Being given a share in a coffee shop

Latitude29 · 08-12-09

Hi. Just wanted to see what some other people think and to see if there is anything else I should look at before moving forward.

My passion has always been two things - coffee and business. I had been working as a barista for 4 years when I was approached by a coffee franchise to come and work as a trainer for their franchisees. I have been enjoying this role for a while now but my goal was always to open a coffee shop. The owner of the franchise still has ownership of many stores and offered me the option to take a 50% share in one of his shops. He would do this at no charge to me to simply avoid me moving away from his business. The said shop has been tracking a small loss for the past year and he no longer wants the full liability. He wants me to take 50% and work in there for 20+ hours per week (on a wage). I am confident that I will be able to turn the shop around within 6-12months. He will transfer the shares immediately but will remain on the lease (and therefore the legal liability) until the stores shows 6 months worth of profit, at which stage he will offer me the other 50% share at base price.

I know what I want to do but I don't want to leap in too soon and miss something critical.

Wayne Radford · 09-12-09

As with all partnerships make sure that there is a legal document stating exactly, what each partner’s role, what are the expectations, what are the responsibilities, and what will happen on the different possible outcomes.
If he wants to make you a partner and retain your services, make a counter offer.
I would suggest that he employ you in the shop for 6 months on full wages, if you turn the shop around and it is profitable then ask for a performance bonus.
I wouldn’t enter into an arrangement that is already showing a loss or decline as you are also inheriting a situation that may have other underlining problems that won’t be apparent until you start working there. When you start out new you can research and decide the location and its clientele, this shop is already there as with the clientele, so what is causing it to loose money? Hence the caution.

Latitude29 · 09-12-09

Hi Wayne. Thanks for the reply!
I have done alot of training with this particular store and have a fairly in depth knowledge of its financials.
The issue with the business is the owner has also sign over 25% to other person to run the shop on his behalf. While he does work hard (60+ hours per week) he only is in there working and is not working at all at improving the business. In my role in the support office I provide coaching and marketing ideas but he seems unable to follow through on anything.
While nothing is certain in business I am confident that in six months I could turn the shop around - the customer base is there however the other coffee shops in the areas seem to have it over ours.

What kinds of exit strategies are available to me?

Wayne Radford · 09-12-09

I would still have a signed agreement to state what each role, expectations and responsibilities of all those involved, in a larger organisation it is called a position statement or position description.

This document clearly states what you are expected to do and what are the outcomes while in that position.
This can include the rewards or bonuses to be paid if you meet the required targets, this is for all parties involved in a partnership or or other business arrangement.
The exit strategies would be harder to define as the only return would be on a sale of the complete business, or the buyout of your share by someone else to take your position in the partnership.
I would opt for a bonus on performance base unless the owner intends to build up the business for sale.
This is a risk as what would be the true value for any sale?
Most small business don’t have a clear defined exit strategy or succession planning in place, to cope with major influences until they find they want to sell or move on, only to find that the perceived value isn’t really there for a profitable sale. At this point they then have to get the business ready for sale and provide the right information and figures reflecting its true value.
You need to find out what the owners intention is and what is the time frame or trigger that will allow you to benefit from being a partner.

David Dunford · 10-12-09

Hi Latitude29,

I own 2 business and one of them bieng a cafe. If I could give you any advice it is this.
If you believe you are able to turn the shop around then go to the franchisor you currently work for and set everything out in plain black and white (a contract).
There needs to be a win win situation so what you can do is use an EBIDTA formula to work things out.
In basics, an EBIDTA (Earnings Before Interest Depreciation Taxation and Amortization) is a formula which is applied at after a certain period of time (agreed by both parties but for eg could be 12 month period) on an agreeable number (generally ranging between 3 - 5) This will work out YOUR total asset aquisition.Works similar to a sliding scale, ie the more the business makes (profit) the more shares you keep within the business, it still becomes a win for the franchisor as the more profit the business is making the greater commercial value it has.

You can factor a wage for yourself in there which must be relevant to any current employee rate of pay.

I might not have explained how this fully works as it is a little complex at first to get your head around but have look around, do some google searches and you'll probably find some great articles explaining much better than I did.

I have used an EBITDA formula in the past and it gives the party without an investment a greater incentive to see that the business becomes highly profitable and quickly.

The formula is still relatively new in venture capitalist circles but works well.
Hope this is of some value to you.

David Dunford.

David Dunford · 10-12-09

Sorry, I just read the post again and I should have said YOUR total shareholdership instead of asset aquisition. cheers.

Latitude29 · 11-12-09

Hi David,
Thanks for your advice.
I am familiar with EBITDA but am not sure how you are applying it to this situation.
I understand what you mean by multiplying the EBITDA by 3-5 to find a business value, but you lost me the sentence after that - how could this work out my shareholdership?
Maybe if we use some for example numbers for reference, and you can explain the 'sliding scale' to me. Ill just use basic, easy numbers for the sake of simplicity.

Current position - $1000 loss per month (-12000 ebitda)
Scenario 1 (Six months time) - $1000 profit per month (12000 ebitda, business value 36000)
Scenario 2 (Six months time) - $2000 profit per month (24000 ebitda, business value 72000)

What are you recommending that I do with these figures at this point?