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7 Due Diligence Required When Buying A Café Or Restaurant Business For Sale
  • 3 months ago

Entering the domain of entrepreneurship is a risky affair that is mitigated to a large extent when you decide to purchase an established business for sale. However, the catch here is that you need to be twice as sure about the profitability of the business model and its brand equity before jumping the gun. Lately, a lot of investors have been giving precedence to acquiring cafe or restaurant businesses for sale in Australiabecause of the growing food and coffee culture in the country. Busy lifestyles and high disposable incomes have made restaurants and cafes the go-to place of individuals looking to let their hair down after a long day at work.

The growing appetite of the market can be gauged from the fact that the restaurant industry is estimated to generate revenue of $20 billion in 2017-18 while the coffee business is expected to reach $8.3 billion during the same period. So if you too are planning to buy a cafe or restaurant businesses for sale in Australia, then you must be prepared to carry out the due diligence as well. It will help you to get access to all the vital information that will allow the correct evaluation of the financial health of the business and the risks associated with its purchase. The process of due diligence begins after the buyer and the seller have decided to proceed with a deal, but have not signed the purchase contract.

Most often, the seller would ask the buyer to sign a non-disclosure agreement at this point so that the sensitive business information remains confidential. This is essential to maintain a cordial relationship with the seller and comply with the rules of the purchase process. For a first-time business buyer, it can be challenging to decide on the items to be examined and valued. It is recommended not to rely on the valuation of the seller and conduct your own independent evaluation. Here is a list of the seven most crucial due diligence pointers that will help you buy a flourishing restaurant or coffee shop for sale.

1. Lease Transfer

The location of the restaurant plays a vital role in its popularity and foot-traffic. If the outlet has high visibility and is positioned in a busy area, then it will witness swarms of customers walking in everyday. On the other hand, if the coffee shop or the eatery is situated in an obscure place away from the hustle and bustle, it will struggle to generate revenue. Additionally, the landlords have become fussy about leasing their property to first-time business buyers and may ask for a year’s rent upfront. So check about the lease transfer or securing a new lease to retain the loyal customer base and benefit from the high-passing foot-traffic.

2. Real Cash Flow Amount

To evaluate the value of a restaurant or coffee shop, you must ask for the actual income generated by the business. In most cases, this amount would vary from the figures given in the financial statements to save taxes. Make sure that the amount being presented is not a rough estimate provided by the owner but the real cash flow amount which should be verified by checking the books and all the financial records.

3. Expenditure on the Business

While understanding the pricing, you need to consider the cost of running the business which would include elements like stock, rent, marketing budget, and employee cost. To avoid overpaying, ensure that the combined value of all the items should not be higher than 65% of the total money generated by the business. If you do not consider this amount, you may end up making losses which will eventually lead to the failure of the venture.

4. The Condition of the Equipment

When purchasing an established food outlet or cafe for sale, you need to check the equipment thoroughly. Just going by the look and feel of the place will not suffice as an inspection. Confirm that the refrigerators, ovens, air-conditioners, freezers, mixer-grinders, and other machinery are in good working condition. Ask the owner about the maintenance of the equipment and get the contact details of the repair person for future use. Also, get in touch with him to know how frequently the machines were serviced and what how it has been functioning. Remember if you do not take the pains to do this, you will end up paying a considerable amount of money on the repair work.

5. Transferable Food And Liquor Licence

This is the most significant action point as these certifications are needed along with food safety documents to start operating the food business. Check if the licences secured by the seller can be transferred or you will have to apply for new ones. The liquor licence takes time for transfer so make sure that the formalities are settled before you start trading. This should be a part of the sale contract, and the lawyer must aid you in getting the existing contracts transferred.

6. Checklist of Items

Determine what all is included in the asking price and evaluate the cost of each item. If you are buying the business with the premises, then the cost will go up, and if you are transferring the lease, you should be aware of its term, rent, bond etc. Include all the inventory, vehicle, and equipment to establish the actual cost with the help of a lawyer. If you do it yourself, you may overestimate some items so let a knowledgeable person do the hard work.

7. Purchase Agreement

Read the draft thoroughly along with your attorney to understand the assets, liabilities and the time from when you can start trading. Pay attention to the terms and conditions and read between the lines to avoid missing any hidden clauses or costs. Determine a trial period where the buyer can ask for the control of the cash sales. Read more about business sales in Australia and take advice from your lawyer on following the guidelines of a business deal.

Endnote

These are the vital details that need to be evaluated before signing on the dotted line so that you do not end up making a loss. Besides these pointers, you need to verify other factors such as staffing obligations, the reputation of the business, and negotiation on the price to get a higher return. Now that you know what needs to be verified go ahead and find the best restaurant and cafe businesses for sale in Australia to score an attractive deal.

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Gemma Davis