House prices are on the rise and so is avo on toast. This must be the reason why millennials can’t afford real estate. What’s the alternative investment? Buying a cafe, of course.
As much as everyone loves their flat whites and double espressos, operating a cafe is serious business and it shouldn’t be thought of as a retirement plan.
You may have read that over 90% of cafes fail in the first year. We can’t comment on the exact number but cafe failure rates are on the rise. Some factors include:
- Over confident buyers – the buyer may have previously worked as a barista but didn’t know the ins and outs of running a small business.
- Wrong location – the buyer didn’t take into account foot traffic or proximity to competitors.
- No business plan – a business without a plan is a business planning to fail. The buyer didn’t think about the initial cash flow problems, the business life cycle, and the need for a financial safety net.
- Consistency – if a menu says avo on toast comes with lemon and feta, then it should come with lemon and feta. The first time you forget, the customer will put it down to a mistake, the second time they’ll be unimpressed and the third time you’ve lost them.
- Poor service – the buyer didn’t hire the right people and took short cuts in training them.
- Poor equipment – the buyer didn’t get the right tools. Buy nice or buy twice.
- Buyer didn’t get legal and accounting advice – skipping on both can really hurt you in the long and short term.
Speaking to a business lawyer and an accountant (who will often work together on your purchase) will help you put your best foot forward and ensure you’re aware of the risks involved.
Perhaps some of the more important legal aspects to consider when purchasing a cafe are:
- Business premises – does it have council approval to operate as a cafe? Just because it’s already operating as a cafe doesn’t mean it has the right approvals.
- Employees – must consider terms of employment, relevant awards, minimum wages, superannuation, workers compensation claims and employee entitlements.
- Equipment – must inspect equipment, check Personal Property Security Register (PPSR), lease and finance arrangements, apportionment of purchase price and the depreciation schedule.
- Lease – is the lease commercial or retail? Assignment or new lease? Must consider duration, further options, permitted use, rent and rent reviews, outgoings, fixtures and fit outs, maintenance, renovation, demolition, liquor licences and car parking licences.
- Restraint / Non-compete – consider distance, duration, and capacity of previous owner operating in a competing business.
The list above is not exhaustive by any means.
A business lawyer experienced in buying and selling businesses is familiar with the process and can pick up things that you might not otherwise have thought of. A business lawyer will also be your representative in negotiating more favourable terms in the sale of business contract (which will incorporate all of the issues listed above).
Working with your business lawyer and accountant in the early stages will ensure you structure the purchase in a way that is most advantageous to you. For example, if a company is the most appropriate entity and you aren’t the only shareholder, you’ll likely want to consider a shareholders agreement.
If you’re thinking of buying a cafe, or a business generally, make sure to contact someone with experience in these type of transactions as you could really find yourself in some hot water before you’re even able to pour your first rosetta.
Author: Alex Beagley