You like the look and feel of a café / bar. But, before you commit to buy (i.e. go unconditional under a sale contract) take the time to check under the surface.
Obviously, you / your accountant will need to crunch the numbers to verify the income / costs are what the seller says they are.
Here is a list of five other headline items you and your lawyer should consider when you are doing due diligence on a café/bar business:
1. The Premises
Location is often key for a café/bar business. If you are not buying the freehold of the café/bar premises, your rights to continue operating from those premises after settlement will be via lease or licence granted by the owner of the premises.
We will review the lease or licence and give you a report summarising the key commercial terms and any risk issues we recommend you need to deal with before settling via a change to a lease/licence. Make sure you are across / talk to us about any concerns you have with the lease / licence, particularly:
- the term of the lease/licence and any options to renew it;
- the financials, how much rent you pay and when, how the rent increases over the lease and what you pay for in addition to rent (e.g. utilities and landlord outgoings);
- what security you are required to give the landlord (e.g. cash bond or bank guarantee);
- your maintenance responsibilities – both during the term of the lease and at the end of the lease (it can be very expensive to rip out the fit out at the end of a lease); and
- your rights to transfer the lease or sublet (so you can sell the business during the term of the lease/licence if you choose to do so).
It is almost always a good idea to meet the landlord before you commit to buy so you can tell them about what you want to do with the premises and gauge your ability to work with them in the future.
2. Plant and Equipment
Your sale contract should include a detailed list of the plant and equipment you are buying (tables, chairs, fridges, ovens, glasses, crockery, computers, wall paintings etc) .
Make sure you:
- take a close look at the list. Does it include everything you need to run the café/bar? If it doesn’t you need to factor in the cost of buying what’s not on the list;
- take the list of plant and equipment with you when you inspect the premises and make sure its accurate and on the day of settlement, check everything is still there; and
- ask the seller for a depreciation schedule.
We will check if any of the equipment is under a lease or hire purchase arrangement (and if it is, what are the terms of the lease/agreement and whether you want to take them on).
3. Licenses and Permits
If you are serving alcohol, the premises will need a liquor licence. If you are serving food it will also need a food licence. The type of liquor and food licence required will depend on what, how, where and when you are serving the liquor / food.
Other permits may also be required for things like signage or outdoor seating.
We will discuss with you what you need, how you get them and the time frames and costs for doing so.
In the case of the liquor and food licences, it is key to get your applications lodged with the appropriate authority as soon as possible after the contract is signed to avoid delays to settlement. We can help with this.
Good employees are gold! Often it is easier to take on some or even all of the seller’s employees to assist with a smooth transition and successful continuation of the business.
But, you don’t want to be obliged to take on the seller’s employees if you don’t want to.
We will discuss this with you and liability for any entitlements (sick, annual and long service leave) due to the seller’s employees and prepare / amend the sale contract accordingly.
After you go unconditional under the sale contract, try to interview the seller’s employees before settling so you are in a position to make an informed judgement about keeping people on. It is often surprising what they reveal about the business.
5. Goodwill and IP
Goodwill is the established reputation of the café/bar business.
It is made up of the café/bar’s name, brand, its customer base and the good relations with those customers and with its employees. It is any reason why the business attracts customers and revenue.
You should do your research the reputation of the business, why people go there and how they find out about it – talk to everyone you can who knows the café/bar, including the seller’s employees.
We will discuss with you what IP rights are listed in the sale contract (e.g. business names, domain names, website URLs, trademarks and contact numbers) and make sure we add any that you/we discover is missing so all relevant IP rights get transferred to you on settlement .
We will also try and get a restraint of trade clause in the sale contract preventing the seller from operating a competing business in the local area for a period of time after settlement.