One of the most pressing questions we hear from people we know around the coffee industry that plan on opening a cafe is this: “I want to invest my money in a business, is opening a coffee shop a good investment?”
Well, that is a tricky one! There is a number of things that can impact how good of an investment a coffee shop will be. This is a small list, just to start:
- Staff Wages
- Cost of goods
- Actual revenue
- Menu items
- …and the list goes on
If you are starting a business from scratch, it is pretty hard to predict some of these numbers, especially if you have never operated a cafe before. So, when opening a coffee shop, we always recommend buying an existing business and working from it over starting a business from scratch. We have actually written a whole article on it, if you are interested you can click this link to read it.
So, considering you are buying an existing business and starting from at least a break-even point (which could take up to 2 years when opening a cafe from scratch), in our opinion, the trick to make sure your investment will be profitable lies in the moment you are buying it.
Gain when you buy
There is a number of things you can look for (and also look at) when you are analyzing a business to buy, making sure you venture in opening a coffee shop will result in a great investment. You need to look for hints that you can buy a cafe that is currently not performing at its best (so you can negotiate a lower purchase price) and has good potential to be flipped and start to make much more money.
You should be looking for things such as:
- Location: is the cafe located at a high traffic spot? Do you see lots of people walking past it? Is there parking spots in front of the location? Is it close to supporting businesses that might help you get more clients, such as hospitals or bank branches? We actually have a whole post just on “Location”, click here if you want to have a look.
- How is the service? Is it efficient? Do you see things that you can improve to get more clients coming in?
- Relationship with the customers: how is the relation with the customers at that venue? Is there any room to improve? How?
- Menu: how is the quality of the menu items? Is the menu too big, making the venue lose money? Or is it too small, making it lose sales? Do you have any idea on how you could do better?
- Pricing policy: how’s the pricing compared to the competitors in the region? Is it so high that scares people away? Or too low that makes the place look cheap and cuts the business margins?
Look for things you think you could do better. Look for a place that has room for improvement and that you feel confident you could turnaround. Then make an offer.
It is always a good idea to consult a business broker to make sure you are buying a business that is aligned with your needs. If you are lost, we recommend talking to these guys here.
Opening a coffee shop: let’s talk numbers
Of course, before you open a coffee shop you want to know how big your margins can be. Now, this is what the main numbers of an averagely managed cafe usually look like:
Based on a coffee shop that sells $300k/year
- Rent represents 15% of the revenue;
- Wages represent 35%;
- Cost of goods around 35%;
- Utilities a maximum of 1%;
- Taxes around 23% (if a sole trader).
Yes, the math is right. You are left with -9% of net profit. In this example, that would be loosing $-27k / year.
Make opening a cafe profitable: here is the trick
Now, here is the trick: let’s say you went ahead with our advice plus a good broker and instead of opening a coffee shop from scrattch you managed to acquire a business with great potential for $50k. Then you work the business and manages to increase the revenue from $300k to $500k/year.
Here is what will happen:
- Rent won’t change, so it will now represent 9% of your total sales
- Also, and since you are working on the business because you want to flip it, so you get a salary, let’s say you manage to get your wages to represent around 25% of your revenue.
- If you do a good job negotiating with your suppliers now that you are selling more and, consequently, buying bigger quantities, you can get your cost of goods down to 31%.
In the end, now, you will be left with 11% of 500k, which amounts to $55k. How does that sound?
Doing a very conservative analysis, after 1 year of working the business, you will now be able to sell it for more than twice the amount you paid, or $110k. So you get you $50k back, plus $65k extra on the sale, plus the $55k new profit you did in the year.
You went from $50k to $165k in one year! That sounds like opening a cafe is a good investment, doesn’t it?
It is a lot of work, though
It does sound good. And I have to say, these are real numbers from a cafe we’ve owned and sold years ago. But you need to know this: it takes a lot of work and real commitment to making opening a coffee shop a good investment.
So get ready, roll up your sleeves, and let’s get working!