Investing in a Coffee shop

[Brandon Levi Eagan]

Does anyone own a coffee shop or have invested in a coffee shop?

I’ve been considering opening a coffee shop up and hiring people to run it. I’ve got family that work and manage a coffee shop and are moving to where I live

Anyone have any experiences to share?

[Joel Owens]

Brandon,

Do you have any experience in restaurants or the food business?

I DO

I did it for decades before getting into commercial real estate about 17 years ago. I know a lot about that business. I think the assumptions you are basing things on sounds like you do not have much experience in that field. It sounds like you have an idea of what you want to do and how you want to play it out but that doesn't make a difference against industry standards for running certain types of businesses and profit expectations.

The reality is about 80 to 85% of food and restaurant businesses are OWNER OPERATORS. Those businesses are so small for sales and scale that they dictate an owner operator to be profitable because once you load in a bunch of positions to go passive there is not enough money there to make it work. 

So if someone has maybe 1 to 3 units they are working themselves into the ground trying to make profit as they have expansion plans. Until they hit critical mass of 50 to 100 stores or more then they tend to get more passive. I have seen where a Church's chicken owner of 40 units hits 45 million in annual sales and clears 4,400,000 pre-tax so just under a 10% margin.

Standard now is about 10%. Back in the day you could get 15 to 20% but now only makes up about the top 20% of locations for all restaurant models the rest tend to be operating on smaller returns. You have blips in labor, food, rent costs, equipment repair and replacement that 10% margin can go to nothing really fast. Most owner operators live like FAT CATS when business is new and sales are strong and suck out the cash flow. Then equipment and interior gets older along with the menu and sales start sliding. Employees get disgruntled when things no longer work optimally and customers complain. Sales go down along with profit and less and less people want to go to the business. Business owner doesn't have reserve so then pulls the plug on the business and equipment get maybe 10 to 15 cents on the dollar.

For an owner operator some of them can do well and make 80k to 100k a year for themselves. As an investible business where you just get a return it doesn't really make sense in my world. I can achieve higher returns owning the commercial real estate as the landlord and having the owner operators run the business and pay me rent each month.

A coffee shop is a hobby for most compared to a national chain like a Starbucks. Don't plan on it being a massive money maker if at all. You need lower rent and a high foot/car traffic location to drive volume.

I just do not want to own a business that does 500,000 in annual sales maybe to gross 50,000 profit (10% margin). That is a ton of work for a low yield.

Good luck.