How to Open a Financially Successful Bakery

How to Open a Financially Successful Bakery

By Sharon L. Fullen and Douglas R. Brown

How to Open a Financially Successful Bakery

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International Standard Book Number: 0-910627-33-9

Library of Congress Cataloging-in-Publication Data

Fullen, Sharon L.

How to open a financially successful bakery /

by Sharon L. Fullen and Douglas Brown.

p. cm.

Book to be accompanied by CD-ROM.

ISBN 0-910627-33-9 (alk. paper)

1. Bakers and bakeries--United States. 2. New business

enterprises--United States--Management. 3. Small business--United

States--Management. I. Brown, Douglas Robert, 1960- II. Title.

HD9057.U59F85 2004

664’.752’0681--dc22

2004004842

Table of Contents

Introduction

Chapter 1: Starting Your Own Bakery

Chapter 2: The Basics of Buying a Bakery

Chapter 3: How to Invest in a Franchise

Chapter 4: Planning for Success—Writing a Business Plan

Chapter 5: Launching Your Business—Pre-Opening Activities

Chapter 6: Successful Employee Relations and Labor Cost Control

Chapter 7: Your Customers

Chapter 8: Marketing Your Business

Chapter 9: Public Relations: How to Get Customers in the Door

Chapter 10: Choosing Your Product Mix

Chapter 11: Profitable Menu Planning

Chapter 12: Recipe Development and Production Standards

Chapter 13: Equipping Your Bakery

Chapter 14: Public Areas of Your Bakery

Chapter 15: Dedicated Work Areas

Chapter 16: Creating a Safe and Productive Work Environment

Chapter 17: The Essentials of Food Safety, HACCP and Sanitation Practices

Chapter 18: Your Bakery Staff

Chapter 19: Successful Kitchen Management

Chapter 20: Internal Bookkeeping: Accounting for Sales and Costs

Chapter 21: Successful Budgeting and Operational Management

Chapter 22: Basic Cost Control for Food Service Operations

Chapter 23: Controlling Your Labor Costs

Chapter 24: Leaving Your Bakery Business

Resources

Introduction

Bread is the staff of life! In every civilization since early man, a grain has been ground and liquid added to create bread. Instruments to crush tough grains are among the earliest man-made tools. Bread (and its cousin crackers) is used in religious ceremonies, and marked Hansel and Gretel’s way home (although the trick didn’t work—they did manage to use a bread-oven to save themselves!).

Calling money dough and bread came from paying for good and services in grain or flour. And don’t forget clichés like the greatest thing since sliced bread and know which side your bread is buttered on.

The smell of bread baking conjures up childhood memories, soothes the tired and makes your mouth water. Warm bread transforms and ordinary meal into a feast.

Bread-only bakeries have become a trend around the United States. Flat breads, sweet breads, savory breads, breakfast breads, sandwich breads, dessert breads, sliced breads, rounds breads, twisted breads, baked breads, fried breads and symbolic breads—so many wonderful tastes to tantalize your customers.

From bagels to zucchini muffins, your offerings are virtually endless, but your job is to make the choices that will bring customers to your door and leave with a smile on their face. Bread, pastries, crackers and the like are life-sustaining and life-enhancing.

If your dream is to own and operate a bakery, this book will help you transform making bread into making profits.

Good reading and good luck!

Sincerely,

Sharon Fullen and Douglas Brown

Table of Contents

Chapter 1

Starting Your Own Bakery

Operating a bakery is hard work and the failure rate is, unfortunately, significant. However, realizing your dream can be an exceptionally rewarding endeavor—personally and professionally. The ingredients for success go well beyond an exquisite cheesecake or a hearty oat bread. They are a complex blend of passion, vision, risk-taking and business acumen.

Solidifying Your Vision

Your dream of owning your own business sparks your quest, but creating a solid vision of how you want to accomplish your dream is the foundation of success. Creating a vision will help you write your business plan, sell your concept to lenders and potential investors and communicate your desires and needs to architects, contractors, designers and suppliers. Following are some ways to help you solidify your vision. This understanding will help you make decisions when faced with compromises, budgetary problems and unforeseen obstacles.

Ways to Explore Your Passion

Can you see your dream bakery? Are the glass displays filled with artfully arranged pastries? Do regulars gather every weekday for a Danish and coffee? Do moms and dads bring in their kids for bagels? Can you smell the enticing aromas drifting from the kitchen? Do your taste buds tingle when you think of your specialty? These images all represent your passion.

Take a few hours of uninterrupted time to think over your personal and financial reasons for committing your energies and nest egg, taking on a partner or tying yourself to a long-term loan. It takes time to become profitable; are you prepared financially and emotionally for this investment?

Create a list of the positives and negatives. Every venture has risk (negatives), but the positives should outweigh them. If your entrepreneurial spirit isn’t dampened by the potential risks, your next step is to give your vision a voice.

Determine what talents you can bring to the process. Do you love to bake, or are you more interested in selling? Do you want to write a check and let the professionals handle the details, or do you want to be consulted on every detail from the front door to the walk-in freezer?

Write a one-minute elevator pitch. If you found yourself in an elevator with a wealthy investor, how would you describe your vision (and secure the cash) in the time it takes to travel up 20 floors? Show your passion while emphasizing the tangible benefits.

Launching Your Business

There are three ways to launch into business for yourself: 1) start from scratch, 2) invest in a franchise, or 3) buy an existing bakery operation. In Chapter 2 The Basics of Buying a Bakery and Chapter 3 How To Invest in a Franchise, you’ll learn the advantages and disadvantages of each. In Chapter 4, you’ll learn about preparing a business plan.

All three methods (scratch, franchise, existing) can be the basis for a successful bakery business. The differences between each are as much emotional and psychological as they are financial. By weighing the pluses and minuses, factoring in your personality and business expectations and balancing it with your potential customers’ needs and desires, you can decide the best method for you.

Jump-Starting a Business

Purchasing an existing business can be the fastest way to get your doors open; however, it may not be the best choice for success. Remember, if the location is a poor one, the prior business had a bad reputation or the equipment is overpriced, you may be hindering your potential. Availability is another factor when purchasing an existing business. The right business for you has to be on the market now, or you have to make an offer that they cannot refuse.

Quality franchise organizations have market restrictions, assigned territories and other ways to keep their franchisees from competing or flooding the market. This may mean that your desired franchise is unavailable in your area. Popular franchises often require higher investments and a great personal net worth.

Starting from Scratch

There’s nothing like a cake made from scratch; in fact, that may be why you want to open your own bakery. Starting your own bakery from the ground up gives you the opportunity to select every display cabinet, paint color, mixer and employee to create a business that most closely reflects your dream! However, like over-beaten batter, it can be too much of a good thing and beyond your scope of experience or budget.

If you have taken the time to do some personal reflection, compare your resources to your needs and set realistic expectations, you’ll be better prepared to build, buy or lease your bakery facility, launch a new business and create a foundation for success and profits. At the end of this chapter you will find various worksheets that are helpful assessment tools to determine which way of starting a business best suits you.

Don’t Know the Answers?

If you don’t know the pluses and minuses of the three ways to launch a business, you will find it helpful to immediately start researching your market, the competition and existing business opportunities. You’ll have to do this before you prepare a formal business plan so the information you gather will help you prepare.

ENTREPRENEURIAL TEST

SCORING

For each answer, YES=3 points, MAYBE=2 points, NO=1 point.

60–75 points. You can start that business plan. You have the earmarks of an entrepreneur.

48–59 points. You have potential but need to push yourself. You may want to improve your skills in your weaker areas. This can be accomplished by either improving yourself in these areas or by hiring someone with these skills.

37–47 points. You may not want to start a business alone. Look for a business partner who can complement you in the areas where you are weak.

Below 37 points. Self-employment may not be for you. You will probably be happier and more successful working for someone else. However, only you can make that decision.

Source: Small Business Administration. http://www.sba.gov/starting_business/startup/entrepreneurialtest.html

Table of Contents

Chapter 2

The Basics of Buying a Bakery

Buying an existing bakery has its advantages and disadvantages. The prior bakery’s track record of success can be a good reference point for your potential in the location. As with most food service businesses, location plays a vital role in your success. Before purchasing an existing bakery, carefully review all financial records, have appraisals done and, most importantly, consult a lawyer.

This chapter addresses many of the issues that are important to you—the buyer. When it is your turn to become the seller, you’ll benefit from understanding everyone’s role in buying and selling your bakery business.

Real Estate and Its Value

Real estate is the land itself and any permanent improvements made on the land, such as utility connections, parking lots, buildings, etc. The real estate property of a bakery is often its most valuable asset. However, many bakeries are bought and sold without the real property being part of the operation because the business is operated in a leased building. Generally, there are three procedures for determining the value of a bakery: Market Approach, Cost Approach and Income Approach.

Market Approach. The value of a property is determined by comparing it to like pieces of property in similar areas. The Market Approach is generally not used to estimate the value of a bakery’s real estate. However, if you are selling land only or the land portion of a bakery, the Market Approach can be an accurate determiner of value, since there are considerably fewer adjustments to make.

Cost Approach. The property is valued on what it would cost to replace it completely. The costs are based on current purchase prices for new equipment and assets. In the case of equipment that is no longer made, add the price of what a new piece of equipment that provides the same utility would cost. Include all taxes, freight and installation in your quotes, and factor in depreciation. The Cost Approach is not widely used to estimate the value of a bakery’s real estate, but is used mostly by insurance companies while processing a claim.

Income Approach. The value is based on future income to be derived from the property. The real estate value, then, is the present value of the estimated future net income, plus the present value of the estimated profit to be earned when the property is sold. This is the preferred approach when determining an accurate sales price for an income-producing property.

The Value of Other Assets

The business itself consists of everything the owner wishes to sell. Usually this means furniture, fixtures, equipment, leasehold improvements, etc. It may also include tax credits, favorable operating expenses, customer lists and name recognition. The price for a food service business is usually 40 to 70 percent of the operation’s 12-month food-and-beverage sales volume. The seller usually will set the sale price at the high end of this percentage, and the prospective buyer will set it at the low end.

Setting a sales price is not, of course, a straightforward process, and there are many other factors that need to be considered. Here are a few:

Profitability

This has the most influence on sales price and salability of a bakery. The most common way to determine profitability is to examine the net operating income figure and compare this to industry standards and the regional standards for that type of operation.

Leasehold Terms and Conditions

The term remaining on the property lease and the monthly payment will affect the sales price greatly. Avoid anything less than a five-year lease, unless it’s very profitable or priced very low. Most buyers also need a reasonable monthly payment and a reasonable common area maintenance payment. This should not exceed 6 to 8 percent of the monthly food-and-beverage sales.

Track Record

Businesses need to show acceptable track records to entice buyers. This usually means the business must be at least a year old. The track record will be used to project the business’s future prospects. If a business depends on the work of highly skilled employees, such as a well-known pastry chef, this, too, can affect the price because it makes the business more difficult to expand and more expensive to operate.

Other Income

Most bakeries don’t earn significant other income; usually less than 2 percent. However, there are rebates, interest on bank deposits, vending machines, salvage from aluminum, grease and cardboard, etc.

Below-Market Financing

When a bakery is sold, usually the buyer puts up a small down payment and the seller then carries back the remainder of the sales price at favorable terms. Seller-financing is almost always below market, and the buyer avoids the fees associated with bank loans.

Franchise Affiliation

If a bakery is part of a large franchise, the sales price will increase significantly. This is truer of the larger national franchises than the regional ones.

Number of Buyers and Sellers

A seller should plan to market their business when there are as many potential buyers as possible. This means early spring and summer—especially if it’s a tourist business—or after legislation limiting construction has passed, taxes are lowered, etc.

Contingent Liabilities

Contingent liabilities reduce a bakery’s net income. These may be coupons issued by the previous owner, or pension plans that eat into your net profit margin. If a buyer cannot eliminate these expenses, they most likely represent a negative value that should be factored into the offering price.

Grandfather Clauses

New owners are expected to meet fire, health and safety codes that the previous owner may have been able to avoid because of being grandfathered in when the regulations were passed. Grandfather clauses usually expire when a business changes hands. If this is the case, the seller or buyer may need to bring the building up to code. If the buyer is responsible for this, he or she will usually ask that the expense be deducted from the sales price. If the cost is very high, this could affect the salability of the business altogether.

Goodwill

The IRS determines goodwill as the amount of money paid for a bakery in excess of the current book value of the physical assets. Most investors, however, look at excess earnings as attributable to positive goodwill and deficient earnings to negative goodwill. A buyer may be willing to pay for goodwill, but a seller should expect the buyer to downplay its value in order to lower the sales price as much as possible.

Terms, Conditions and Price

In most cases, sellers will determine a likely sales price, terms and conditions, then pad those somewhat to create room for negotiation and compromise. Employing a skilled business broker can help you determine your price offer.

Terms

The terms of sale are the procedures used by the buyer to pay the seller. Seller-financing is a frequent arrangement where you will make a minimal down payment and pay the remainder over a 3- to 5-year period. All-cash offers are rare so the seller probably won’t be seeking that. It is in the seller’s interest to seek a large down payment. Your financial advisor can assist you in determining how much down payment you should be willing to make. Sellers are also more likely to grant favorable terms to a buyer making a substantial down payment because the financial risk is lessened.

Conditions

There are several conditions the seller and buyer will attach to most sales contracts. Sometimes they are separate agreements, but most of the time they are part of the sales contract. The following lists conditions that are the largest concern to the seller:

Conclusion of sale. How long it will take to close the sale.

Buyer access. Your access to the facility and staff to facilitate a smooth transition.

Guarantees. Sellers usually have to guarantee the condition of assets. Sometimes sellers have to guarantee that buyers can assume some of the bakery’s current contracts. Imprecise language should also be avoided here. If the seller is making guarantees, then buying the relevant insurance to back up these claims is prudent.

Indemnification. The conditions and penalty should anyone back out of the deal.

Escrow agent. Agents hired to supervise the sales transaction paperwork. It is wise to use an independent, third-party agent.

Legal requirements. Agreement to comply with all pertinent laws and statutes.

Buyer’s credit history. Providing personal and business financial records, and permission to run a credit report.

Security for seller-financing. A clause requiring the seller’s approval before the new owner can obtain additional financing. The promissory note will contain a default provision that the lender can foreclose if loan payments are not met, in addition to other specific provisions pertinent to the business.

Assumable loans and leases. Detailing assumable contracts, loans and leases.

Life and disability insurance. Insurance naming the seller as beneficiary should the buyer be unable to pay the loan due to death or disability.

Collection of receivables. A fee paid to the seller if they collect receivables incurred by the seller, but payable to the new owner.

Inventory sale. A physical inventory of all food, beverages and supplies taken at the end of escrow. Use an independent service and a separate bill of sale prepared for the agreed-upon price of this merchandise.

Non-compete clause. An agreement that the seller will not open a competing business nearby. Usually a time period is set and competing business is defined.

Repurchase agreement. An agreement that grants the seller an option to buy the bakery back within a certain time period.

Employment contract. Details of a seller becoming an employee of the new owner.

Consulting contract. An alternative to the employment contract. This may be a more acceptable employment contract that gives the new owner a tax-deductible expense but doesn’t burden the former owner either.

Conditions not met. Details if the seller can back out due to the buyer not meeting the sales conditions.

Initial Investment

Buyers must estimate, as accurately as possible, the total initial investment needed to get their businesses up and running the way they envision them. Many bakeries that could have been successful failed because they were undercapitalized. For exactly this reason, one of the very appealing aspects of purchasing an existing bakery is that many start-up costs are avoided. There are, however, a number of start-up costs even with transfer of ownership. Here are a number to be aware of:

Investigation costs. Be willing to spend time and money to thoroughly examine the opportunities that are available. Many investors falsely believe that once initial development work is complete, the start-up costs are eliminated. These costs still exist, and wise investors calculate them in their analyses.

Down payment. A standard down payment is usually around a quarter of the sales price. The down payment can affect the sales price, and, in many cases, sellers will accept a lower sales price with a larger down payment, and vice versa.

Transaction costs. Prorated insurance, payroll, property taxes, vacation pay, license renewal fees, advertising costs, etc., on the close-of-escrow date.

Working capital. Available cash to ensure supplies are on hand to run the bakery.

Deposits. Cash deposits required of the new owner for utility, telephone, sales tax, payroll tax and lease deposits.

Licenses and permits. All required operating licenses and permits should be budgeted as start-up expenses.

Legal fees. Fees for legal advice, buyer negotiation and contract review.

Renovations. Costs required to renovate or rectify building code violations.

Equipment and utensils. Costs to purchase new or replacement equipment, supplies and serving ware. Don’t forget to include maintenance agreements.

Advertising. Costs to promote an opening or reopening, rebuild signage and offer promotional discounts and incentives.

Fictitious name registration. Also know as doing business as, or DBA. If the name of a bakery doesn’t use your own name, the name usually must be registered at the local courthouse or County Recorder’s Office.

Loan fees. Loan fees from the lending parties.

Equity fees. Attorney, document preparation and registration fees for selling stock.

Insurance. Lender-required life and disability insurance with the lender named as sole beneficiary. Adequate real property insurance may also be required.

Franchise fees. Franchise transfer-of-ownership fee. This fee pays the franchiser for the costs of evaluating the new owner for the franchise. It is paid up-front and in cash before the new franchise can begin operations.

Distributorship fees. Exclusive distributorship licenses or discontinuing a current license agreement may incur costs similar to franchise fees.

Pre-opening labor. Labor required during pre-opening and transition period.

Accounting fees. Fees for assistance in the evaluation of a bakery purchase.

Other consulting fees. Fees for specialty services, such as bakery consultants, labor-relations specialists and computer consultants.

Other prepaid expenses. Any prepayment required by a creditor.

Sales taxes. Property subject to a transfer tax and non-food supplies are often subject to sales tax.

Locksmith. Cost to change all the locks on a bakery after the sale is concluded.

Security. Transfer or set-up fee for security service or systems.

Contingency. A contingency fund large enough for at least the first six months’ operating expenses. It is often necessary to over-hire and over-schedule employees before an effective sales distribution pattern emerges, so operators incur incredibly high expenses during the first six months of operation. Not having an ample contingency fund is the primary reason many businesses fail within the first few months.

Reviewing the Books

As a potential buyer, you must thoroughly analyze the finances of the bakery. Carefully study its current profitability and use this information to determine its potential for