Start & Run a Catering Business. George Erdosh
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you have made your decision to be a caterer, work toward your goal with a deliberate plan that includes distinct steps, each of which will give you the required knowledge, skills, and information.
Many would-be caterers want to slip into the business slowly on a part-time basis while holding down another job. This concept sounds feasible, but rarely works in practice. A full-time commitment is necessary. Catering requires your full attention. Potential clients who call to ask questions (usually about prices) get discouraged by an unanswered telephone, a telephone answering machine, or even an answering service. Very few will leave a message on your answering machine unless they know you personally.
If you have another occupation that allows you to answer catering calls on your cell phone as they come in, then part-time catering may be feasible. Call forwarding to a cell phone is an excellent solution, provided that you can answer the telephone with your catering business name. Otherwise you lose precious business every time you are unable to answer the phone.
The widespread use of the Internet and email is also making part-time catering more feasible. If you have your email address and cell phone number on your business cards and brochures, and perhaps even your own website, potential clients will be more likely to approach you with a click of the button and a quick message. Provided that you check your messages regularly and answer promptly, clients will consider you easily accessible. Taking advantage of communication technology may allow you to hold a part-time job to generate the necessary income while you are starting your catering business.
Another solution that I discuss below is a partnership. If your partner is a friend or a mate, then telephone answering may be divided between the two of you, freeing you up to earn the money you need to support your catering business.
2. Purchasing an Existing Business
In order to get into catering by purchasing an existing business, you need the following prerequisites:
• You must have funds to purchase the business outright or at least secure it with a down payment. You must also have a significant financial cushion left to purchase additional equipment and run the business for many months with a possible negative cash flow.
• You must be an accomplished caterer with significant skill and knowledge related to every aspect of the business. You must be able to take over, manage, and run the business by yourself, even if the former owner promises to help you during the first three months.
• You must be able to devote up to 16 hours a day to the running of your business for the first five to six months until you know your clients well and your business intimately. After that initial period, you should be able to slowly relax, reduce your working hours, and resume your social activities.
2.1 Buying a business directly
Restaurants and catering services are often available for purchase, which makes it a buyer’s market. In the restaurant business, the hours are very long; in catering, the pressure is extreme. In both industries, the profit margins are low and the rate of burnout is high.
If you live in a large town or city, chances are you can find a catering business for sale. Along with responding to advertised businesses for sale, write a letter or send an email to every genuine catering establishment in town. Even delis with sideline catering or small restaurants may be possibilities. Unless they are located in high-volume downtown areas where rents are prohibitive, their health department-approved kitchen facilities may be reason enough to consider the purchase. You can always scrap the deli or restaurant part if the purchase price is right. (If you are interested in the restaurant business, have a look at Start & Run a Restaurant Business, another title published by Self-Counsel Press.) However, if catering is a restaurant’s sideline business, its client base may be too small to be of much value to you as a caterer.
A fair purchase price is tricky to determine. Larger businesses with good record-keeping are easier to assess, but smaller ones are notoriously poor when it comes to bookkeeping. You must know the true annual gross and net of the business for several years back to determine the fair price. The higher the annual gross, the better the business looks in the eye of the buyer, and the more the net profit is, the more the business is going to be worth. Good record-keeping by the current owner is a must, although it is as rare as a new client who pays in full, in advance, for an event three months from now.
Get a lawyer to help you with the purchase and an accountant to decipher just how true the records are. Income tax returns are not reliable and the seller isn’t likely to show them to a buyer since the reported gross earnings on these returns are often not as high as the true gross earnings.
There are different formulas to help determine the fair price of a business: one calculates the percentage of the last full year’s gross profits; another is based on the average of the last three years’ net profits. You should discuss this topic with experts, which is why you need a lawyer who can protect your interests and an accountant who will thoroughly check all records, verify their authenticity, and tell you his or her opinion of how realistic those records are. Naturally, you should study the records very carefully yourself. Working with the present owner for a while will likely give you a clue to how good the bookkeeping records are.
If the books and records have been maintained by professionals, you’ll know they are reasonably accurate. But a bookkeeper can only do as good a job as the records given to him or her allow. You never know if receipts are missing due to neglect or if unrelated receipts have been added. For example, when the owner bought a food processor for her home use, did she include the receipt as a business expense in order to reduce her business’s net income? Always be suspicious.
Check the client list carefully and see how often each one uses catering services. Discuss with the owner the style of catering service, the prices charged, the average size of events, minimum and maximum number of guests, suppliers, credit lines, the labor force he or she uses, pay scale, and so on. Other questions to ask yourself: Is this the style of catering I want to do? Can I run the business without the former owner’s help?
Before you utter even one word expressing serious interest in purchasing the business, ask if you can work in the kitchen for a week or two with the crew and go with them to several events — at no charge, of course. Even better, don’t ask; insist on doing so. You will learn a lot about the business and whether it is for you. Remember, you are likely to be in a buyer’s market and the owner will try to bend over backwards to please you. You can do this frontline work while your lawyer and accountant are doing their work.
Remember, total immersion in every aspect of the business is essential. Do nothing else. Drop your social life to a minimum. Live with the business you are interested in buying. Do your research, either in a library or on the Internet, on legal and financial aspects. Perhaps even check out the suppliers, but for now only a cursory check is needed.
Whenever you have free time, work on your recipe collection and food preparation techniques. Work on your efficiency as well.
Once you have worked in the business for two to three weeks, attempt to figure out the costs of labor, insurance, rent, utilities, taxes, vehicles, and so on. Compare your figures with those reported by the owner. Then estimate food costs, or even better, ask for a current monthly food and supplies total and calculate roughly what the current month’s gross and net profits (or losses) are. This exercise will certainly give you some indication of the authenticity of the owner’s records. Discuss your findings with your accountant. Keep in mind that catering income is seasonal and can vary from month to month. The two and a half weeks of Christmas holiday season could bring you 50 to 70 percent of your annual gross income!
Then it is time to develop the purchase agreement and negotiate the price. The owner will likely come up with an asking price, and you will, in consultation with your lawyer, give a much lower figure based on what you feel the business is worth. No matter how far apart you start, eventually you usually can come to a mutually satisfactory agreement.
How you are going to come up with the dollars is not the subject of this book; it could