purchasing an existing shop

Discussion in 'The Think Tank' started by pizzaboi, Oct 26, 2017.

  1. d9phoenix

    d9phoenix Well-Known Member

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    Always believe the higher/worse case scenario. If you can make money their, then you can make money on the low/good numbers.
     
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  2. bodegahwy

    bodegahwy Well-Known Member

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    I owned a pizza by the slice operation for 10 years. My COGS was about 22-24% but we were in a resort environment and able to charge pretty high prices and used fountain beverages.

    As a business appraiser and broker I am very reluctant to use any non-reported income. On the other hand, if you know there is some (and non-reported wages to go along with it) you try to take it into account. My general thought would be to use the reported income and be willing to look at the upper end of the indicated value range... This is why I advise sellers to clean up the books and declare everything for a couple of years prior to putting a business on the market.
     
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  3. Piedad

    Piedad Active Member

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    Have you ever won a game of Whack-A-Mole at an arcade? Sounds like thats what you are trying to pull off here. Go back to read my earlier suggestion about getting written food distributor conformation of their flour and cheese purchases over a 12 month period (shorter term periods could be misleading when there are seasonal sales discrepencies). Then extrapolate from those numbers to find approximate sales numbers. This purchase is way too big to be guessing where the next "mole" will be popping up.
     
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  4. pizzaboi

    pizzaboi Member

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    This owner has owned this business for only 3 year and this (2017) is the 4th year now. He purchased it from the original guy who owned it for probably 6 years. Reported sales for 2014 were around 500K and in 2015 they are 830k, 2016 they are 885k.

    I also see "loan from owners" entry in the balance sheet for 240K. I wonder if this was the price they paid to purchase the business initially.

    Since you are a business broker, hopefully you can shed some light on the following too, if possible.
    • Also in your opinion what is an acceptable (SDE or EBITDA) multiple for a pizza joint.
    • How does the lease impact the valuation. (This has only 1 left on the current lease, with option to renew for another 5 years).
    • How would a competing business selling EXACTLY same product right next door, impact the valuation? There is a competitor selling same style of pizzas who is literally next door, and no one knows why, but this business gets 3 times more traffic and sales compared them. I have spoken with shop owners nearby and across the street, and even they say, they dont know why more people come to this shop (that is for sale), compared to the competitor shop next door. They are all seem to be visibly baffled by it too.
    • Would the fact the current owners will have owned it for only 4 years before selling, impact the valuation?

    Thanks for your input. This is tremondously helpful for me, hopefully all the knowledge in this thread, will help others in the future too.
     
    Last edited: Nov 18, 2017
  5. pizzaboi

    pizzaboi Member

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    You are right. There are lots of moving parts and variables that I am trying to get a hang of in this case. But I also see it as a good exercise to learn the nuances of the industry, if I dont end up buying the business. So I am really learning a lot here.

    As to your point about flour purchases..

    1) I will get written confirmation from their food distributor on flour and cheese purchases for 12 months, as you suggest. But that will be during the due diligence phase, for which I need to put in an offer first, before the broker will let me come in with a fine tooth comb and go through their books. But they are willing to show me everything to my satisfaction once I put in an offer which will be contingent on all their claims checking out positively.

    2) My dilema is even if the seller is actually ordering all the stuff he claims from their distributor, what if the nature of the operation constraints him on running super high cogs which is beyond his control (wastage, unsold inventory, anything else?). Hence I am trying to understand what could the cogs be for a "pizza by slice" operation. I have seen made-to-order type pizza franchise have 30% cogs. I saw another "pizza-by-slice" franchise have 37% cogs.

    I have asked the broker to set up a meeting with the owner. So the more knowledge I have before hand, the better I can frame my questions during the meeting.
     
  6. Piedad

    Piedad Active Member

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    Now we see that there is another pizza joint next door??? Getting more bizarre as we go along. And only a year left on a lease, with one 5-year option ... how vital is the location (foot traffic, car traffic, etc.). There sure are a lot of red flags here. I can appreciate that you want to learn more about the nuances of the business, but maybe this particular shop isn't the one for you. I'm also still concerned with your reluctance to commit to whatever number of hours that it will take for the business to be a winner. Small businesses can't be expected to thrive when an owner wants to simply wind them up and then go on vacation.

    One other thing is still nagging at me. I think you've characterized the place as primarily a slice shop (sorry, if I'm remembering that wrong), but, if it is, the reported sales volume sounds high ... so I would expect a very high volume of customers in and out the doors ... you know, busy busy busy, with many of them eating inside the store ... is that what you see here?
     
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  7. pizzaboi

    pizzaboi Member

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    Yes there is Pizza shop right next door, literally. But they get 1/3rd the traffic and business. I observed this when I sat outside the shop for 1 week (Morning, noon, night, late nights) to monitor traffic for the store that is on sale. The competitor pizza shop owners arent very savvy with marketing (nor are the sellers for that matter). If this business makes as much as it claims, I think I will have enough money for marketing.

    Location is super critical, as I find most traffic is just walk ins. But I am thinking of valuing the business at 1X to 1.5X max. So I will get my money back in 1 year and have 4 years atleast to earn money. Also I dont think it would be hard to get an extension on the lease for another 10 years, because this shop has been at this location for atleast last 10 years and will most likely be there for another 15 years, unless the landlord decides to gut the building down.

    I am willing to put in whatever hours in takes, ideally less than 50 hours. But I am also not averse to paying good wages for a manager who I can oversee. Ofcourse before that I will be working at the shop to know ins and outs, prepare a system that can be used to train a manager, then co manage with them. I will be there are the shop daily even if the manager is there. I just dont want to be the single point of failure, which requires me to be at the shop ALL the time. I wont be just hiring a manager and taking off.

    Yes it is a slice shop. Majority of their sales comes from slice sales. I have sat outside for about a week and observed that they get about 25 customers during their "down" time and during rush hours it is 40 people, upto even 60 or 80 people, when it is INSANE rush. I am guessing their average ticket price is about $5 (2 slices of pizza and pop). The reported numbers (revenue of 880K) can be proven via tax returns. The owner is open to that.

    I know there are lot of things to think about. Which is why I am not rushing into this. But I also am piqued and want to research it well. I am nowhere close to putting an offer in for this yet. But my analytical mind wants to really dissect and understand this situation.

    Even if I dont end up buying this shop, all the knowledge I have acquired through this process, will only make equip me more, to value the next business I will be reviewing.
     
  8. Pacific Pizza Co.

    Pacific Pizza Co. New Member

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    They have no problem lying to the government and you expect them to be honest with you? I would run... FAST
     
  9. pizzaboi

    pizzaboi Member

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    Just to give an update, I am no longer pursuing this store.

    Too many red flags for me and no way to confirm or deny anything.

    When I met broker, he wanted me to give him the questions beforehand, that I wanted to ask the owner directly.

    That was the last straw. Plus info provided was wrong/vague, interactions with brokers too was haphazard and kind disorganized.

    So figured I pull the plug.

    I also want to thank everyone who contributed to this thread. You guys are AWESOME!
     
    Last edited: Dec 9, 2017 at 5:18 PM
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  10. pizzapiratespp

    pizzapiratespp Well-Known Member

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    Most restaurants are for sale simply because they are loosing money. I've sold 3 locations over the years and it was for that reason. I told the buyers they were loosing money and that they needed an owner/operator to turn them around. Most restaurants for sale are listed as " owner retiring" or " health issues " I just laugh. Just say it like it is. Selling because I'm loosing my shirt!
     
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  11. bodegahwy

    bodegahwy Well-Known Member

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    As a business broker I will say that there is certainly some truth to this. Especially when limited to "most" and not implying "all". If you expand that statement to say "because they are not making enough money" it certainly becomes "most". However, the last several restaurant for sale situations I have been involved with are:

    1. Shop that made very little money. Owners divorced. Both wanted out. Sold cheap. Value of equipment in place basically.
    2. Shop that made pretty good money. Kind of a "buy yourself a job" scenario. Owner worked 20 hours a week and made about 70K. Also had another profession where she makes six figures. Did not want to work that much. Elected to try and sell herself. Priced at 2X fair market. Still for sale.
    3. Shop that grossed 800K. Run with manager so owner only makes about 40K from it and owns 5 other restaurants. Seller's discretionary earnings were about 100K if you replace the manager.
    4. Shop that grossed 600K. Absentee owner (we see that in resort towns). Place never made money but would have made about 120K for an owner operator. (At least if they steal they are getting the money!) Sold pretty easily for a low price.
    5. Shop that grossed 2.8 million. SDE was about 300K. Owner divorced, wife moved away with kids. After six months sold to move and be closer to children.
    6. Shop that grosses 400K. Owner does not work there at all. Loses money. Owner self listed for less than 100K. Still on the market. Called me this week to ask why it had not sold and ask if I will take the listing.
    7. And then there is my shop. Grosses a bit over 400K. SDE is 90K (but I pay a general manager out of that). I spend about 4-5 hours a week on the business. Been for sale for some time. I get buyers with money who don't buy when they realize they would have to work there to get the 90K and buyers without money that would be great owners and want to work.... but don't have any money. I think an owner operator would get sales up to 450-500 and SDE of 120-150.
    8. Shop that grossed over 3 Million. SDE around 500K (but rent was a bit low). Sold easily with multiple offers. Owner had been out of the place for the last 10 years but wanted to really be retired.

    There are more, but the Pirate is right. In many cases restaurants are for sale because they don't make enough money. In my experience it is less often the case that they are losing money. Restaurants that actually lose money are mostly not around long enough to sell!
     
    Last edited: Dec 8, 2017 at 3:16 PM
  12. pizzaboi

    pizzaboi Member

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    What was the asking price for the shops below and how much did they get sold for?

     
  13. bodegahwy

    bodegahwy Well-Known Member

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    Sorry, all information regarding the sale of a business is confidential and is not available for disclosure. For what it is worth, both of these businesses were single location bar/restaurant businesses and not involved in pizza.
     
  14. pizzaboi

    pizzaboi Member

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    No issues. I can understand.