I have an opportunity to purchase an existing pizzeria with a building that also contains two apartments. He’s asking for 375K which includes the real estate and the pizzeria. This place is located in a resort beach town that is open only about 5 -6 months per year. I know the equipment is included but I don’t know yet if it is “fully” equipped.
Here’s the trick:
The owner of the building was leasing the pizzeria to another person. That person is no longer in U.S. so I have no way of seeing the books. If he doesn’t sell the building, the owner of the building is planning to open the pizza shop up himself and run it because he has done before many years ago.
How do I know if 375K is a good deal? It seems like I can only value the real estate since I have no way of knowing the value of the pizza shop. The building is 4000sq ft.
I plan on running the pizzeria myself so there will be no manager. Open 7 days a week.How much can I earn after all expenses in a town of 250,000 people for 5 months?
What do you guys think?
It’s difficult to place a value on the business. If the previous pizza shop owner was doing well, you might expect him to have sold the business. Did the previous shop owner do a poor job and ran up lots of unpaid bills and then bailed. Perhaps you could try to contact a few of the previous purveyor’s sales reps and see what kind of volume he was doing or if a he left a trail of pain.
What do the apartments and pizza shop rent for?
There is no value to the pizza shop. It is not a business; it is just a collection of used restuarant equipment unless it is up and running with verifiable financials.
The value is: Market value for the building (Rent it could generate is a good place to start to get handle on this) plus the value of the used equipment.
What is the appraised value of the building? You will need to get it appraised to buy it anyway assuming there will be a mortgage. If you move forward you might consider a clause in the offer that the building has to appraise for at least the contract value or you can get out.
Both apartments combined rent for $2000 and the pizza shop rents for $2000 as well.
Apparently, the pizza shop owner decided to move back to his country. That was what the building owner told me. The building owner also told me that he was getting ready to go and buy some equipment in a few days. He said if I was seriously interested in purchasing the business and building, that he would hold off and not buy the equipment yet. I don’t know what equipment he was going to purchase or the cost. I do know he is planning to open up for the season if no one buys it. There must be some money to be made if he’s willing to do that. I’m sure he wasn’t able to find a person to buy the pizza shop business or the building for that matter. So it must be worth it to him to open.
So I should try to find the vendors that sold the previous pizza shop owner the food and see if there were any debts and to see how much the he was spending in food per week/month? What do you mean exactly by “sales reps?” That could be like searching for a needle in a haystack. But I’ll try.
Thanks for the tip. I agree with you. There is no value in the business without the books. I’m just trying to figure a way to estimate what my potential earnings could be for a high traffic area in a booming beach town for 5 months. Even though I can rent out the apartments which would cover the mortgage, it feels like a gamble.
What would be my worst case scenario with the pizza shop?
Another big question:
Will I be able to purchase the property/business, go through due diligence, pass all code inspections (health, fire, building) and get the pizza shop up and running by Memorial Day Weekend? This is already April 7th.
“Will I be able to purchase the property/business, go through due diligence, pass all code inspections (health, fire, building) and get the pizza shop up and running by Memorial Day Weekend? This is already April 7th.”
I can not answer for the code issue in your area. Where I live, it would not be a problem.
You have no due diligence to do as you are not buying a business.
The key issue will be your bank. Talk to them about a realistic time frame for appraisal and loan approval for a closing in 30-45 days.
Last, don’t worry about missing Memorial Day. If this is a good deal, a week or two here or there will not change that.
In California, where I live, a place generating those kind of rents would go for $800K. I’m jealous. I do own a number of residential rentals out of state and one question I ask is whether the purported rents are sustainable and typical of market. Sometimes I see places that have unrealistically high rents that are likely fluffed to generate investor interest.
As far as sales reps, you could look in the yellow pages for purveyors covering your area. Houses such as Sysco, US Foodservice, etc typically have a specific sales person dedicated to a geographic area. Thus, you could contact the food service houses and ask to talk to the sales rep that covers your area. Let the sales rep know your looking at purchasing the business and ask whether they serviced the place in the past. They may be willing to share some numbers with you especially if they think you may be a future customer. Weekly flour and cheese quantities can give you a sense of pizza volume. On the other hand, they may state that the previous owner left them holding the bag.
Look on the internet for reviews of the previous place. Are they overwhelmingly bad? Keep in mind that grumps are more likely to post then non grumps.
Worst case scenario might be such things as such:
-Previous owner had poor quality food and the place has developed a bad rap. Sometimes a name change and under new ownership sign can help.
-Previous owner burned purveyors and purveyors will only do COD.
-Some friends of mine purchased a place and the previous owners had several workman’s comp claims. Resultantly, my friends had to pay a substantially higher rate even though it didn’t happen on their clock.
-These same friends incorporated the business they bought, as a result the local utility required 3 months estimated utility payments in advance-$5,000. If your financially against the wall, things like this can sink the boat.
Bodegahwy, are you sure about this?
“2. You have no due diligence to do as you are not buying a business.”
Seems like you could have a due diligence clause regarding code update requirements. For instance, the county or city may require updated flooring, fire suppression, triple sink, or hood system. Thus, you would need an amount of time to discover if the place can be brought to code for under a certain amount of money. If the updates cost more then this amount, you could renegotiate price or terminate sales agreement.
- Got to ask, have you owned, managed, or worked in a pizza shop before?
BCP, yes you could call those items “due diligence” good point. I would generally refer to those as inspection items. It should be possible to arrange for those items inside a 30 or 45 day escrow.
Thanks for the tips on vendors. I will investigate them and post a reply with my findings.
Yes, the rents are typical in my market. However, this beach town is a resort town which means that the place turns into a ghost town for 6 months during the winter season. So sustainability with rent incomes is certainly a risk factor.
Another issue I’m concerned about is making a living that will support my lifestyle and just working 6 months out of the year. Since I’m going to be managing the shop I’m hoping to take home 75K for myself. Is this being unrealistic?
I have never owned a pizza shop. I have been self-employed as a technology consultant in New York City for the last 10 years. I’m used to working 12 - 14 hours a day. I’m a first generation Italian. I grew up in a household full of authentic homemade italian food. Though I believe this will help me to a degree in the pizza shop, I realize I’m jumping into unchartered territory for myself.
I’m partnering with my father who is a self-made business man in the liquor business and commercial real estate. But again, he doesn’t have experience running a pizza shop specifically. That’s why I’m here on PMQ…to seek advice from the pros
Just a side thought…you say apt rents total $2000 and another $2000 from the pizza business… but you are buying the entire property so you have $2k coming in not $4k until your pizza shop is up and going. Might want to make sure you have the capital to cover the place until it turns a buck! What happens is this first season of 5-6 months of tourist dont bite because of last years crappy experience? To have someone just pack up and leave the country…hmmm? Do your homework!!! :!:
My number two location was a seasonal store (owned/ran it for 10 years. It is great to run at efficient high volume when you are open and take time off when slow. Don’t forget you can still do things like catering, special events or other jobs in the offseason. It might be that your business makes you 55K in season and you earn another 20 doing something else in the off season.
Thanks guys for all the great insights! In terms of having enough capital to get me through the first season is definitely a concern of mine. This week I will try to find out how much the previous owner was spending on food.
Latest Update on Previous Owner
I did some online research on the old pizza shop and could only find 3 reviews. They were all extremely negative. Complaints such as bad tasting food, and not getting the orders correct for deliveries. I even read that the owner got into a 20 minute argument on the phone with a customer because the order was completely wrong. Even though 3 bad reviews and 0 good reviews are not many. I would have to bet he was not running a good business. Do you guys agree?
All I need to do is change the name of the business and put up a sign that says New Owner. Any suggestions for that?
Another review stated that supposedly the pizza shop didn’t even have a Mercantile License. Any thoughts on that? Will it be easy for me to obtain one?
Seems like your rushing into this too fast. Others may disagree. It would be good to get some experience in a shop or hire an experienced manager. Your going to have develop menus, recipes, procedures in addition to getting the place up to code within the next 1.5 months. If you have a large budget, consultants can be hired. When you open the doors, you don’t want to be subjecting your customers to your learning curve-especially if the previous shop had quality issues.
Restaurants are not easy to operate and it’s not uncommon for owner operators to put in 12 plus hours a day or more when first getting a place going.
Am I missing something as far as the building?..With 2 rentals suites the building carries itself without any income from the commercial space…
And if the building carries itself on the suite rentals, you do not have to go full out in the commercial space…Just open 11am to 6pm and catch the peak…
BCP: I definitely feel like I’m rushing into it. But I may have more info to share with everyone after my meeting with the building owner this week.
Here’s another idea:
Perhaps I can take over the pizza shop at some point in the middle of the season. That way the building owner/pizza shop owner will have operations in place and I can get trained. He used to run the pizza shop years ago and has years of other restaurant experience. Then after a certain period, I can take over the business. Any thoughts on this guys?
You are right! The rentals would cover the mortgage, so that eliminates some pain in the beginning. And though the hours are so appealing to me that you mentioned, I think I will earn more by staying open much later. Since it’s a beach town with a decent bar scene, there will be a lot of hungry people leaving the bars at 1am on Friday and Saturday nights. I was thinking to stay open until 2am and make money.
Do you think this is a good idea?
I am far too old to work past 9pm at night…lol…
As far as this deal, if the owner is motivated and the deal is sound as far as the suite rental income, if you go too slow there may be nothing to buy…
Royce I misread it at first but with only $2k in rental i doubt he had enough coming in to cover the units, building, all utilities and taxes. Not knowing true taxed value and other expenses or the area…but If the business is up and running it should/might work. Too many questions to make a good educated decision as of yet. I think! :?
You’re right. The apartment rentals will not cover all the building expenses such as taxes, utilities, and mortgage. I would be in a slight negative from the start.
I spoke with the builder owner and he told me to keep my expectations low in terms of earnings for the Pizza Shop. He said for me to expect 10k -12k gross per week and there will only be about 15 strongs weeks with a few more “slower” weeks. So we’re looking at potential range of 150k-180k gross earnings from the pizza shop. Plus 24K in annual rental income.
Later in the conversation with the owner, he told me I could expect to take home 30k-40k for myself. Is this realistic?
Since I will be running it myself, what do you guys think I can take home for myself after all expenses?
Inquire as to what other restaurants are doing as well as rentals. Talk with the locals. If you’re really interested, spend a week or 2 there and investigate the business climate. Good Luck.
There is not enough information here to say what you will take home but the scenario you describe is certainly possible. As an operator who does business in a resort town, I can tell you that you will have two challenges:
- Make the most out of the business when it is there.
- Keep your expenses as low as possible when the business is not there.
It really involves a change of focus when the season changes. It also means figuring out the marketing puzzle to get that business when it is in town.
1: What were some of the staffing problems you had problems with in the beginning? Will it take me a few weeks to see at what times I will need to be fully staffed and how many people I actually need helping me? It seems like the beginning will be trial and error.
2: Do you suggest I investigate the Black Book right from the start for my advertising? Or some other approach? I was thinking about sending people out to the beach and handing menus out there. What do you think?