How To Prepare A Cafe Business

With the world’s overwhelming reliance on coffee, it is no wonder that aspiring entrepreneurs and business tycoons gravitate toward starting a cafe. Coffee is the most consumed beverage globally; however, there’s a lot more to running a successful coffee shop than just serving brews. 

The typical time for a cafe to stay open is less than five years, so many cafe owners will be looking for a buyer at any given time. If you are considering putting your cafe business up for sale, you’re probably wondering where to start. 

Many factors will affect the market value of a coffee shop. When selling a small business, you’ll want to prepare well ahead of time to ensure you get the best value from the sale. 

This article will discuss what you need to consider before selling a cafe or coffee shop and what impacts its sale price. Continue reading to learn more.

What to Consider Before Selling Your Cafe 

If you’ve decided it is time to sell your cafe business, there are several factors you will have to consider first. We have compiled a list of the top five points you should consider before you go ahead with the sale of your cafe: 

1. Lease – The premises the cafe is on is one of the most important considerations before selling your cafe. You likely have a lease that will either need to be transferred or renewed as part of the sale of the cafe. If you are the property owner, you’ll have the choice of selling the property as part of the sale or if the new cafe owner will be leasing the property from you.

2. Licences – In most cases, food and liquor licences come as part of the sale of a business such as a cafe. You will need to include any documentation for licences and certificates you have for the business when compiling information relevant to the sale and transfer of your cafe.

3. Stock – What happens to your existing stock is another thing to consider for the upcoming sale of your cafe. You aren’t required to keep your existing stock as part of the business and are within your rights to do with it as you please. Regardless of whether you keep your stock or include it as part of the sale, you’ll need to consider it when pricing the value of your business and writing contracts to transfer ownership to the new owner.

4. Tax Implications – As you prepare for the sale of your cafe, you’ll need to consider how your taxes will change and the Capital Gains Tax implications when selling a business. It’s highly recommended that you sit down with your accountant and discuss the sale with them, so they can inform you of any current or future tax obligations you may not have considered.

5. Contracts & Suppliers – As part of your business, you would have developed contracts and relationships with suppliers of ingredients and kitchen supplies. If you are preparing to sell your cafe, you’ll need to consider what happens to those contracts. You’ll have the ability to end the contracts with your suppliers or transfer them to the new owner of the cafe, so they can continue working with the existing supplier relationships you have.

How to Sell Your Cafe Business in Australia 

Once you have considered the above factors and decided that selling your cafe business is the best decision, it’s time to move on to the sales steps. When you decide to sell a business, there is a lot to think about. Following these steps when selling your business can help streamline the process and maximise the sale price. 

Steps to selling a coffee shop or cafe include: 

  • Create an exit plan – A strong exit plan will ensure you are as prepared as possible for the sale of your business. Use this time to plan each step of the sale and outline everything you need to organise. 
  • Consult an accountant – Preparing your finances is one of the biggest factors when selling a business. Get a business accountant onboard early to streamline the sales process. Your accountant will help value the business and assess the financials of interested buyers.
  • Hire a broker – You can manage the sale of your cafe yourself, but hiring a broker will make the process much smoother. A business broker will manage the sales process of your cafe and work towards getting you the best sales price for your business. 
  • Get an expert valuation of your cafe – It’s important to figure out exactly what your cafe business is worth. Your accountant can point you toward a professional, or you can undertake the process yourself. 
  • Prepare important documentation – This includes legal, commercial, financial, and operation documents. 
  • Start advertising – A strong advertising strategy will help you reach the right buyers.  Whatever advertising strategy you choose, be sure to promote the unique aspects of your cafe business.
  • Screen potential buyers – Your accountant should be able to help with this process. Potential buyers should have adequate financial resources and skills to ‌take on your cafe business.
  • Negotiations and contracts – You may consider hiring a lawyer for this step. Signing the contract will signify the end of the deal and the final sale of your business.

Where to Sell a Cafe Business in Australia 

If you’re working with a business broker, they will take care of advertising. If you’re handling the advertising yourself, there are several sites you can list your business for sale.

Things to Do Before Selling Your Cafe 

In the lead-up to the sale of your cafe, there are several things you can do to add value to your business and make it more attractive to buyers. You should implement these factors in the six to twelve months leading up to the sale of your business. 

  • Keep your business running at its best – Don’t slow down just because you plan to sell. The more profitable your coffee shop continues to be, the more attractive it will be at sale time. This means keeping up the quality of your products and services. 
  • Consolidate & grow your customer base – Prospective buyers will be pleased to see you have a strong base of loyal customers they can rely on when they take over your business. 
  • Develop comprehensive marketing and succession plans – This enables prospective buyers to see the future of your business and how it can continue to grow. This will help your business to transition smoothly into its new ownership. 
  • Strengthen and upskill the management team – If your current staff stays with the new owners, work on building a strong management team within your business. This will make it easier when the new ownership comes on board and keep the business running as smoothly as possible. 
  • Carry out repairs and maintenance – Make sure your cafe is well maintained. If anything needs fixing, repairs or upgrades, do it now. You want to ensure the premises are in their best physical condition when it comes time to sell. 

Should I Get My Cafe Business Professionally Valued?

Yes. Having your cafe business valued professionally in Australia is very important, especially if you plan to sell your business soon. A professional valuation ensures that your company is objectively and fairly valued.

If you are selling your coffee shop, a professional valuation will help justify your sale price to interested parties. It also ensures your advertised price isn’t too far above or below an acceptable market price. This can be an enormous obstacle to a timely sale.

Business valuation, regardless of the industry, can be a confusing task. However, valuing a cafe business boils down to two parts — earning potential and asset value. As long as the owner can demonstrate the company’s financials, objective valuation is possible.

A business valuation is just as important if you are a prospective cafe buyer. The valuation price will be one of the major questions you’ll need to ask a business owner when performing your due diligence. 

Whether buying or selling a cafe, you should ensure you also have a professional on your side to investigate the seller’s valuation fully. Understanding the valuation method will ensure you’re getting what you pay for – and not unnecessarily overpaying. 

When the valuation of a cafe or coffee shop often includes intangibles – like goodwill – this makes it even more important to get the assistance of an valuation expert. 

How to Value a Cafe Business For Sale 

There are several ways to value a cafe business in Australia. These methods are market-based valuation, ROI-based valuation, asset-based valuation, and expected future earnings valuation. 

The top four methods of business valuation are: 

  1. Market-based valuation: this method uses the historical sale price of other businesses as a benchmark. This may be the ‘going market rate’ method – simply using sale prices as a reference point – or the use of an industry revenue multiplier. This is a standard multiplier (like x1.5 or x2.5) multiplied by the annual turnover. 
  1. Asset-based valuation: this method looks at the assets and liabilities of the coffee shop. This may consider the book value (net value of assets), liquidation value (market price of the assets), or replacement value (cost to rebuild a similar business). 
  1. ROI-based valuation: this calculation focuses on the internal and external risks involved in taking on the business. This is a ratio of the value of investment to the cost of investment. 
  1. Expected future earnings valuation: also known as earnings-based or cash flow valuation. This method focuses on expected earnings, current profit projections and potential for growth.

How to Value a Cafe Business Based on Revenue

Cafe owners in Australia can value their business using the multiples approach, also known as the revenue multiplier or the times-revenue method. Using industry multiples for similar businesses in the same area, business owners can approximately value their business based on revenue. 

This method is similar to using previously sold homes of a similar size and location to value your own home in the real estate industry. 

What Multiplier Applies When Valuing a Cafe Business?

Coffee shops in Australia generally have a multiplier between 1.5 and 2.5. High-quality cafes will generally use a higher multiplier. Specifically, cafes with a longer lease, more extensive customer base, better position, greater growth opportunities, and better social media marketing suit the higher end of the industry multiplier range.

How Do I Value a Coffee Shop’s Assets?

To value a coffee shop’s assets in Australia, use the liquidation or replacement value. Suppose you decide to value your assets through the liquidation method. In that case, you will need to individually price every asset of your coffee shop instead of valuing the business as a whole. This prevents entrepreneurs from making a profit by reselling your business assets at a higher price.

Alternatively, the replacement value emphasises how much it would cost to replace the business itself. For instance, if it would require $300,000 to create another coffee shop on the same scale as your existing one, the business’s valuation should be around $300,000.

Before deciding how to value your coffee shop’s assets, ask yourself why you want to sell your business and what you want to do after the sale is finalised.

How Do I Value the Goodwill of a Cafe Business?

Goodwill is an intangible commodity and a major factor in the success of any cafe business. Generally, a year or two of net profits are used as a proxy measure to determine the sum of a business’s goodwill.

Goodwill is usually ascribed to businesses with a unique position, such as a highly favourable or strategic location, a well-known brand name, or a track record of consistent net profits. These factors strongly correlate with what it takes to succeed in the cafe industry, so, understandably, this is an important component of business value. 

However, goodwill isn’t always transmitted when you buy a cafe or restaurant business. This is because it can stem from personal elements like the owner’s reputation or customer relationships. 

If a cafe is underperforming and lacks goodwill, net asset valuation may be a more accurate method of determining its worth. This is because it focuses on the business’s physical assets, including if the business is to be liquidated or significantly altered after the sale. 

Related Questions

Is a Coffee Shop a Profitable Business?

Yes, coffee shops can be a profitable business in Australia. However, despite the great demand for cafes in Australia, there are also unique challenges. The average cafe has a net profit margin of around 10%, and many businesses fail in the first few years. 

Most coffee shop owners who have just started will realise that the industry is not as profitable as they would have initially expected. The industry benchmarks from the Australian Taxation Office (ATO) show an average gross profit margin of 65-70% but a net profit of around just 10%. 

Profitability boils down to optimising the three biggest expenses of a coffee shop — the cost of goods sold (also known as Cost of Sales), rent, and wages. Getting trusted small business advice from an expert will give a coffee shop the best chance of success. 

Disclaimer:

This article is provided as general information only and does not consider your specific situation, objectives or needs. WealthVisory makes no warranties about the ongoing completeness or accuracy of this information. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.

A portrait of Aaron Colley, WealthVisory's Director

Aaron is a Chartered Accountant with over 15 years experience in the accounting industry. Aaron has been able to provide advice around structuring, cashflow, tax compliance and working with clients to develop strategies.

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