Owning a coffee shop may be a dream come true: the smell of freshly roasting beans, the whirr of the espresso machine, delighted customers depending on you to get their day started right … The coffee shop industry is growing by nearly 5% a year, according to Statista. Depending on what you serve, your location, and your customer base, you can expect up to a 25% profit margin.
If this is your dream, but you don’t want the work and complications of starting a coffee shop from scratch, then buying an existing shop may be for you. Using the steps below, we’ll go over how to buy a coffee shop, from finding the perfect place to signing the final paperwork.
Most likely, you’re reading this article because you’ve already decided owning a coffee shop is the life for you. However, if you are still on the fence, consider the following pros and cons:
Pros and Cons of Buying a Coffee Shop
| pros | cons |
|---|---|
| Growing demand | Often working long hours (60-80/week) |
| Generally a higher profit margin and less complexity than running a restaurant | Highly competitive business |
| Personal satisfaction (brewing, interacting with customers, etc.) | Fickle customer base |
| Can start business right away | You inherit the problems the shop already has |
Many potential coffee shop owners have a romantic idea about the business: sipping coffee, talking to your regulars, sharing a joke with a caffeinated staff. However, those in the business warn that you will be putting in a lot of hard hours, both behind the espresso machine and at the computer, and will spend as much time dealing with the harried “Karen” who got the wrong order and a teenage barista who needs constant supervision.
However, if you are ready for the joys and frustrations of ownership, then purchasing an existing coffee shop offers some advantages: You have an established customer base in a known location, all the equipment (if it’s included), a staff that knows what they’re doing…in theory, a turnkey solution whose strengths and weaknesses are already known.
By contrast, starting a coffee shop from scratch means taking a chance on location, building a starting customer base, and training staff from the beginning. However, you have more opportunities to be creative from the ground up
Step 1: Find a Coffee Shop
The first step to buying a coffee shop is finding one for sale. Finding a coffee shop to buy is a pretty straightforward process, you just need to know where to look.
Where to Find Coffee Shops for Sale
Unless you’re taking over a shop from someone you know, the search is on! You can look around for yourself or enlist the aid of experts in the business, called brokers.
Work With a Broker
Business brokers and real estate brokers can help you if you don’t have a lot of connections or are new to food service. The best brokers understand the importance of location and know what to look for when buying a coffee shop. They may have leads on successful coffee shops even before they go on the market, plus can provide tips on lease terms, permit issues, or government regulations. To find a broker, do a Google search, check with your local Chamber of Commerce, or try BusinessBroker.net.
Online Listings
If you want to skip the middleman and understand both the coffee and business industry, then search existing listing sites. Like real estate websites, they provide the basic information to get you started. However, you are best off getting a business attorney to complete the deal.
Determine What You Are Looking For
When looking at coffee shop listings, you’ll usually see three prices: asking price, FF&E (furniture, fixtures, and equipment), and inventory. FF&E and inventory may or may not be included in the total asking price.
As you negotiate, you should decide exactly what assets you want to purchase. For example, you may decide not to buy the furniture, knowing you want to redecorate. Here are some assets to think about:
- Equipment: This can include everything from the espresso machine to the drive-thru headsets. When deciding on these, consider their age and how well they’ve been kept up. If the shop roasts its own beans, ask if that equipment is staying with the shop. If you don’t know much about coffee shop equipment, bring someone who does to assess its quality.
- Point-of-sale (POS) system: Will you be taking over the cafe’s existing POS system? This could save you in hardware but lock you into a contract.
- Furnishings and small wares: Furnishings include everything from stools to light fixtures. Small wares include plates, cups, and silverware. Before negotiating, check their wear as well as whether they fit your vision.
- Lease or property: Most coffee shop locations are under long-term commercial lease contracts. If the owner does not own the location, you’ll be taking over the lease.
- Branding: Branding can be expensive, and changing the brand may mean losing customers if the shop has a good reputation. You may need to pay to transfer the trademark to your name.
- Liquor license: Some coffee shops make extra money by selling liquor in addition to coffee, such as on the weekends. If the owners have a liquor license, you may be able to purchase it from them. This is especially helpful where such licenses are in high demand, like Los Angeles.
- Permits and insurance policies: Coffee shops require many permits: business, health, food service, and more. Find out what permits and insurance policies come with the purchase, and which you can negotiate for.
- Business documents: Ask about the documents that establish the business entity such as incorporation documents that form the LLC, and sales and payroll tax ID numbers.
- Operational documents: If the staff is working well, why reinvent the wheel? Requesting training materials, employee handbooks, and other governing documents saves you time.
- Product inventory: This includes ingredients, packaged foods like breakfast bars or chocolate-covered espresso beans, and retail items like branded coffee mugs or T-shirts. You may not want all of it: for example, the thermoses if you are going to change the coffee shop’s name, or perishable foods if you know you’re closing for a while to remodel.
- Online sales channels: Some coffee shops roast their own beans and sell them online. If the shop you’re considering does this, you’ll need to consider if you want to keep their ecommerce software, packaging vendors, and shipping service contracts.
Consider Each Potential Space
Unless you are buying a shop that you’ve been working in, it’s important to get to know the shop at its best and worst. This takes an investment of time. Visit your potential purchases for an hour or two at different times of the day. Get a feel for the morning rush, the quiet Thursday afternoon, or the after-church crowds. How well does the staff work? What are customers looking for in their coffee and their experience?
Check layouts for the flow of traffic. This can determine whether you need to invest in expensive remodeling.
- Is there sufficient parking that’s easy to get to?
- Does the drive-thru have enough line space for a rush?
- Are the workers bumping into each other when trying to fill orders?
- Do employees and customers have enough room in the entry, behind the bar, and in the bathrooms?
Consider the future. Of all food services, coffee shops are the most vulnerable to changes in the community. Check with city planning to see if there are expected changes to the businesses in the area. A new apartment building, for example, can mean an influx of new customers, while a new road might result in people taking new routes to work that don’t pass by your shop.
Check the Coffee Shop’s Performance Metrics
Even if you are buying your coffee shop from someone you know, you should do your due diligence in checking the shop’s financial performance. Even when listings give numbers for sales or cash flow, get paperwork that verifies the numbers. The current owner may ask you to sign a nondisclosure agreement (NDA). This is a common practice that protects them and you.
Most business listings have some indicators like gross revenue, cash flow, or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Others you need to ask for. Some key performance indicators to ask about are:
- Gross Revenue: This is straight earnings, without consideration of expenses. While high is good, you have to look at costs.
- EBITDA: This is useful when comparing different companies or determining profitability. Divide EBITDA by gross earnings to determine profit margins.
- Profit margin: Profit margin tells you what amount of top-line sales flows through to the coffee shop’s bottom line. We found profit margins as low as 2.5% and as high as 25%. Higher profit margins usually came to those that roasted their own beans, sold alcohol, or were in high-traffic areas.
- Cash flow: like the name, this measures the flow of money in and out of your business, including revenue paid to the owner.
- Labor cost: This is how much you spend on staff wages and benefits, expressed as a percentage of total sales. Ideally, labor costs should be 30% or less.
- Coffee shops, like fast food restaurants, often experience rushes and employee absenteeism, so you may need more staff on hand during specific shifts, like the morning.
- Food cost: Food cost tells you how much the shop is spending on the food it sells. According to Toast, this can be up to 35% of sales, depending on what kind of food you sell. The less or simpler the foodstuffs, the lower the percentage.
- Prime cost: Prime costs are the controllable expenses it takes to run the shop, usually raw materials and direct labor.
Don’t forget online profits and losses if the company has an ecommerce component to the business. These sales should be included in the financial information above, but check in case they are running their ecommerce business as a separate entity.
How much it costs to run a coffee shop depends heavily on location and what you are providing. Based on multiple sources, the range runs from $5,000 to $65,000. For example, adding sandwiches and pastries increases costs but also increases your average ticket amount. Serving alcohol adds complexity legally and labor-wise, but has a high profit margin.
What the Metrics Tell You
Strong Metrics
If the metrics are strong, then you are golden. The coffee shop is doing well, and you should probably consider keeping things as they are and introducing changes slowly. You may want to purchase the coffee shop completely, from branding to barista handbook.
Weak Metrics
If the metrics are weak, you need to do some research. A bad location is hard to fix, while mismanagement is something you can tackle. If the reputation is bad, a rebrand with a new angle (whether new staff or an updated, trendy look) might be the perfect challenge.
However, you’ll need to consider the costs involved in making changes. For example, hiring more or better staff (to resolve a bad reputation for customer service) may mean increasing wages (which will cut into profits). If the building needs remodeling, that is a huge up-front cost.
Step 2: Secure a Lawyer & Evaluate the Business
Buying a coffee shop involves a lot more than securing the location and building. There’s a lot of legal paperwork, plus you are taking on the relationships the coffee shop has had with tax authorities in your country, state, and even city, not to mention the health department, and if you sell alcohol, there are additional regulations as well.
Hiring a business attorney is a critical step in ensuring you have everything in order legally. It’s also vital for protecting your interest and avoiding misunderstandings with the current owners.
- Letter of Intent/Asset Purchase Agreement: These documents state your intent to purchase the coffee shop and set out some basic terms and conditions of the purchase. An LOI may not be binding and can expire, while an APA is binding once both parties sign. According to Wesellrestaurants.com, an APA is better for simpler transactions.
- Lease agreements: Buying an existing coffee shop usually means taking over a current long-term commercial lease. An attorney will assess the lease terms and raise any red flags you might otherwise miss.
- Purchase agreement: Also referred to as a purchase contract or sales contract, the purchase agreement is the official document that governs the sale of the business. It lays out terms like the agreed-upon purchase price and any conditions that must be met by either party to complete the sale. Some of these may be noted in the LoI or APA.
Find an attorney who understands the food industry and has some experience with coffee shops. Try contacting the local branch of the American Bar Association for recommendations or search for business attorneys in your area.
If you truly want to DIY, there search any of the major legal services sites that offer editable business documents that you can use to create a business entity or your own purchase agreement. However, we suggest you have even these checked by an attorney. These sites offer “Find an Attorney” or “Get Legal Help” tools.
Appraise the Business Value
There are two ways to appraise a coffee shop’s value: the market approach and the income approach.
The market approach works similarly to the way real estate is appraised. The appraiser uses a sample of recently sold coffee shops. However, instead of merely looking at those similar in size and location, they analyze financial statements, key value drivers, and risks. The income approach is best for businesses turning a good profit and considers competition, location, consumer demand, management, and key risks.
Determine Your Expenses
Your search will have already told you how much the coffee shop costs to purchase (at least the asking price—there’s always room to negotiate). However, that’s not the only cost to consider. In your budget, you should account for:
- Professional fees for architects, lawyers, accountants, and other consultants
- Remodeling or replacing outdated equipment
- Bringing the building to code
- Marketing for the launch
- Training
- Loan interest
- Costs to transfer permits, etc.
- Closing costs
You may be able to negotiate some of these fees in the contract.
How Will You Make It Better?
You could be buying the coffee shop from someone who was not turning enough profit to keep it worthwhile. But even if the business is profitable, you’ll likely want to improve it or at least make your mark.
Indie coffee shops do better when they have something that makes them stand out:
- Does the shop already come with something—they roast their own specialty beans, for example? Do all their baristas learn to make art in the froth?
- Do they have Saturday cat adoption days when the felines interact with customers? If so, ask the price of keeping this feature.
- If not, what can you offer that other coffee shops (or cafes that sell coffee) don’t?
Two recent trends include using carbonated water for fizzy coffee or offering olive oil instead of creamer. Other trends include using sustainably grown coffee, featuring coffee with a cause, and taking orders via mobile app.
Check out the competition to see what they are providing customers that the shop you’re wanting to buy is not. Do people in your area need a quick in-and-out on the way to work, or are they looking for something higher-end, with more atmosphere and an eye toward ethically managed coffee plantations?
Once you know that, you can consider the cost and time involved in adding this feature to the shop.
Step 3: Secure Funding
Personal Investment
Just like buying a house, purchasing a business requires a down payment. Depending on the kind of loan you get, you can expect to contribute 10% to 30% of the purchase price from your funds.
These funds can come from a retirement account or 401(k), although many coffee shop owners warn against depending on the shop to replace those invested funds. Other avenues of income include investors, crowdfunding, or loans from family and friends.
Loans
To buy a business, you will likely need a business acquisition loan or an SBA loan. SBA loans are backed by the government; they have stricter requirements, but lower rates. Regardless, you can apply for them through your local bank or via lending marketplaces. Some online banks specialize in small business loans.
When applying for a business loan, you need a strong business plan, letters of recommendation, and financial statements for the business and yourself. In some cases, you may be asked to personally guarantee the loan. Be careful with this, as you could be risking your house! Having a credit score of 680 or higher is required for SBA, but higher scores can help decrease the interest rate.
Investors
Investors can bankroll your coffee shop, but they’ll want something in return. There are many kinds of investors, from full partners to angel investors (who provide capital in exchange for ownership equity). Regardless of the kind of investor, you’ll need to have a legal agreement drawn up, defining how much is invested, any timelines for repaying funds, and additional benefits (like free coffee). It should also include contingencies in case the coffee shop fails.
Step 4: Negotiate With the Seller
Finally, you have settled on your shop and you have the means to buy it. Now, you need to open negotiations with the seller. This includes more than just the selling price, but also what assets come with the shop, what licenses and agreements transfer to you, and even whether the owner sticks around for the transition. Your business lawyer and your broker, if you have one, will work with you during this process.
Take your time. Don’t be afraid to go through a few rounds of negotiations with the seller to ensure you are getting the best deal for yourself and your future business.
When negotiating, be sure you have in writing exactly what you are getting and receiving. Never assume something is included in the sale. If you need a license, ask. If you are taking over the lease, get the details (including whether the price is expected to rise with the change of hands). Will you take over the Facebook account? Be sure your final agreement includes passwords, key codes, and any other pieces of information you need to run the business.
Sign a Letter of Intent/Asset Purchase Agreement
Once you have hammered out the terms of the sale, you create and sign a letter of intent (LOI) or an asset purchase agreement (APA). An LOI says that as long as no red flags show up in the attorney’s analysis of the company, you will buy the coffee shop and its assets at the agreed-upon price. An APA is more binding and is used when the transaction is simpler.
Do Your Due Diligence
Due diligence is done after the LOI and before signing the formal purchase. It helps you fully determine the financial health and possible future performance of the coffee shop you want to buy.
It’s a careful consideration of the economic, legal, fiscal, and financial considerations, as well as the operational side of the business. This includes verifying the financial information you’ve been given, and checking for outstanding debts, like unpaid taxes or accounts in arrears. It can include legal information, like a potential lawsuit. Essentially, anything that puts the success of the business in jeopardy and which will pass onto you.
Buying a Coffee Shop Due Diligence Checklist:
- The lease: How many years are left? (Five is optimal.) Can you transfer or sublease? Are there planned increases in the rent?
- Financial information: Use this to confirm the coffee shop’s performance: balance sheets, income statements, and tax returns.
- Insurance policies: Look at the shop’s general liability policy, workers’ compensation policy, and employee health insurance policies. Are prices expected to increase? Can you cancel or change—and when? Are there outstanding claims, especially on workers’ comp, that affect you when you take over? Are the premium rates fair or are they due to increase soon?
- Permits and licenses: Have all applicable licenses been kept up-to-date? Are there some missing or in need of renewal?
- Tax history: If you are buying the entire business, you will inherit the tax history, so be sure all taxes have been paid.
- Patents and trademarks: Intellectual property, whether brewing technology or a specialty drink recipe, can be patented. Be sure that any that the shop has will transfer with the purchase, or you may be paying monthly fees to use them.
- Personnel information: This includes employee salary information, payroll documentation, typical schedules, and employee bonus plans. These can confirm labor cost and prime cost performance metrics as well as give you ideas for improvements.
- Inventory and vendor contracts: Know the status of the vendor contracts and the relationship between vendor and shop. How long before you need to renew? Are there penalties for breaking contracts? Look at contracts for software and payment processing as well as ingredients.
- “Grandfathered” clauses: “Grandfathering-in” means a longstanding business has been excused from updating when business or health codes change. However, that exclusion ends when the business changes hands. Check to see if your business was grandfathered in for any codes, as you’ll need to update the building or procedures when you take over.
If you’re lucky, you won’t uncover any problems during your due diligence. If you do, however, you can go back to negotiations to adjust the price or add some stipulations (like paying back taxes or including patents).
Step 5: Complete the Purchase
Congratulations! You’ve made it through the most difficult steps of buying a coffee shop. Now, it’s just a matter of setting up the closing date and drafting the final sales paperwork
Transition & Closing Date
It’s tempting to set the closing date as quickly as possible, especially if the negotiation process took some time, but allowing for some transition time can make the process smoother.
Here are some things you should do during the transition:
- Arrange for transfer of all software and passwords on the closing date
- Walk through the tasks the original owner typically does, both administrative and operational
- Get some training on the software you will use (such as payroll software)
- Get all the lists and paperwork, from client and vendor lists to operating manuals and the employee handbook
- Spend a day or two on the floor getting a feel for operations
- Get introduced to the staff and the regular customers
- Update permits, policies, and vendor accounts with your contact information. (This can take weeks or even months—check with your state before setting a date.)
- Updating the premises to meet new codes. This could include inspections by the health and fire departments.
- Renovations. These may be done after the sale is completed, or you may get started during the transition.
- Marketing. Allow time for letting the public know about the change in ownership. This could mean press releases, social media posts, or planning a celebration on the closing day.
When setting a closing date, discuss with the seller the details and how long each will take. Restaurants, for example, typically take two months from agreement to sell to actual closing. Transfer of permits, which can take up to 180 days, can also determine the date.
Draft a Purchase Agreement
Your lawyer will draft this agreement, which is a permanent and binding contract concerning the terms of sale. Be sure to look it over to ensure it includes everything from purchase price to transfer of accounts (including social media associated with the business). You should also make sure it itemizes outstanding costs like closing, renovations, and permit transfer fees, along with who pays for what.
Noncompete clause: Consider adding a noncompete clause in the purchase agreement. A noncompete clause prevents the seller from opening a coffee shop or similar cafe in the same market that could directly compete with the one you just bought. Many attorneys add this automatically. If not, ask for it.
Once you’re OK with the contract, you pass it on to the seller. Allow time for the seller to have their attorney look it over as well.
Sign the Purchase Agreement
When everyone is fine with the agreement, all that’s left is to sign it. On the closing date, you transfer the money to the seller, and the seller releases ownership to you. Be sure to change the lock or codes and make sure your new employees have your contact information.
Congratulations! You own a coffee shop! Have an iced latte or whatever drink you love and celebrate!
How to Buy a Coffee Shop: Frequently Asked Questions (FAQs)
You may still have some questions about buying a coffee shop. These are some of the most common questions we get about buying a coffee shop.
Last Bite
Over 60% of Americans drink coffee every day. Coffee shops are a growing industry, but they can still be a tricky investment. Buying a coffee shop rather than building one makes the process easier, but there are still important steps. Find the shop within your budget with the best location and potential for continued profits, get legal counsel and don’t be afraid to negotiate and diligently check everything from building to legalities before closing the deal. Ensuring a strong start is the first step toward success.
