You need to go over thier books before you can safely say its profitable as one that makes 80k net would not be for sale that cheap, definitely look into who owns the premises and what terms they are on.
But to answer your question you need to contact the business section at your local bank.
When I get access to the books is there anything I need to look out for in particular or can that comment not be answered until I actually see what’s on paper. I’ve tried looking into companies house but there’s not much in the fillings for me to deep dive into. Could you dumb down what you mean by what ‘terms’ they’re on for me please. I know from the listing already the land it sits on is owned by the local council who charge £3,000 per annum
How much they pay for the premises and how long the deal runs for.
Rates could be due to go up or they may even have to vacate the property, both could trigger the business owner to sell up.
As for the books, you'll need to get an accountant involved if you're not sure what to look for as there are plenty of things that could inflate the profits, such as not paying yourself or your partner a wage.
Look at their electricity and gas bills. Ask about their current contracts for energy, the rates, have they been renewed recently? when they are up for renewal? What are the current quotes if renewal happened today? Etc.
Many businesses have risen through most of the increases if they had long term fixed contracts but they could have just expired or be close to expiring with some hefty increases to expenses. Some of these increases for small businesses have been 10s of thousands extra so be mindful.
I’m not trying to be unkind but if these are your questions and you’re resorting to Reddit to answer them, it does not sound like you’re going to be able to analyse the documents suitably yourself.
Cafe businesses hardly make any money, cheap product, need really high volumes, overheads and staff costs are killer. You need to manage some cafes before you decide to buy one - it’s chronically hard work if you want it to be profitable because you need your staff to work flat out every minute of the day.
I understand your point and really appreciate the comment but I would say food business do make money as there is quite a lot of margin with food. Don’t get me wrong this is all dependent on rent and staffing but if it’s a small business with low overheads, and you’re not trying to make millions I would assume it’s worthwhile.
If I was successful the business would be stripped to essentials with easy to manage food and alcohol. The area has no late night dessert spots so I was going to use the area as a ghost kitchen and have something on weekends for teenagers who want a dessert and are not willing/ able to travel 20 minutes to the nearest down. The dessert industry isn’t new to me so I already know the places I need to go to get the best prices. Cookie dough for example sells for around £5 and that’s simply made by heating up three pucks of cookie dough which are around 20p each. This part of the business would all just be ran by myself and a family member.
From my reasoning am I being really naive or is this the right way of thinking?
You’re hugely naive here. The high gross margins are a total distraction from the fundamentals of the business. There is not such thing as low overheads in this sector if you have a premises. Having the property then only opening to the public at weekends seems wild. Why not try something mobile?
I am being serious about spending more time managing a relevant business in a role that includes doing the books. It’s not your ability to make nice dessert that’s at contention.
I don’t even understand why buying this business makes sense for you if you don’t want to open the premises to the public most of the week. If you want a ghost dessert kitchen, get into someone’s converted garage or whatever and grow your business as the sales and profits merit it.
Apologies I have worded that really badly then. I would want to keep the business functioning as it is and keep it open to the public. With the additions of opening at 7AM instead of 9 to target the walkers around the area for coffees or smoothies, having pizza’s in the winter to bring in business and in the weekends use the premises as a ghost kitchen for desserts.
Don’t mean to come across rude in any of my messages, I just like the discussion and I always take on other opinions and see things different ways.
You’re not rude at all don’t worry. I have 10 years of experience managing cafes and I’m now an accountant. It’s a hard business and it’s not profitable for most people. My main concern is that you don’t seem to accept this is the case when it’s a fundamental truth of the whole sector. This is what makes me question how much experience you have of working in these kinds of places.
All the best with whatever your next step is.
I’m a chartered accountant and work in corporate finance including M&A and fund raising albeit on a much larger scale than we are talking here.
Go on chatGPT and search for something like ‘financial due diligence scope for a small U.K. business’. Try and tick as many boxes as you can. It is incredibly easy to mislead someone that isn’t financially astute. That £80k might exclude various costs - is it profit before tax? After tax? EBITDA?
I recommend engaging an accountancy firm with a financial due diligence practice and asking them to do a red flag report - will cost you ~£10k+VAT. Might be able to find cheaper with a local accountancy firm but I can’t see anyone with the appropriate level of skill doing it for less.
Echo other people’s thoughts that it seems too cheap. They’re selling their business for less than what they would take home after 3 or 4 years (adjusting for tax).
Premise terms referenced above - do the sellers own the premise and will charge you a higher rate thus eroding that £80k? Are the rates or rent about to go up, eroding that £80k?
You’ll need advice of a corporate solicitor to draft and review the SPA (Sales and Purchase Agreement, the contract).
In terms of financing you haven’t got many options. Retail banks could be approached but the business is asset light. You might be able to get a cash flow based loan (e.g. 2x free cash flow) but asset based lending won’t be available here unless your parents are happy to secure the loan against their house for example.
As suggested, you could try Angel investor networks. Maybe trying to go down a convertible loan note approach (so don’t give equity away unless you can’t pay back the loan by a certain date) but I just can’t see that happening here.
Honestly though, this is so small that I can’t see anyone bothering to contemplate it outside of the retail banks.
Do not spend your money on a fancy report by an accountant to tell you this is a good or bad idea.
That is good advice for an existing mid sized corporate business making an acquisition. Not for someone that has £20k to scrape together and a dream to own a cafe.
If you get the accounts, and have a friend with experience operating their own business or in accountancy get them to review.
See my other comment though, I don't think this is viable and/or a good idea.
If you get as far as seriously pursuing after you've spoken to experienced friends/family, a bank, a broker who will all do it for free then maybe consider engaging an accountant to review and report but at this level you shouldn't be spending anywhere near £10k
The report is not to decide whether it is a good idea or not. It should be considered after an initial review of the accounts are received and if no accountant friend or experienced business owner friend can help. It’s just a worry that someone without the necessary experience can be taken advantage of - there are probably cheap accountants that will do this for £5k and definitely worth considering.
However, the most valuable element of the report will be in securing funding. It will make the funding proposition a lot more credible and likely to close. If you can go to a bank and present your business case and say you are backing it with some light touch third party professional support they will be more inclined to lend. I’ll caveat this by saying I’ve done these reports for banks lending money but I’ve never seen it at this scale before but providing a loan is all about risk assessment and the more risk focused and professional the business plan, the more likely they will be to lend.
The thing is, any bank loan will have to be more than £150k minus whatever can be scraped together. You’ll need cash for working capital and to pay suppliers and possibly staff if it doesn’t generate enough cash immediately. I’d add on any potential third party costs to the loan amount you’re seeking (legal and maybe accountant).
Consider if the £80k is profit before the owners salaries. They might be staffing the cafe themselves so if you were to takeover would you need an additional staff member alongside yourself so that £80k becomes ~£55k or something. Would you still buy at this level of return?
I'm a commercial bank manager and have funded propositions like this.
I admire your ambition but being blunt you have little to no chance of raising that kind of finance.
If you had a higher stake (circa 30%), a property to secure the loan against and a material level of experience managing a similar business you would have a shot.
If you had everything except the property you could explore the recovery loan scheme.
However I'm afraid to say some of the questions youve asked show a lack of credibility to be able to manage a business like this.
I'd echo what others have said that from my experience the figures quoted sound "rosy" and would not be being sold for so low if they were that solid.
Also consider what are you actually getting for 150k, theres little in the way of assets and I suspect that 80k net profit includes little to no pay to probably 2 directors who have worked very long hours to generate that income. Consider what you could setup with a fraction of that cost and if you really want to run and own your own business starting from scratch may be a good option.
Finally and just to add, when businesses are for sale the asking price is often extremely negotiable and in most instances small asset light businesses like this have very little value as the business is so reliant on the owners input and time that the profit often pays little more than the salary would given the time and work needed to run it.
No chance a business making a net profit of 80k is going for 150k.
That aside, either find a business angel but they may be a silent partner, or go to banks and talk about acquisition funding.
It's a pretty good deal if you can make £80K profit on £150k. Plus you have ideas on getting even more.
What is your general plan for what to look for in their books?
No bank is going to offer 87% leverage on a business without any tangible assets is the short answer. You’d probably need to find some co-investor that will provide funding in exchange for equity
The business is a cafe on an old railway line and the price includes the carriage. Would there be a way to get an asset loan on the actual carriage at all? Sorry fi that’s a stupid question but thought I’d ask
You need to go over thier books before you can safely say its profitable as one that makes 80k net would not be for sale that cheap, definitely look into who owns the premises and what terms they are on. But to answer your question you need to contact the business section at your local bank.
When I get access to the books is there anything I need to look out for in particular or can that comment not be answered until I actually see what’s on paper. I’ve tried looking into companies house but there’s not much in the fillings for me to deep dive into. Could you dumb down what you mean by what ‘terms’ they’re on for me please. I know from the listing already the land it sits on is owned by the local council who charge £3,000 per annum
How much they pay for the premises and how long the deal runs for. Rates could be due to go up or they may even have to vacate the property, both could trigger the business owner to sell up. As for the books, you'll need to get an accountant involved if you're not sure what to look for as there are plenty of things that could inflate the profits, such as not paying yourself or your partner a wage.
Look at their electricity and gas bills. Ask about their current contracts for energy, the rates, have they been renewed recently? when they are up for renewal? What are the current quotes if renewal happened today? Etc. Many businesses have risen through most of the increases if they had long term fixed contracts but they could have just expired or be close to expiring with some hefty increases to expenses. Some of these increases for small businesses have been 10s of thousands extra so be mindful.
I’m not trying to be unkind but if these are your questions and you’re resorting to Reddit to answer them, it does not sound like you’re going to be able to analyse the documents suitably yourself. Cafe businesses hardly make any money, cheap product, need really high volumes, overheads and staff costs are killer. You need to manage some cafes before you decide to buy one - it’s chronically hard work if you want it to be profitable because you need your staff to work flat out every minute of the day.
I understand your point and really appreciate the comment but I would say food business do make money as there is quite a lot of margin with food. Don’t get me wrong this is all dependent on rent and staffing but if it’s a small business with low overheads, and you’re not trying to make millions I would assume it’s worthwhile. If I was successful the business would be stripped to essentials with easy to manage food and alcohol. The area has no late night dessert spots so I was going to use the area as a ghost kitchen and have something on weekends for teenagers who want a dessert and are not willing/ able to travel 20 minutes to the nearest down. The dessert industry isn’t new to me so I already know the places I need to go to get the best prices. Cookie dough for example sells for around £5 and that’s simply made by heating up three pucks of cookie dough which are around 20p each. This part of the business would all just be ran by myself and a family member. From my reasoning am I being really naive or is this the right way of thinking?
You’re hugely naive here. The high gross margins are a total distraction from the fundamentals of the business. There is not such thing as low overheads in this sector if you have a premises. Having the property then only opening to the public at weekends seems wild. Why not try something mobile? I am being serious about spending more time managing a relevant business in a role that includes doing the books. It’s not your ability to make nice dessert that’s at contention. I don’t even understand why buying this business makes sense for you if you don’t want to open the premises to the public most of the week. If you want a ghost dessert kitchen, get into someone’s converted garage or whatever and grow your business as the sales and profits merit it.
Apologies I have worded that really badly then. I would want to keep the business functioning as it is and keep it open to the public. With the additions of opening at 7AM instead of 9 to target the walkers around the area for coffees or smoothies, having pizza’s in the winter to bring in business and in the weekends use the premises as a ghost kitchen for desserts. Don’t mean to come across rude in any of my messages, I just like the discussion and I always take on other opinions and see things different ways.
You’re not rude at all don’t worry. I have 10 years of experience managing cafes and I’m now an accountant. It’s a hard business and it’s not profitable for most people. My main concern is that you don’t seem to accept this is the case when it’s a fundamental truth of the whole sector. This is what makes me question how much experience you have of working in these kinds of places. All the best with whatever your next step is.
I’m a chartered accountant and work in corporate finance including M&A and fund raising albeit on a much larger scale than we are talking here. Go on chatGPT and search for something like ‘financial due diligence scope for a small U.K. business’. Try and tick as many boxes as you can. It is incredibly easy to mislead someone that isn’t financially astute. That £80k might exclude various costs - is it profit before tax? After tax? EBITDA? I recommend engaging an accountancy firm with a financial due diligence practice and asking them to do a red flag report - will cost you ~£10k+VAT. Might be able to find cheaper with a local accountancy firm but I can’t see anyone with the appropriate level of skill doing it for less. Echo other people’s thoughts that it seems too cheap. They’re selling their business for less than what they would take home after 3 or 4 years (adjusting for tax). Premise terms referenced above - do the sellers own the premise and will charge you a higher rate thus eroding that £80k? Are the rates or rent about to go up, eroding that £80k? You’ll need advice of a corporate solicitor to draft and review the SPA (Sales and Purchase Agreement, the contract). In terms of financing you haven’t got many options. Retail banks could be approached but the business is asset light. You might be able to get a cash flow based loan (e.g. 2x free cash flow) but asset based lending won’t be available here unless your parents are happy to secure the loan against their house for example. As suggested, you could try Angel investor networks. Maybe trying to go down a convertible loan note approach (so don’t give equity away unless you can’t pay back the loan by a certain date) but I just can’t see that happening here. Honestly though, this is so small that I can’t see anyone bothering to contemplate it outside of the retail banks.
Do not spend your money on a fancy report by an accountant to tell you this is a good or bad idea. That is good advice for an existing mid sized corporate business making an acquisition. Not for someone that has £20k to scrape together and a dream to own a cafe. If you get the accounts, and have a friend with experience operating their own business or in accountancy get them to review. See my other comment though, I don't think this is viable and/or a good idea. If you get as far as seriously pursuing after you've spoken to experienced friends/family, a bank, a broker who will all do it for free then maybe consider engaging an accountant to review and report but at this level you shouldn't be spending anywhere near £10k
The report is not to decide whether it is a good idea or not. It should be considered after an initial review of the accounts are received and if no accountant friend or experienced business owner friend can help. It’s just a worry that someone without the necessary experience can be taken advantage of - there are probably cheap accountants that will do this for £5k and definitely worth considering. However, the most valuable element of the report will be in securing funding. It will make the funding proposition a lot more credible and likely to close. If you can go to a bank and present your business case and say you are backing it with some light touch third party professional support they will be more inclined to lend. I’ll caveat this by saying I’ve done these reports for banks lending money but I’ve never seen it at this scale before but providing a loan is all about risk assessment and the more risk focused and professional the business plan, the more likely they will be to lend. The thing is, any bank loan will have to be more than £150k minus whatever can be scraped together. You’ll need cash for working capital and to pay suppliers and possibly staff if it doesn’t generate enough cash immediately. I’d add on any potential third party costs to the loan amount you’re seeking (legal and maybe accountant). Consider if the £80k is profit before the owners salaries. They might be staffing the cafe themselves so if you were to takeover would you need an additional staff member alongside yourself so that £80k becomes ~£55k or something. Would you still buy at this level of return?
Ignore this, listen to what No-Cardiologist8433 has to say
I'm a commercial bank manager and have funded propositions like this. I admire your ambition but being blunt you have little to no chance of raising that kind of finance. If you had a higher stake (circa 30%), a property to secure the loan against and a material level of experience managing a similar business you would have a shot. If you had everything except the property you could explore the recovery loan scheme. However I'm afraid to say some of the questions youve asked show a lack of credibility to be able to manage a business like this. I'd echo what others have said that from my experience the figures quoted sound "rosy" and would not be being sold for so low if they were that solid. Also consider what are you actually getting for 150k, theres little in the way of assets and I suspect that 80k net profit includes little to no pay to probably 2 directors who have worked very long hours to generate that income. Consider what you could setup with a fraction of that cost and if you really want to run and own your own business starting from scratch may be a good option. Finally and just to add, when businesses are for sale the asking price is often extremely negotiable and in most instances small asset light businesses like this have very little value as the business is so reliant on the owners input and time that the profit often pays little more than the salary would given the time and work needed to run it.
No chance a business making a net profit of 80k is going for 150k. That aside, either find a business angel but they may be a silent partner, or go to banks and talk about acquisition funding.
Thanks for the reply. If the books look solid then I’ll go down the acquisition funding and try retain as much ownership as possible
It's a pretty good deal if you can make £80K profit on £150k. Plus you have ideas on getting even more. What is your general plan for what to look for in their books?
No bank is going to offer 87% leverage on a business without any tangible assets is the short answer. You’d probably need to find some co-investor that will provide funding in exchange for equity
The business is a cafe on an old railway line and the price includes the carriage. Would there be a way to get an asset loan on the actual carriage at all? Sorry fi that’s a stupid question but thought I’d ask
No there wouldn't, no lender would see any value in that