Buying an Existing Business

Purchasing an existing business can be the fastest way to get your doors open; however, it may not be the best choice for success. Remember, if the location is a poor one, the prior business had a bad reputation, or the equipment is overpriced, you may be hindering your potential. Availability is another factor when purchasing an existing business; the right business for you has to be on the market now or you have to make an offer that they cannot refuse.

Business brokers help buyers and sellers connect (just as a real estate broker does). Start by finding a business broker who will represent you and your interests. He or she will be able to research cafes for sale in office buildings within your desired geographical area. Depending upon your level of urgency, it might take months or even a year to find the right spot for your cafe. Your broker may even approach business owners on your behalf to explore buying them out. Look for operations where a long-term lease can be assumed by a new owner.

Buying Costs

Buyers must estimate, as accurately as possible, the total initial investment needed to get their businesses up and running the way they envision them. Many restaurants that could have been successful failed because they were undercapitalized. For exactly this reason, one of the very appealing aspects of purchasing an existing restaurant is that many start-up costs are avoided. There are, however, a number of start-up costs even with transfer of ownership. Here are a number to be aware of:

• Investigation costs — are willing to spend time and money to thoroughly examine the opportunities that are available. Many investors falsely believe that once initial development work is complete, the start-up costs are eliminated. These costs still exist and wise investors calculate them in their analyses.

• Down payment — a standard down payment is usually around a quarter of the sales price. The down payment can affect the sales price, and in many cases sellers will accept a lower sales price with a larger down payment and vice versa.

• Transaction costs — Prorated insurance, payroll, property taxes, vacation pay, license renewal fees, advertising costs, etc., on the close-of-escrow date.

• Working capital — Available cash to ensure sufficient supplies are on hand to run the restaurant.

• Deposits — Cash deposits required of the new owner for utility, telephone, sales tax, payroll-tax and lease deposits.

• Licenses and permits —All required operating licenses and permits for retail, health and occupational

• Legal fees —Fees for legal advice, buyer negotiation and contract review.

• Renovations — Costs required to renovate or rectify building code violations.

• Equipment and utensils — Costs to purchase new or replacement equipment, supplies and serving ware. Don’t forget to include maintenance agreements.

• Advertising — Costs to promote an opening or reopening, rebuild signage and offer promotional discounts and incentives.

• Fictitious name registration — also known as “doing business as” or “DBA.” If the name of a restaurant doesn’t use your own name, the name usually must be registered at the local courthouse or County Recorder’s Office.

• Loan fees — Loan fees from the lending parties.

• Equity fees —Attorney, document preparation and registration fees for selling common stock.

• Insurance — Lender-required life and disability insurance with the lender named as sole beneficiary. Adequate real property insurance may also be required.

• Franchise — Franchise transfer-of-ownership fee. This fee pays the franchiser for the costs of evaluating the new owner for the franchise. It is paid up-front and in cash before the new franchise can begin operations.

• Distributorship fees — Exclusive distributorship licenses or discontinuing a current license agreement may incur costs similar to franchise fees.

• Pre-opening labor — Labor required during the pre-opening and transition period.

• Accounting fees — Fees for assistance in the evaluation of a restaurant purchase.

• Other consulting fees — Fees for specialty services such as consultants, labor-relations specialists and computer consultants.

• Other prepaid expenses — any prepayment required by a creditor.

• Sales taxes — Property subject to a transfer tax and non-food supplies are often subject to sales tax.

• Locksmith — Cost to change all the locks on a business after the sale is concluded.

• Security — Transfer or set-up fee for security service or systems.

• Contingency — a contingency fund large enough for at least the first six months’ operating expenses. Among other things, it is often necessary to over-hire and over-schedule employees before an effective sales distribution pattern emerges, so operators incur incredibly high expenses during the first six months of operation. Not having an ample contingency fund is the primary reason many businesses fail within the first few months.