment

The U.S. specialty coffee and tea industry is relatively young, and retailers of upmarket beverages are constantly having to familiarize themselves with the changing complexities of their business. The same applies to the suppliers and installers of specialty coffee- and tea-making equipment that also have to negotiate an ongoing learning curve. We recommend, therefore, that you build in extra lead time for the ordering and installation of your specialized equipment. 

Milk Dispensers/Ice Cream Freezers 

In the flurry of pre-opening activity, do not forget to organize any additional pieces of equipment necessary for the smooth running of your operation, such as milk dispensers and cream freezers. Many suppliers offer contracts for the use of equipment that are worth considering when you also guarantee to purchase their products exclusively. Ice cream freezers, milk dispensers, and various other kitchen equipment, such as water boilers, are available on contract. Your sales representative will have all the information about the necessary equipment. These arrangements may be very beneficial for small coffee and tea shops that have limited capital. Whatever your financial situation, do a thorough, careful investigation into the terms of the service contract. 

Organizing Public Utilities 

Notify public utility companies of your intention to be fully operational by a certain date. Allow plenty of lead time for completion. Some of these companies may require a deposit before they will provide service. Every company and city has different policies, so be sure to investigate yours thoroughly.

Phone Company 

Two external phone lines are recommended, with some sort of intercom, handheld radio system, and/or paging system throughout the shop so you can speak from your position to key areas for any information that you may need to communicate. A discussion with your local phone company business office about your needs will reveal your many options. You also may wish to consider the installation of a music intercom paging system. Above all, be sure to place local emergency numbers at all phones. 

Gas and Electric Companies 

All major items of equipment need special hook-ups that can only be completed by trained technicians of either the gas or electric company, or by authorized representatives. They should be contacted as early as possible to come and evaluate the amount of work required. In many cases, they will need to schedule the work several weeks ahead of time. 

Many gas and electric companies offer service contracts for purchase. If available, it is highly recommended that you purchase them. Equipment that is maintained to manufacturers’ specifications will last longer and operate more effectively and efficiently. Set up a loose-leaf binder to contain all the information on your equipment and its maintenance schedules. Included in this binder should be warranties, copies of receipts, brochures, equipment schematics, operating instructions, maintenance schedules, parts lists, order forms, past service records, manufacturers’ phone numbers, a chart showing which circuit breaker operates each piece of equipment, etc. Keep this manual up to date from the very beginning. Become aware of your equipment’s needs and act accordingly. Train your employees thoroughly in the proper use of all equipment, and it will serve the establishment well for many years. 

Water 

Running a specialty beverage operation means that you cannot take any risks with the standards of water supply to your brewing equipment; the quality and purity of the water that goes into your tea and coffee is of vital importance to the overall success of your business. Water is different in all parts of the country due to the type of chemical particles it contains. Water that has been subjected to a chemical treatment plant may contain a high level of chlorine. Bear in mind that the chemical particles in the water can have a particularly bad effect in the brewing of fresh coffee and tea. Your state’s department of natural resources can give you information concerning 44 the water’s chemical makeup in the local area. 

Several companies now have filtering devices on the market that attach directly to the water supply lines. Discuss your particular situation with your state’s department of natural resources and the sales representative for your coffee and tea suppliers. 

Securing Other Essential Services Locksmith 

A registered or certified locksmith must be contacted to change over the locks as soon as you occupy the shop building and at intervals thereafter. Also, ensure that the locksmith periodically changes safe combinations. 

Fire and Intrusion Alarms 

Every beverage and food outlet should have two separate alarm systems. A system for fire, smoke and heat detection, and one for intrusion and holdup. As a side note, the installation of an alarm system will increase the value of the property, and a 24-hour monitored system may make you eligible for a rate reduction of 5 to 10 percent with your insurance company on the insurance premium. 

Dishwasher Chemical Company 

Contact all the dishwasher chemical suppliers in the area and meet with their representatives. In most areas, four to five companies will be able to provide the dishwasher with the service it requires. Several of these companies will monitor the entire system, making sure the machine and staff are working together for maximum efficiency. Clean cups, saucers, and serving accessories are an absolute necessity for any beverage outlet. Do not gamble on the outcome by not using an expert. 

Sanitation Service 

In most counties, a private business must provide its own garbage pickup. Receive quotes from all the sanitation companies in the area. Prices may vary considerably depending upon who purchases the dumpsters. You may wish to get advice from your local health department to help you make your selection. 

Parking Lot Maintenance 

Parking lots will need periodic maintenance besides the daily duty of light  sweeping and picking up of any trash. Painting new lines for the parking spaces should be done annually. Blacktop surfaces will also require a sealant to be spread over the surface periodically. Winter climates will require snow removal and possibly salting and sanding of the lot. Most of these services may be purchased under contract.

Plumber 

A local plumber will be needed to handle any miscellaneous work and emergencies that may occur. The plumber must provide 24-hour emergency service. Make every effort possible to retain the plumber that did the original work on the building. 

Electrician 

As with the plumber, it would be a great advantage to retain the original electrician who worked on the premises. An electrician will be needed when equipment is installed or moved. If it has not been done already, the electrician should check and label all the circuits and breakers in the building. The electrician also should be on 24-hour emergency service. 

Refrigeration Service 

The most important consideration when choosing a refrigeration company is how fast they can respond to emergencies. The company must have 24-hour service. 

Exterminator 

Exterminators must be licensed professionals with references from other similar beverage outlets they service. You may wish to consult the health department for their recommendations. Exterminators can eliminate any pest-control problems such as rats, cockroaches, ants, termites, flies, etc. The company selected should be signed to a service contract as soon as possible. This is not an area to cut corners or try to do yourself; it will not pay in the long run. 

Plant Maintenance 

If your coffee, espresso, and tea shop contains large, expensive plants, you may need the services of a plant maintenance company. A professional plant-care person can provide all the necessary services to protect your investments: watering, pruning, transplanting, arranging, etc. Contact plant-care companies in the area to get their opinions, quotes, and references. They must be made aware that they are working in an environment where toxic sprays may be used only with the approval of the health department and, even then, very cautiously.

Selecting Coffee and Tea Suppliers

The suppliers you choose can make or break your specialty beverage venture, so it is in your best interest to view them as your long-term business partners. 

The perishable nature of coffee and tea ingredients, more so than any other retail beverages, requires precision timing for deliveries in order to ensure optimum product quality. Coffee and tea retailers are highly dependent upon their chosen suppliers doing what they say they are going to do. 

The range of suppliers of renewable products as well as equipment will depend on the scope of your particular coffee and tea shop, but of primary concern will be the suppliers of your espresso equipment, including your espresso machine, grinder, brewer and tea-brewing equipment. 

Choosing the most reliable suppliers of coffee and tea-making equipment is, therefore, central to the future success of your business. Any delay in supplying the necessary machines and equipment, or in servicing malfunctioning equipment, can cost you dearly. So take time to source suppliers who will work with you; you need purveyors of both renewable products and equipment that are aware of the bigger picture. When making initial contact with potential suppliers, try to: 

• • Evaluate their response as soon as they answer the phone. Are they professional and friendly, and do they appear to take a personal interest in your business? 
• • Ask potential suppliers how they will add to the success of your specialty beverage operation, beyond just supplying products and services. For example, will they provide you with drinks recipes or perhaps give you a practical demonstration of how to get the best from your espresso machine? 
• • Assess whether they try to put pressure on you to make a decision or focus too heavily on price; both are telltale signs that they are not listening to your specific requirements. 

Approximately six to eight weeks before the scheduled opening date, it will be necessary to contact all the local suppliers and meet with their sales representatives. Make certain each sales representative understands that quality products are your top consideration. 

Competition is fierce among both sales representatives and suppliers. Let each know you are considering all companies equally. Never become locked into using only one purveyor. Shop around, and always be willing to talk with new sales representatives. Important points to consider when choosing coffee and tea suppliers include: 

• • Quality of products. Accept nothing but A-1. 
• • Reliability 
• • Delivery days. All deliveries should arrive at a designated time. 
• • Is the salesperson really interested in your business? 
• • Do they seem to believe in what  they are selling? 
• • Billing terms (interest, credit, etc.) 
• • Is the company local (for emergencies)? 
• • From the first meeting with the sales representative, you should obtain: 
• • Credit applications t o be filled out and returned 
• • Product lists or catalogs describing all the products 
• • References from the restaurants they are currently servicing in the area. Check them out! 

You should supply them with a list of the products you will be purchasing, with estimates as to the amount of each item you will be using every week. Emphasize to the sales representative that price is certainly an important consideration, but not your only one, when selecting a supplier. Point out to the sales representative the other concerns you have about using their company. Indicate that you do intend to compare prices among the various companies but would not necessarily switch suppliers due to a one-time price undercutting. 

Loyalty is important to sales representatives; they need to expect that order from you each week. But at the same time, let them know they must be on their toes in order to earn your business. Most companies offer a discount for bulk purchases. Keep this in mind when comparing prices and suppliers. Choosing a supplier is often a difficult task, with so many variable factors to consider. Begin to analyze these problems in terms of the overall picture, and your purchasing decisions will consistently become more accurate.