Due Diligence Process for Buying a Cafe

Finding your dream café space is the first step on an exciting road to entrepreneurship, but before you sign on the dotted line and hand your money over, have you done your due diligence? 

The UK’s booming coffee shop market is worth an estimated £15 billion annually to the British economy, but that doesn’t mean every venture is a roaring success. Some of these failures occur due to a failure of due diligence, meaning the new owner didn’t verify the facts before confirming their purchase.

In this guide, we’ll discuss what the due diligence process looks like when buying a café and why it’s so important.

What is the typical due diligence process when buying a business?

Making a formal offer and a commitment to buy unlocks the due diligence process. It isn’t unique to cafes but applies to every business that appears on the market. The due diligence process is your opportunity to verify the facts the seller has presented you with.

Three types of traditional due diligence exist, including: 

1. Legal Due Diligence – Investigate the legal aspects of the transaction, such as ownership of assets, regulatory issues, outstanding litigation issues, and whether the seller has the legal title to sell. 
2. Financial Due Diligence – Open up the books and check the numbers to ensure there are no hidden financial issues. You’ll look at everything from the balance sheet to cash flow statements. 
3. Commercial Due Diligence – Where does this café fit into the marketplace? Commercial due diligence explores the current regulatory environment and some of the café’s main competitors. 

Typically, a small business might take three to four weeks to conduct its due diligence. If problems are unearthed, the buyer might have the option to change their offer or walk away entirely.

Generally, a professional with relevant experience in each due diligence area should carry out due diligence for the best results.

Why due diligence is so important when buying a business

Independent coffee shops are seeing such growth that there’s been a rush to take advantage of the trend. According to the World Coffee Portal, sales for independent coffee shops were projected at £4.6 billion in 2024. However, don’t get carried away. Improper due diligence can cost you.

Due diligence is your only opportunity to investigate every aspect of a business before committing to the purchase. If you miss any serious problems, you could be left with a financially unstable business with hidden liabilities or outstanding legal problems.

Issues found don’t necessarily mean a purchase is bad, but it can mean reworking your offer or terms. In many cases, problems found within due diligence serve as negotiation leverage that can net you a better price. 

However, if you haven’t done your due diligence, there’s no going back, as the “let the buyer beware” or caveat emptor principle comes into play.

How due diligence is conducted when buying a café

Due diligence begins when you agree on a price and terms with the seller. As part of this process, agreeing to an exclusivity period is standard. During this process, the café will be taken off the market, and any other buyers will be put on hold. Some sellers may also ask for a down payment to secure these terms. 

How long the investigation period lasts varies based on the transaction. However, most professionals recommend taking anywhere from three to four weeks for a small business. 

Due diligence is nearly always conducted through a professional, so you don’t have to do it yourself. It’s an established process that shouldn’t be conducted by the inexperienced, as the chances are you won’t know what you’re looking for. Typically, due diligence professionals have business, finance, and law backgrounds.

What are the most common due diligence issues for cafes? 

Issues can crop up when you open up the books. For example, the true health of a café may be obscured by looking at the numbers for when every table is occupied rather than the average level of trading.

Awareness of the most common problems resulting from due diligence can help you know what to look for (and what to do about them). So, what are the most common issues?

• The seller has overstated their sales numbers.
• Debts and liabilities, such as pending tax bills or unpaid invoices, have been undisclosed.
• The café doesn’t have the necessary licenses, or the ones they have can’t be transferred.
• The café has unfavourable lease terms that can’t be negotiated.
• Equipment is either outdated or is being leased.
• Staffing issues, including high turnover rates or labour disputes.
• Declining sales trajectories.
• Poor online reputation.
• Maintenance issues have been unaddressed or deferred.
• Long-term supplier contracts are poor value for money, eroding margins. 

Some of these issues may be things you’re already aware of before entering the due diligence stage. In other cases, the seller may have attempted to hide or downplay them. How you react to existing issues depends on how problematic they are and how much they’ll cost to rectify. 

Ultimately, deciding how you proceed if you encounter due diligence problems is down to you.

Due diligence checklist for buying a café business

Due diligence encompasses entire businesses, meaning knowing where to start can confuse people. Thorough due diligence often requires multiple professionals’ input to address the business’s various operations and finances. 

Here’s a quick checklist to show which areas should be covered:

• Balance sheets
• Income statements
• HMRC tax returns
• Sales records
• Bank statements
• VAT returns
• Outstanding debts
• Property and lease agreements
• Café licenses and permits
• Employment contracts
• Equipment
• Inventory
• Supplier contracts
• Customer contracts
• Health and safety compliance
• Location analysis
• Competition analysis 

If you’re satisfied with the results of your due diligence, the next step is to draft an agreement outlining sales terms, warranties, and indemnities. The seller will likely also present you with a disclosure letter that details any liabilities or issues they already know. Doing so protects both parties from future disputes. 

Encountering due diligence issues during the process doesn’t have to mean the end of your transaction. Instead, consider how much of an impact those issues have on the sale and whether you’re willing to pay the previously agreed price. If any issues can’t be resolved, it’s time to walk away and seek other opportunities.

If you’re still searching for an independent café to buy, this is where the team at Cogogo can help. We have a comprehensive database of independent cafes available for sale and provide support as you tackle your new business venture. If you’re ready to get started, look for the latest cafes for sale today.