Buying a café in Australia: what to check before you buy

Buying a café that is already trading can look like the safe option: the coffee machine is plumbed in, the customers already know where it is, and there are real numbers to look at. Sometimes it is the better choice. Sometimes it is a way of paying a premium for someone else's problem. This guide is about telling the two apart.

If you have not yet decided between buying and starting fresh, read this alongside how to start a café in Australia. Many of the same steps apply either way.

#Buying versus starting fresh

When buying makes sense. The café has verifiable profit, a long lease, equipment in good order, and a reason for sale that holds up. You can see what you would change to improve it, and the price leaves room for you to earn a fair wage and a return.

When starting fresh makes sense. The cafés for sale in your area are priced on profit that is not there, have short leases, or are in the wrong spot. Or your concept is different enough that you would rip out most of what you bought.

A middle path. Some cafés sell for little more than the value of their equipment because they are not making money. Taking over a site that is already approved and fitted out as a café, then relaunching it under your own concept, can be much cheaper and faster than a new fit-out. Just be sure you understand why the last owner could not make it work.

#How cafés are valued

There is no official formula, and every broker has their own rules of thumb. These are the common approaches, with honest caveats.

A multiple of adjusted profit. Most small Australian cafés are priced as a multiple of their annual profit, after adjusting for the owner's wage and any one-off items. Marketplace and valuation guides commonly quote around 1.5 to 3 times adjusted net profit, often described as seller's discretionary earnings (SDE): roughly what the owner takes out, including their own wage. One guide puts cafés at 1.5 to 2.5 times SDE, or 2 to 3 times EBITDA (earnings before interest, tax, depreciation and amortisation), which is used more for larger cafés with a paid manager. One marketplace calculator uses a lower 1 to 1.75 times owner's earnings. These ranges are rules of thumb from people who sell businesses, not independent valuations.

What moves the multiple. Higher for a long lease with options, consistent profit over several years, a café that runs without the owner on the floor, good equipment and strong reviews. Lower for a short lease, falling sales, owner dependence, poor records, or a big competitor opening nearby.

Plus stock at value. Stock on hand (coffee, milk, food, packaging) is usually added to the price at cost, counted on the day of settlement.

Asset value. For a café with little or no real profit, the realistic value is roughly what the equipment and fit-out are worth second-hand, plus whatever the lease is worth to you. Equipment loses value quickly: one marketplace guide notes a five-year-old espresso machine that cost $25,000 adds "a few grand" to the value, not $25,000. Sellers sometimes ask for a price based on what they spent on the fit-out. That is a sunk cost, not a value.

Normalising the owner's wage: a worked example

This is the adjustment that matters most, and the one sellers least like to discuss.

A café shows a net profit of $90,000 a year. The owner works 50 hours a week behind the counter and pays themselves nothing.

• If you plan to run it yourself, that $90,000 is mostly payment for your own labour. At 2 times, a $180,000 price means paying $180,000 to buy yourself a job that pays about $90,000, before you see any return on your money.
• If you plan to hire a manager, subtract their full cost. If a manager plus super costs you, say, $75,000 a year, the business only earns about $15,000 for you as an owner. A 2 times multiple on that is $30,000, not $180,000.

Neither answer is wrong, but you need to know which one you are paying for. Ask your accountant to prepare a "normalised" profit figure that replaces the owner's unpaid hours with a market wage, removes personal expenses run through the business, and strips out one-off items.

#Due diligence checklist

Due diligence is where you check that what you are told is true. Make your offer conditional on completing it, and give yourself enough time (several weeks is common).

Financials

• Three to five years of records, as business.gov.au recommends: tax returns, profit and loss statements, balance sheets and business activity statements (BAS).
• Check BAS against the P&L. The sales reported to the ATO for GST should match the sales in the accounts.
• POS reports: daily and weekly sales, transaction counts and average spend, ideally for the last 12 months.
• Supplier invoices, especially coffee. Coffee kilos a week give you a rough cross-check on sales. As a rough example, at around 20 grams per coffee, a kilo makes about 50 coffees, so 20 kilos a week suggests roughly 1,000 coffees. Compare that with the POS figures.
• Wages records: the roster, pay rates, awards applied, super paid. Underpayments can be a hidden liability.
• Compare with benchmarks. The ATO's 2023–24 benchmarks for coffee shops are a useful reasonableness check: cost of sales typically 33% to 42% of turnover, rent 6% to 17% and labour 21% to 35%, depending on size.
• Sit in the café. Spend several mornings and a weekend counting customers. If the count and the books disagree, believe the count.

The lease

• Remaining term and options. How many years are left, including options? Is there enough time to earn back the price you are paying?
• Rent, outgoings and reviews. What will the rent be in three years? Any market review coming up?
• Permitted use, trading hours, make good, demolition or relocation clauses.
• Landlord consent to assignment. You will usually take over the existing lease by assignment, which needs the landlord's consent. State retail leases laws set out a process: in Victoria, the landlord must not unreasonably withhold consent but can recover reasonable costs of checking you out. In NSW, the outgoing tenant must give you an assignor's disclosure statement before the assignment. Expect the landlord to ask for your financial position and experience, a new bond or bank guarantee, and possibly personal guarantees.
• Or a new lease. Sometimes it is better to negotiate a fresh lease with the landlord as part of the purchase. Ask your solicitor.
• Make the sale conditional on the landlord's consent (or a new lease) on terms you accept.

Equipment and assets

• A full list of what is included, with make, model and age. Is the espresso machine owned by the café, or supplied by the coffee roaster? Roaster-supplied equipment usually belongs to the roaster and stays with the supply agreement, not the business.
• Leased or financed items. POS hardware, fridges and machines are often leased or financed. Search the Personal Property Securities Register (PPSR), as business.gov.au suggests, for any debt secured over the assets you are buying.
• Condition. Have a coffee machine technician and a refrigeration mechanic inspect the key equipment. A failed compressor or boiler is a real cost.
• Second-hand protections are limited. When you buy used goods as part of a business sale, the usual consumer guarantees may not all apply. Rely on the contract's warranties and your own inspections.

Staff

• Who is employed, on what terms, and for how long. Get a list with roles, award classifications, pay rates and accrued leave balances.
• Transfer of business rules. If you take on existing staff to do the same work, Fair Work's transfer of business rules can apply. Some entitlements, such as personal leave, carry over to you. If you are not related to the seller, you can choose not to recognise prior service for annual leave, in which case the seller must pay it out. These rules are specific, so have your solicitor or accountant address accrued entitlements in the contract and adjust the price for anything you take on.
• Key people. If the head barista or chef is the reason customers come, will they stay?
• Check award coverage and pay rates going forward. Our guide to hiring and paying café staff explains the awards that usually apply.

Licences, registrations and approvals

• Food business registration usually does not transfer. In Victoria, councils say Food Act registrations have not been transferable between owners since July 2021, so you apply for your own. Brisbane City Council says the same for its food business licences, and for footpath dining consents, and that you must have your own approval before you start trading. Check with the council in your area.
• Ask for a pre-sale inspection. Some councils offer a pre-sale inspection report (Brisbane does, for a fee, with the current operator's consent) that shows whether the premises meet food safety requirements. Anything that needs fixing is better found before you pay.
• Trade waste. Water utilities generally require their own trade waste agreement in the owner's name. Yarra Valley Water, for example, says agreements are not transferable and must be in place before trading.
• Planning approval. Confirm the café's current use, seating numbers and hours are approved. An unapproved courtyard or extended hours may not survive a change of owner.
• Other licences: liquor, music, signage. Confirm what is needed and whether it can be transferred. Our café licences and permits guide lists them by state.

Reasons for sale and reputation

• Ask why the owner is selling, and test the answer. Retirement, a move or a new baby are common and genuine. "Too busy" is worth checking against the books.
• Read every review on Google and elsewhere, going back a few years. A steady pattern of complaints about the same thing is more telling than one angry review.
• Talk to neighbouring businesses. They often know more than the broker about what is changing in the street.
• Check for change nearby: road works, a new development, a big tenant leaving, a competitor about to open.

#Red flags

• Profit that only exists with unpaid family labour or unrecorded cash.
• Sales falling over the last two or three years, explained away as temporary.
• A short remaining lease with no options, or a landlord who will not commit to assignment terms.
• A demolition or relocation clause in the lease.
• Records the seller will not share, or that do not match BAS.
• Equipment that turns out to belong to a roaster or a finance company.
• Pressure to sign quickly because "other buyers are interested".
• Staff on below-award rates or cash-in-hand. Underpayments can become a problem for whoever runs the business next, and they signal how else it has been run.
• Outstanding council or food safety orders on the premises.
• The rent is a large share of turnover. The ATO's benchmarks put rent at roughly 6% to 17% of turnover for coffee shops, depending on size. Above that, the business is working for the landlord.

#The process: offer, contract and settlement

The details depend on your state, so let your solicitor run the legal side. The typical sequence:

1. Make a conditional offer. Usually through the broker, often as a letter of offer or heads of agreement. Make it subject to due diligence, finance (if you are borrowing), the landlord consenting to assign the lease, and your getting the licences you need. A deposit may be paid into a trust account.

2. Do your due diligence. Use the checklist above. Your accountant reviews the financials and normalises the profit. Your solicitor reviews the lease and the contract.

3. Negotiate the contract. The contract should cover the price and what it includes (goodwill, equipment list, stock), how stock is valued at settlement, warranties about the business, a restraint of trade stopping the seller opening nearby, how staff and their entitlements are handled, a training or handover period, and conditions such as lease assignment.

4. Sort out GST. A café sale can be GST-free as the sale of a going concern if the conditions are met: the sale is for payment, you are registered (or required to be registered) for GST, the seller supplies everything needed to keep the business running and keeps trading until the day of sale, and you both agree in writing before settlement that it is a going concern. If the conditions are not met, GST may apply to the price. Your accountant should confirm this.

5. Lease assignment and licences. While the contract is conditional, the landlord processes the assignment, and you apply for your food business registration, trade waste agreement and any other approvals in your own name.

6. Settlement. On the day, stock is counted and paid for, rent and outgoings are apportioned, keys and passwords are handed over, and the balance is paid. Have your own accounts, insurance, POS and payroll ready to go from your first day.

7. Handover. A few weeks of the seller working alongside you, introducing you to suppliers, staff and regulars, can be worth a lot. Put it in the contract.

#Who to have on your side

An accountant with small business or hospitality experience, to review the financials, normalise the profit, advise on the structure to buy through, and confirm the GST treatment.

A solicitor who does business sales and retail leases, to review the contract and the lease, handle the assignment, and protect you on staff entitlements and the restraint of trade.

Specialist inspections of the coffee machine, refrigeration and any kitchen equipment.

The broker is usually engaged and paid by the seller. They can be helpful and honest, but their job is to sell the business. The people checking it for you should be working only for you. Their fees are small compared with the cost of buying the wrong café.