Buying a Bakery continued (back to first page of Buying a Bakery)

After you've done your due diligence about the location, the next thing to look into is the businesses reputation.

Checking with the Better Business Bureau and your local Chamber of Commerce is a good start, but you'll also need to talk to commercial customers of the store (like restaurants and pastry shops around town) and walk in customers. Ask suppliers, ask stores on either side of the bakery. Ask competitors, especially if they aren't direct competitors, like local caterers, personal chefs, or grocery store baked goods managers.

The next major issue is price. Valuating the bakery is a complex art. There are three standard ways to value food service businesses: cost approach, market approach and income approach. The market approach is similar to a real estate appraisal -- you get the value of the bakery based on "recent" sales of similar bakeries, or similar businesses. The cost approach is typically only used by insurance agencies, but it has its strengths; you get the business's value by totally up all its assets, depreciating each asset appropriately and figuring out, basically, what it would cost to reassemble the bakery from scratch. Those are both interesting homework exercises, but the usual way bakeries are valued is based on their sales. Non-franchise bakeries typical sell for 40 to 70 percent of sales from the last 12 months.

To know the income for sure, you'll need to have access to the company's books, and unless you have some strong accounting skills, its a stellar idea to find a bookkeeper or a CPA to go over the sales and liabilities of the bakery from the past year. You want a complete financial diagnostic of what you are getting into.

Through this process, you are certainly going to find some things that aren't good news. If this place was a complete goldmine, why would the owner be selling it? That's another question to ask in detail, by the way... are they leaving town, retiring, or starting up a different bakery with a better business model and location a few blocks down the road?

There are ways to overcome problems you find, and you should have a can-do attitude toward getting past those problems. But you have to be realistic. Maybe adding some vending machines to the location could help with sales, but if your sales are going to realistically be 4% or your monthly rent, then this may not be the bakery for you. Its hard, but don't get so swayed by your dreams of buying a bakery that you buy just any bakery. Wait for the right one, even if that means you have to do detailed reviews of two or three bakeries before you find one that's a real winner. Its a lot of work, but nowhere near as much work as trying to turn around a business that was destined to fail.