I’ll Take One Bakery, Please

The phone call came on a Friday evening. The owner of a local brewery is a friend, but he has never called before. It was the Friday before my move back to Erfurt, having just finished up my goat cheese internship. I answered the call and was greeted with, “I have the solution to all your problems!”

The brewer had always been a supporter of mine, given my reasons for being in Germany. He had also quit his desk job in order to open his beer store and brewery. This is also a guy that always has schemes for “excellent business ideas”; he regularly gifts them to me – some are interesting, most are just thematic variations to already common tactics. He has a background in milling grains and bread, and consequently has been very involved in my attempts to become a master baker.

The brewer then clarified his declaration, “I have found a way for you to stay longer in Germany and to become a master baker in the process: you are going to buy a bakery.” Germany still enforces laws that certain shops cannot be opened without a master in residency. So, in order to open a bakery in Germany, one must be a master baker or one must employ a master baker. I was informed that in the case of the later, after three years of operation, the owner will be granted a master-baker-equivalency. This was the scheme at hand.

He had been approached by a insolvency lawyer about an opportunity to take over a failing bakery; she had been informed through the grapevine that he was connected with someone interested in opening up a bakery. Assuming that rumor was about me, the ‘where’ was omitted. The plan was for me to contact this lawyer and discuss the details for acquisition.

I called the following day (Saturday) and was informed of the urgency of insolvency proceedings in Germany. We were to meet in person on Sunday and start the negotiations immediately. I was already overwhelmed.

Sunday Discussion

As the brewer is the instigator of this foray, I am meeting the lawyer at his brew shop. He is along for the ride as we are in his shop and it was his idea; he takes the role of my ‘consultant’. Of course, we sign NDAs regarding the bakery’s location and finances as I will be receiving all of their tax documents for the past couple years.

The lawyer jumps into a discussion of how insolvencies work and how we are on the clock to get this resolved. Insolvencies can be triggered by a variety of events. Typically this occurs when a business does not pay its taxes for three months, the company goes immediately into receivership and the state lawyers would get involved. Less common is self-reporting of impeding insolvency, where the owner declares their intent to stop paying taxes (i.e., cash flow problems). Regardless, this bakery was put into receivership, which is how she got involved, why she contacted the brewer, and why we are all gathered today.

Immediately, I am concerned about the roles of the players. I do not know enough about German regulations or, bluntly, compensation structure to comprehend motives at the table. The lawyer is hard selling this project to me, jumping into how I could be finance the acquisition; the brewer appears excited to put my funds to use and shares his thoughts on product advertising and sale strategies.

Within 15 minutes of the discussion, I count over 800 red flags for taking on a bakery that could not pay its bills; I was able to express about 50 of them in German. The fact that I could not adequately express 750 of my concerns is yet another red flag for taking on a business in a foreign country.

Each concern is batted down by the other two at the table, claiming that problem would be easily surmounted. My gut is telling me to walk away and quickly. This is the point where the lawyer retorts that perhaps I simply am not an entrepreneur. Upon hearing this, I am viscerally triggered.

I proceed to go into a ten minute rant about how I am in fact well-educated in business practices, having also worked for large corporations in leadership roles. She then smirks as her plan succeeded: I agree to visit a couple of the sales locations as well as the main production facilities the next day.

The brewer is to join as a consultant, but reveals that he is also aware of another interested buyer that is out-of-town; the brewer will also be reviewing the business for this other gentleman. Upon hearing this, I quickly chime in that if there is another interested party, I withdraw my interest. However, the two at the table do not accept that option, and we agree to meet the next day for the tour.

Monday Visit

We meet at the appointed time and jump in the car. The idea is to visit two of the satellite shops in order to assess layout, equipment and potential. We agree to pose as customers as to not arouse suspicion. During the drive, the lawyer is bringing me up-to-speed on the construct of the bakery; it is run as a GmbH, which can be equated to an LLC. This has quite a few implications, which I’ll summarize later.

The brewer is also taking this info in and re-explaining it to me unnecessarily. I do not respond to him in the hopes that he gets the hint. He continues his discussion on marketing techniques and how I should be able to easily turn the business around with advertising campaigns touting “local” or “organic” or “gluten-free”, which is desired in Germany, but hard to find. The brewer has a book on the topic; I happen to have college credits for the subject.

We discuss current mortgages and other claims on the property, equipment, and vehicles. The way one purchases a business in liquidation also impacts the transfer of said encumbrances. I ask the lawyer about the approximate interest rates being paid on those liabilities; the brewer chimes in that a quick win would be refinancing. It is at this point that I am about to clobber this guy.

We arrive at the actual bakery, which is located in the center of a small village. We check out the two mobile sales vans, and note that there are two additional delivery vans parked elsewhere. We approach the front door as the baker arrives; one of the other shops had called her to tell her that some city folks stopped by and oddly bought two or three rolls. Our attempt to be inconspicuous failed majestically.

The four of us walked through the bakery noting the type of equipment and the remaining life of them. This bakery had every gadget and amazing ovens and shock freezers and grain silos. It actually would be a sight to see when in action. We learn that it used to be fully staffed, but as the years went by, new hires were not found to replace the departing. In a small town, and in fact throughout the country, not many of the next generation want the lifestyle of working third shift. The baker was burnt out; she had inherited the business from her father, and she was trying to run it alone; often working alone where six would generally work with room to spare. It is definitely the largest operation I had ever seen.

We then tour the apartment above the bakery as the entire structure is included in the GmbH. No one had lived there in a while and it would need a lot of work, but was arguable livable. Then we climb the stairs to the top floor, where someone had built an amazing “knight pub”. This floor is uneven cobblestone floors with a ‘cart path’ running through the center. Ye olde bar top sits at the far end and rustic tables and stumps are scattered about. The baker explains that this was built out during the times of plenty, but is admittedly gaudy now. It is definitely awesome and terrible at the same time.

We thanks the baker for her time and depart to discuss particulars.

Numbers and Implications

As mentioned above, the soon-to-be-insolvent bakery is set up as a GmbH, which means that the entire company is set to be sold off and the proceeds will be used to pay off the debts (and taxes). On the other hand, the bakery where I am currently interning is set up like a self-proprietor business; all assets and liabilities are directly the responsibility of the owner(s). If something happens in the former, the liability is limited; in the later, the owners are responsible. Both have advantages and disadvantages.

For the visited bakery, I was given the option of buying the business directly from the baker and avoid going the insolvency. I would take over the liabilities and assets, meaning that I would then be responsible for the back taxes and the mortgage, which also assuming all of the cash in the bank. Additionally, I would take on the full staff of the sales shops as well as the shop’s rental contracts. The idea is that the business could be purchased as a strongly discounted price.

The other option was to wait until the business goes insolvent. I would then need to negotiate with the state for the assets that remain. In this case, my initial investment would be used to pay off their taxes and mortgage obligations, and I would still acquire the assets, but I would not need to worry about the people. Oddly enough, it is the unemployment costs of laying off people that became a big talking point. In Germany, laying someone off is expensive and could be a huge cost for a long time.

Theoretically, it could be cheaper in the short term to wait until insolvency, but the long term solution could be buying the company outright prior to. In order to sweeten the deal, the lawyer had already received approval for government assistance to the tune of three months free payroll – they would foot the bill for all salaries for the first quarter. It would save them from relying on the government for unemployment benefits. I also got the feeling that I could negotiate for more in order to keep them on the books.

After working through all of these intricacies of acquisitions, I was quite confident in the choice put before me: No, I have no desire to buy a bakery. The easiest issue was that I would need to move back into a small village. The cost estimate (very back-the-envelope) was put at around a quarter million Euro. The lawyer suggested that I simply need to apply for that loan at my bank. Ha! That still makes me laugh. I think I’ll stick with the tried and true process of going to a baker school, to which I had recently finalized my application.

Declination

I meet up with the brewer the next day. We had both received the annual statements from the GmbH for the past couple years. I had had the chance to quickly peruse them; sales were down and profits followed. He once again discussed all the positives of the purchase and urged me to consider it. However, he could see in my face that I was not going to make a bid for the business. I did happily let him know that his other investor can now simply step in.

He responds, no, it would be a bad investment. WTF?

Aside

On August 14, 2018, I was informed that the Dresden Crafts Council accepted my application to attend the master baker school and participate in the final examinations. As a foreigner, this is a huge opportunity for me. I will be studying there for the first six months of 2019 with the assessments in the middle of June. I am excited and nervous. Language may definitely be a barrier – especially for the oral part of the exams.