Do you dream of owning your own coffee shop? Will it be a small and cosy place to catch up with friends serving fresh coffee and sandwiches? Or will you offer hot food too? If you’d like to step into small business ownership, a coffee shop can seem like a safe bet. After all, research from Mintel shows that the market increased by 37% between 2011 and 2016 to be valued at £3.4million. We Brits are certainly drinking more coffee than ever before, but is opening up a completely new business the best way to go?
Last year, equity research specialists Citi Group warned the big high street chains that in their view, the UK coffee market to have just a few more years of structural growth ahead. Not every street can support a coffee shop, so by buying an existing business, you may be better placed to carve out a stable spot in the market. These are the key points you need to consider when looking for a coffee shop to buy.
Scoping out your perfect location
Coffee shops are one of those bricks and mortar businesses that heavily rely on footfall. There are very few successful ‘destination’ cafes. This means when you’re looking for a business to buy, you’ll want to view places that are near office blocks, on the town’s high street or midway along a beachfront walk. The café itself may not currently be set up to appeal to the demographic you’d like to target, so you’ll need to do research to check your ideal customer base exists in the area.
It’s important to be realistic about the viability of a location when you conduct your search. Running a coffee shop on your doorstep may seem like the natural thing to do, but if you don’t live in a tourist town or an area with a strong coffee culture, you may struggle to grow profits. By all means, chat with local commercial estate agents and get a feel for the market by viewing prospects nearby, but be prepared to look elsewhere too. Head online to search on platforms like Business Trade Centre and you could find a shop that’s better placed within an easy travelling distance or even an enterprise worth relocating for.
Nowadays, competition in the coffee shop market is fierce, but it’s not necessarily a bad thing to be located near competitors. In theory, this should encourage footfall, though as part of your initial research for potential purchase you’ll want to ensure there’s enough business to go round and investigate how venues are differentiating themselves. Visibility is incredibly important too, particularly when competitors are in close proximity. Think about whether the premises are easy to spot and access and also whether the layout, kitchen and size of the service area will accommodate your food and drink plans. Don’t forget to scope out parking too; this will be especially important if you plan to offer a takeaway or catering service.
Three key questions to ask the owner
If you already work within the hospitality industry and have a clear vision for the coffee shop you’d like to run, you will likely have a good bank of questions you’ll want to answer when viewing a business, either through observation or questioning the owner. In the first instance, you’ll want to initially verify profit and turnover and explore the potential for growth before getting your accountant to delve into the financials. Here are a few less obvious questions you could ask:
Q: What is included in the sale?
You want to make sure all of the equipment you’re viewing will be included otherwise you’ll have further costs to budget for before you can start trading. This could mean more borrowing, which in turn means reducing your profits. Be sure to ask if any equipment such as the coffee machine is subject to a hire purchase agreement. Don’t focus solely on physical objects either; intellectual property can prove very valuable. Does the business have a website, social media accounts or marketing materials and will they be included in the sale? You could give your marketing a head start if the coffee shop enjoys a good reputation and has a respectable following on social media platforms.
Q: How long is left on the lease?
It is possible to buy a coffee shop freehold, which means you don’t need to worry about a landlord raising rents or selling the building in the future. However, these businesses naturally cost far more to purchase. If you’re looking at purchasing a leasehold business, you’ll want to know how long is left on the lease, how much the rent is as a percentage of turnover and of course, what the landlord is like. You’ll find it far easier to get finance from banks if there’s a long-term lease on offer with plenty of time left on it. If you decide to proceed with a purchase, you’ll also want to be sure the owner isn’t going to set up in competition nearby in order to take their existing customer base to another venue.
Q: How much coffee do you sell?
If you’d like to verify profit claims, a quick and easy way is to ask the owner how much of the basics like coffee beans, bread or milk they need to order on a weekly or monthly basis. You should also ask them how many covers they do on weekdays versus the weekend and how many full time and part time staff work in the business and what hours they do. This will give you some indication of how busy the place gets, though you should also do your own reconnaissance for validation. Spend a day or two nearby noting how many people go in and out of the place to see if the numbers add up. You could also ask to spend a week or two working in the business to see if everything is as the owner claims.
As a quick check on potential profits, you should remember that businesses with a turnover above £85,000 need to be VAT registered. It’s also possible to purchase the accounts of limited companies from Companies House, though your vendor should show you accounts and allow access to their accountant as part of due diligence. You’ll also want to examine supplier invoices and energy bills to get a feel for the potential costs you’d be taking on.
If a coffee shop has consistently good sales, it will command a higher price, but less successful businesses shouldn’t necessarily be dismissed if you can pinpoint what’s going wrong and be confident you can turn it around. Perhaps prohibitive opening times mean the business is missing out on key trading, or the current offering just isn’t in line with what the locals want. Don’t forget to ask the owners what they have and haven’t tried. While some businesses have embraced online advertising, you may find that the shop currently does no marketing whatsoever. This could, of course, make a real difference to the number of people coming through the door.
Think about any potential diversifications and how they may increase yield and how realistic they would be to implement. For example, would the site be likely to be granted an alcohol licence so you could open up as a café bar or bistro in the evening? Is the kitchen large enough to allow for external catering? And if you’d like to start serving hot food, does the premises have an A3 food licence or would it be likely to be granted one?
There are many ways you can put your own stamp on a floundering or even a successful coffee shop in order to take it to new strengths. What would you dream coffee shop set up be?