Buying a Cafe in Australia: Due Diligence and Lease Risks Explained

A strong aroma and rich taste of coffee are enough to awaken your energy for the entire day. Unsurprisingly, it is one of the most favourite beverages consumed in Australia, a staple drink in workplaces, social gatherings and community events due to its delicious and freshly brewed flavours. According to a recent report, the Australian coffee market is expected to reach $4.90 billion by 2030, making it a highly lucrative industry to invest in.

If you are a coffee lover or a passionate individual seeking a high growth business opportunity, buying a cafe business in Australia can be a golden entry point into a booming industry. Every precinct boasts stylish coffee café shops that are generating consistent income and growth at an increasing rate. When it comes to choosing the location, you can look for a thriving cafe business for sale in Melbourne. Renowned as Australia's coffee capital, Melbourne has some of the most renowned cafes and baristas. The city's vibrant café scene is renowned for its freshly brewed roasters, latte art, and frothy cappuccinos, promising sustained revenue and success.

However, despite choosing an established venture, navigating the complexities of legal, financial and regulatory due diligence is critical. Many people end up making a misguided investment move, putting their capital at stake. Worry not! This guide will help potential buyers with a due diligence checklist, lease risk factors and other key aspects when buying a café in Australia. This will help ensure a smooth process to high potential café ownership.

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1. Financial Due Diligence is a Must

Before pouring your funds into an existing cafe business, it is imperative to conduct a comprehensive financial due diligence. This comprises of careful examination of the business’s financial standing to assess its true value as well as potential risks.

To review the financial health of a cafe business, you must request at least three years of financial records, such as P/L statements, cash flow, BAS statements and payroll records, tax returns, supplier and customer payment terms, asset/stock valuations, etc.

These records provide detailed insights into an entity's revenue, net profit, cost of goods sold or COGS, operating expenses, liabilities, etc. It is good to hire a seasoned accounting professional to analyse all financial documents to help understand their performance in numbers. They can also help identify any potential red flags to make the most of your investment.

2. Business Assets and Equipment Assessment

Whether it's a small cafe or a stylish shop in a business precinct, evaluating all assets and necessary equipment available in the sale is a crucial undertaking. It helps you determine the actual condition, depreciated value, and upgrade or replacement requirements when acquiring an established business for sale in Melbourne. Things to review are:

- Inventory/Stock: Make sure you check the existing stock of food and beverage supplies, including their quality, quantity and expiration dates.

- Kitchen Equipment: Assess the condition of commercial kitchen equipment, such as refrigerators, coffee machines, ovens, grills, stovetops, etc. Ensure they are in working condition to meet your operational objectives.

- Furniture, Fixtures and Fittings: Customers come when the ambience is relaxing. So, review the condition of tables, chairs, air conditioners, counters, cabins, and other equipment.

Make sure you consider the depreciation value of assets like kitchen equipment. This helps you provide a clear understanding of their worth while negotiating the buying price.

3. Legal Due Diligence: Transferring Licenses and Permits

Understanding legal requirements is essential to prevent legal penalties and lawsuits. Consider these aspects:

Food Business Licenses:

In Victoria, operating a café that prepares and serves food needs a food business license. When acquiring an existing café shop, ensure you understand the license transferring process. It is usually issued by the local council where the café is situated and ensures that the business adheres to the Victoria Food Authority regulations. Make sure you provide relevant documentation and purchase details when applying for a transfer.

Liquor Licenses if required:

If you are investing in a café that already has a liquor license and planning to continue serving alcohol, you need to transfer the license. Ensure you apply to the Victoria Independent Liquor and Gaming Authority to use the existing license in your name.

Other Permits:

Apart from core licenses, you may need permits depending on the venture. For instance, if the eatery has an outdoor seating area, you need to seek an outdoor dining permit from the local council.

4. Mandatory Food Safety Obligations

Do not forget to verify the company's compliance with food safety regulations. All food businesses must be registered with the local council under the Food ACT 1984, Victoria. Make sure the cafe has a proper Food Premises Registration and meets Food Standards Code obligations for storage, hygiene and temperature control. It is good to conduct inspections to check kitchen hygiene levels, equipment maintenance and pest control before finalising the deal. Make sure you consider other red flags when acquiring an established business.

5. Evaluating the Market Reputation and Customer Base

Ensure you check online customer reviews, active social media presence and loyal customers. Speak to them and gain insights about the business and its reputation in the local market. This helps you unveil the true performance of a cafe business for sale in Melbourne.

6. Common Lease Risks to Look for When Buying a Cafe

A successful café acquisition majorly relies on legal requirements, lease terms and contracts. It is essential to understand the potential risk factors related to lease agreements to avoid unexpected expenses:

- Short Lease Terms: If the lease term is ending within two years, this could limit your ability to capitalise on your investment and foster longterm value. It is good to opt for a café that comes with longer lease terms that provide more flexibility.

- No Renewal Option: Short term lease with no renewal option is a big a when investing in an existing café shop business. Ensure the tenancy includes options to renew, letting you extend the period beyond the initial term.

- Rent Increases: It is important to understand how much rent needs to be paid and whether it's fixed or subject to annual reviews. Also, be aware of your expenses, such as utility bills, maintenance fees, and council rates. High rent with low revenue is one of the most common reasons food businesses fail. So, keep this aspect in mind.

- Delay in Lease Transfer: When acquiring an existing tenancy, new owners must obtain the landlord's approval for the transfer of the lease. Landlords have the right to refuse or impose strict conditions that may affect your buying deal.

- Restriction on Alteration: Another common risk faced by tenants is that some tenancy agreements restrict major renovations, such as expanding the area or installing signage. Ensure you verify for any restrictions on alterations, operating hours and even menu offerings.

Ensure you carefully read the lease agreement, including the lease terms, cleaning clauses, and rights and responsibilities as a tenant, to avoid incurring hefty expenses when purchasing an established business for sale in Melbourne.

Wrapping Up

Acquiring an existing cafe in Australia can be a lucrative opportunity to tap into a booming hospitality sector. However, a successful entrepreneurial investment requires thorough due diligence, critical planning, and an understanding of both financial performance and legal aspects. With the help of this guide, you can easily navigate due diligence to mitigate potential lease risks, ensuring consistent revenue and long term growth.