Start & Run a Catering Business. George Erdosh
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a year or two, or there could be conditions attached to your payments regarding the seller’s true representation of the business. It will depend on your situation.
Before a purchase agreement is prepared, you and the owner should do a thorough inventory of all equipment and vehicles that are a part of the business. Prepare a complete list of everything, including vehicles; office furniture and equipment; even an approximate amount of china, glassware, silverware, napkins, and tablecloths. Make a separate list of items that will be excluded from the sale, if any. The owner is likely to have personal items, perhaps a collection of cookbooks, files, pictures, and so on. The list of items included with the business should show anything having an approximate value of $50 or more.
The purchase agreement is now the lawyer’s territory. It should include the purchase price, the full list of all equipment and vehicles that are part of the purchase price, and any contracts or events in progress. For example, if much work has already been done on an upcoming event, the owner could be entitled to some of the net proceeds. That, too, should be outlined and included in the agreement.
If the seller is willing to train you or assist you during the takeover period, contract with him or her for a specified number of hours over a period of weeks or months in the purchase agreement. Be specific about what the contracted work will include. For example, the seller might be contracted to attend all catered events for the first month.
The agreement should also include a list of clients with addresses, telephone numbers, email addresses, and contact names; a copy of the rental lease; and many other clauses for mutual protection, like goodwill. Goodwill encompasses the client list, the name of the business, the value attributed to years of marketing, word-of-mouth recommendations, client satisfaction that generates future revenue, and everything else that is part of a successful business.
The third major piece of the agreement is a covenant not to compete. Insist on this. Without this covenant, the seller could set up in another location and keep his or her faithful clients, leaving you sitting by a quiet telephone. The covenant should be for a minimum two-year period, preferably more, and it should specify a geographic area of a 30- to 40-mile radius around your kitchen.
Chances are, once you take the business over, you will lose some clients: perhaps many. You cannot exactly duplicate your predecessor’s style, charm, food, and service. But why would you want to? You have your own style, cuisine, service, and presentation to develop. If you suddenly lose many clients, start worrying and ask clients what changes they would like to see in your service or menu.
2.2 Buying through a business broker
Another common way to buy a business is through a business broker. Business brokers are like realtors; the best way to find them is through recommendations. Your local chamber of commerce is also a good source. The broker finds buyers on behalf of a seller and takes care of the paperwork. According to contract law, a business broker represents the seller, because the seller pays the broker’s commission. A few brokers are willing to represent the buyer. The broker can also assist in selecting an escrow officer. He or she can help in reassigning the seller’s lease to you if there is one on the premises. Brokers’ fees are high since most of them don’t like to deal with small businesses. Their commission is about 12 percent and a minimum of about $8,000.
If you are considering purchasing or expanding an existing business and you don’t have ready cash, your challenge is to borrow money or equity, either by selling shares or stocks or by bringing in partners with ready cash or equity. Both options have advantages and disadvantages, but it is beyond the scope of this book to delve into a discussion on this subject. I mention it here so you are aware of the possibilities.
3. Buying into an Existing Business as a Partner
If you buy into an existing business as a partner, make sure you know that business well: the owner, the staff, and the style of catering. There is only one way to know a business really well, and that is to work in it for some time. This usually means forming a partnership with someone who has common goals and interests, and complementary expertise. The business must be able to run profitably without serious friction between the two of you.
Business partnerships are unpredictable. You may get along well with a partner today but you may grow in different directions later. Like marriages, some partnerships succeed, some fail, and some float along without much satisfaction for either partner. If you find a good business partner, you have many advantages, including shared workload, responsibility, expenses, and decision making. In a partnership you don’t have to be an expert in all aspects of catering. In the best circumstances, your weakness is complemented by your partner’s strength. It is also pleasant to take some time away from the business without worrying about leaving it in dubious hands. Taking a week or two off for a well-deserved vacation is especially hard when you are the only key person. There is an unwritten law that says that the week you take off for your own pleasure will be the week every client you have calls about an important event.
You have two choices when buying into a business. You either buy or earn part of the business up to a predetermined share and become a partner, or you work toward becoming a full owner over a period of several years. For instance, you may have worked in a catering business for a while and the owner is approaching the age when he or she wants to retire. This is an ideal situation since you have the time to pay for the partnership slowly over time or add the so-called “sweat equity” of your own labor toward ownership instead of cash. You work for little or no compensation and the value of your time applies to your equity in the business at a predetermined rate. This is not easy unless you also have an income-producing job and the effort you put into the catering business is part time. It is also hard to work for something that gives no immediate return. What if you have worked 1,000 hours over a year (averaging 20 hours a week), which earned $10,000 equity in the business (at a rate of $10 per hour) and all of a sudden business drops off significantly because of an unexpected economic downturn? Since you have not earned enough equity yet, you have no control. You may see your equity slowly lose its value as the business suffers from neglect. At this point your best option is to borrow the money to buy the business outright in order to save the equity you have already built up.
Look out for diminishing personal interest in the business by the current owner. Once the end is in sight, enthusiasm weakens, and you may find yourself taking the brunt of the responsibility, worries, and workload while the owner takes much of the profit.
However you approach buying into an existing business, you must be sure that there is a crystal clear understanding between you and the owner. Everything must be on paper and legally binding. The help of a lawyer familiar with partnerships is essential.
Resolve critical issues before a partnership deal is finalized. For instance, define contributions to the partnership (cash, expertise, property) and the percentage of ownership granted to each partner at the inception of the deal. Arrange for a method of obtaining additional funds in the event of operating cash deficits. Define the responsibilities and remuneration for each partner. Also define when and in what order of priority cash will be distributed. Finally, make sure there are adequate provisions for buying out or removing a partner in the event of unexpected problems, if a partner wishes to terminate the venture, or if a partner dies.
Before making the decision to get involved in a business, here are some sobering statistics to consider:
• According to the National Federation of Independent Business (NFIB), owners who have worked with the same products or services in prior jobs have a 10 percent better chance of surviving over owners who have not.
• Another study conducted by the NFIB and American Express states that 80 percent of small-business people who worked between 60 and 69 hours a week remained in business after three years.
• The same study found that companies emphasizing good service had a higher survival rate than those offering low prices to promote business.
• Of the firms surveyed, 84 percent that started with $50,000 or more investment had a 10 percent better chance of making it than those that started with less than $20,000.