Like many, I developed my love of coffee as a student. Burning the midnight oil cramming one more case, for tomorrow’s exam. I also happened to work as a barista at the time, and so coffee became ingrained in me – literally – in the skin of my hands. They would always smell of coffee. Today, I’m still involved with coffee (albeit indirectly). For every half dozen or so business’ LegalVision has helped clients buy, one of them is, in some way, involved with coffee and in each case, there are always these six issues purchasers should consider before buying a café.
1. Council Approval
First and foremost, can you actually operate a café from the premises? Although this seems obvious, buyers typically overlook this point. Just because the business is currently operating as a café from the premises, does not mean it necessarily has the approval to do so. A local council may not have approved the premises for the operation of a café.
Checking to see whether the local council has granted approval in NSW involves the following steps:
- Reviewing the zoning criteria set out by the Council for the premises;
- Making enquiries to confirm if the zoning allows for the operation of the café; and
- In some cases, obtaining a copy of and reviewing the Occupation Certificate for the premises.
Receiving council approval and knowing the limits of this approval is particularly important if you intend to change some of the operating conditions of the cafe. For example, if you want to start trading at night or serving chips (and therefore need a fryer) when previously you only sold sandwiches, you’ll likely need to obtain council approval to do so. Whether the proposed change is possible will generally depend on the local zoning criteria.
It’s also important to note that while the same legislative instrument governs local councils (and that this instrument varies from state to state), each council operates differently. As such, you will need to contact the relevant council to determine what they require to obtain the appropriate approvals. Finally, for some councils, such as the City of Sydney, they need to be notified of the change in ownership of the café.
We have experienced first hand the importance of council approvals. Recently, a client discovered following the purchase of a business that the existing owner had never actually obtained an Occupation Certificate for their café. Consequently, they had to close their business for almost two weeks while they went through the process of obtaining an Occupation Certificate. Losing two weeks of revenue when you’re just starting your new business is never good.
2. Licences (and Permits and Certifications)
Although closely related to council approval, licences are sufficiently distinct to deserve their own consideration. In NSW, there are two main licences (technically one) to consider before purchasing a café and both are related to serving food.
The first (although technically not a licence), is food safety certification. Almost all cafés will be required to appoint a Food Safety Supervisor (FSS) if they serve food. There are exceptions, for example, if you only sell coffee, or if you only sell pre-packaged food, but in most cases, an FSS is required.
If you are buying a café, there may already be an existing employee who is the FSS so you won’t need to worry about obtaining the certification. However, from experience, it’s common to find that the owner of the cafe is the FSS, and therefore when they sell the café, you’ll need to appoint a new FSS (usually yourself). Food safety certification is relatively straightforward to obtain however it’s important always to ensure that it is made a condition of settlement. Otherwise, like the example above, you may be restricted from operating the café.
The second licence (and it is a licence, although it’s called a permit) is a Trade Waste Permit. This is required if a café disposes of greasy water and food scraps down the drain from, for example, cleaning pots and pans, dishes and the kitchen floor. To be clear, this is not always required, and will generally only apply for those café’s that are predominantly food based, but it’s always worthwhile to check. Depending upon the location of the café, there may be no requirement to transfer the Trade Waste Permit, but you’ll likely need to notify the relevant authority that you are buying the café.
Although the above two are the most common, they are not the only types of licences that you may need when you buy a café. Other common licences can include liquor licences and outdoor seating/dining permits. In the case of liquor licences, in NSW at least, this can be transferred, so there is no need to apply for a new one. However, you’ll still need to comply with the relevant training and other regulatory obligations. For example, this includes holding a Responsible Service of Alcohol qualification. As to the outdoor seating/dining permit, you will typically need to apply for this from your local council.
Most people who purchase an existing café will take on all of the existing employees. When doing so, it’s important to note the following:
What are the terms of the employee’s current engagement?
Generally, the easiest way to find out is to get copies of each employees’ employment agreement. However, not everyone will have formal employee agreements in place. It’s important to know the terms of engagement because generally, you will have an obligation under the contract for the sale of the café, to re-engage the employees on the same terms as they are currently engaged. If you want to change, for example, the manager’s hours from full-time to part-time, you will need first to negotiate with the vendor who will be responsible for payments made to the manager because this is typically considered a redundancy.
What are the current employee entitlements for each employee?
Although from our experience, most employees of a café are engaged on a casual basis, there are generally one or two members who are part-time or full-time. For these staff members, it’s vital that you negotiate with the vendor what will happen to their entitlements. The most common situation is where the vendor simply pays out all entitlements at settlement, and the employees start fresh. However, even in this case, you will need to remember that this may not affect the employee’s entitlements to long service leave (i.e. if an employee has worked for five years, then they are entitled to take long service leave in another five years’ time).
We cannot emphasise this point enough – always check equipment. For many people buying a café, the only check of the equipment they make is during the handful of days before the sale when they are receiving training on the café’s operation. Unless you are a qualified technician who knows what to look out for, you should engage a third party to check the equipment. This initial investment could save you a fortune in the future. For all you know, the freezer might only be held together by duct tape and break down in one week. By catching these issues before the settlement, you and the purchaser will be able to negotiate who is responsible for the repairs.
Checking equipment also involves obtaining copies of documents evidencing ownership – this is particularly the case for the espresso machine. It is very rare for an independent café to own their espresso machine. In every case we’ve been involved in, the coffee supplier owns the espresso machine, and the café is merely renting it. This means you need to obtain a copy of the lease agreement and to speak to the owner about transferring the agreement before finalising the sale.
We’ve been involved in a situation where the vendor told a purchaser that there was no ongoing fee for borrowing the espresso machine. As it turned out, the owner had lent the espresso machine to the vendor for free only because the vendor had agreed to buy a significant amount of coffee. This was not an issue for the vendor who had a number of different cafés. For the buyer, however, there was no way they could buy that much coffee, so they had to pay for the ongoing use of the espresso machine. Luckily, in this case, this happened before settlement, and therefore the purchaser was able to renegotiate the price.
On a similar note, also obtain copies of any supplier agreements. You’ll need to know what terms the current owner enjoys for their supplies, and you’ll need to negotiate your own when you take over the café. If you don’t intend to use an existing supplier, for example, you want a different cake or bread supplier, then make sure you tell the vendor to terminate the existing agreement so there can be no liability that passes onto you.
5. Restraint of Trade
The last thing that you want after buying a café is for the vendor to set up shop down the road, taking all of your customers. You can stop this from happening by ensuring that the contract includes a proper restraint of trade provision (also known as a restrictive covenant).
The standard NSW sale of business contract by default allows parties to a contract to include a restraint of trade provision. How long and how far this extends is something that you’ll need to negotiate with the vendor. Importantly, when negotiating the breadth of the restraint, remember that in NSW, the clause will only be upheld to the extent that it is considered reasonable for the protection of a genuine commercial interest.
Although NSW courts may under the Restraint of Trade Act 1974 read down or ‘modify’ a restraint of trade provision until it is considered reasonable, you should always only try to include a restraint that is not too unreasonable otherwise it may be held unenforceable. An example of a reasonable restraint of trade for a small local independent café would be between 3 – 5 kilometres and 6 – 12 months. Obviously, this will depend on the particular circumstances of the sale.
6. Social Media Accounts
Finally (and something that many of the older lawyers fail to recognise) is the importance of transferring online and social media accounts. For a large number of cafés, one of the most important sources of goodwill comes from their online accounts – whether it’s Facebook, Instagram or their own website. You’ll need to make sure that the contract expressly states that the vendor will transfer to you their online and social media accounts.
If you’re thinking about buying a café, you’ll likely be discussing the quality of the coffee beans, familiarising yourself with locals, and deciding whether you’ll opt for a seasonal menu. However, ensuring you have the necessary approvals and permits from the outset can reduce any stress before finalising the sale. Ask yourself:
- Do I intend to reduce my employee’s hours from full time to part time?
- Do I have copies of documents evidencing ownership of the equipment (e.g. the espresso machine)?
- Does the Sale of Business contract contain a restraint clause?
- Has the vendor transferred their social media accounts?
Buying a café is an exciting and involved process. If you have any questions or need assistance completing the due diligence process, get in touch with our business purchase lawyers on 1300 544 755. Happy Brewing!