my husband and i are considering purchasing a local pizza restaurant
it has been in business 25 years
its 3500 sq feet and seats 124 people
revenue is $775,000 a year
lease is $10,000 a month
not so sure about much else, but is 200 thousand waay too much to pay!!! it seems like most other restaurants for sale are soo much cheaper. whats the deal here??? my husband is mostly i charge of this, but im feeling worried!!!
thanks guys!!!
$200,000 is definitely not too much to pay for the right, profitable business. That said, you have not posted anywhere near enough info here for anyone to judge whether this is the right one, or even if this is profitable. If fact, the 15.5% annual rent would make me believe that this is very likely not a profitable business. Find out what the rest of the costs are and you’ll be taking a step in the right direction.
$34+ per foot annually is quite steep for rent in most places. I would not expect to find commercial space renting for this where I am at unless it was one of the top 5 or so premier spots in the whole town. Is there any chance the seller of the business owns the real estate and is trying to subsidize the purchase price with a huge lease? Anyway, a lease that size would scare the cr@p out of me. You are on the hook for $600K+ if you sign for 5 years. I hope the place makes a great profit to warrant rent/risk like that.
This.
Drag your husband in front of the computer and provide some more details. This forum has a crew of posters that are extremely adept at asking the tough questions and pointing out trouble on the horizon.
Yikes.
High pizza Lady:
You are going to get some great questions and even better advise from the pros on this forum.
My contribution is the same as I make to every prospective buyer. I would expect a 25 year old food service establishment to be loaded with a great many features that will not conform to the latest building codes and other regulation which are vastly different now than they were only a few years ago.
Yes the seller is no doubt grand fathered in on a great many code changes. Be advised that grand fathered exclusions to codes cannot be passed on to a new owner.
In order to get a license to operate a restaurant, a new owner will be required to bring the facility up to the very latest codes. This could cost thousands of dollars.
In your offer to purchase you should stipulate that the owner submit to an inspection by the Building, Health and Fire Departments with a view to bringing the facility up to the current codes Prior to your purchase. Further stipulate that the seller be responsible for any pre- existing violations discovered during the year following your taking over ownership.
George Mills
George,
In your experience (or anyone elses) has that been the case in all forms of ownership (corporation, LLC, S-Corp) or just sole proprietors and partnerships?
Advice to the OP in additon to the other advice. Get an accountant and/or lawyer that is experienced in auditing and aquisitions. You will want to go through all the books, returns, cash flows, etc and be careful of not taking over tax liabilities from the previous owner.
Getting that help may seem expensive but if you are thinking of dropping 200K it’s going to pay you back in spades when it comes time to sign the deal.
Bryan
I do about 500,000 a year and my rent is give or take 5,500 after taxes. (which you didn’t mention). I can say my biggest downfall is my lease. If i’m having a hard time with my over head, Id suppose they are too. $10,000 is way too much money for a place only doing 3/4 million. Without any other info. I’d say no.
One Avenue you can take is see if the landlord will work out a new lease with you. Times are tough, maybe they want someone new. He’s probably having a hard time getting his money from the current owner being that his rent is astronomical. is this place in times square?
I think that’s an awfully big restaurant (size wise) to be doing $775k per year. I have a store that is going to do $1 mil in it’s first year and that’s out of 2,400 square feet - and we have plenty of capacity for more.
I can’t say that your cost per square foot is too much or too little - that all depends on the location. The store I mentioned above pays $34 per square foot, but the location is amazing. The rent in your proposal is high because the space is so large.
I’ll reiterate what was said above - we need more information to gauge the sales price.
YES!
$200K is TOO MUCH for this place!
$5K may be too much to pay for this place!
Rule #1: NO ONE WANTS TO SELL A PROFITABLE BUSINESS!
Rule #2: IF THEY DO, ITS NOT FOR A GOOD REASON: See highways moving, lease expiration, building condemnation, or other hidden closures for reason.
George,
In your experience (or anyone elses) has that been the case in all forms of ownership (corporation, LLC, S-Corp) or just sole proprietors and partnerships?
Hi Piemaker; It makes no difference what the form of owner ship the seller or the buyer has or selects. New operators must bring the facility up to the very latest codes.
George Mills
If you were to go into a partnership for a few months and then buy them out you may not have to bring the facility up to the very latest codes.
Rules and regulations will vary greatly from 1 jurisdiction to another as to whether or not a premises has to be brought up to code at a transfer of ownership…So best to do lots of research at the local office to make sure you know what it relevant…
I don’t know which rule book you have but its not a good one!
No one wants to sell a profitable business?? since when? I sure as hell want my business to be profitable when I sell it and yes I do plan on selling it one day. There are a million reasons to sell a profitable business - I plan to sell mine one day and do other things with the money I’ve made.
When the time comes to sell your business are you planning for your business to be making a loss?
Yeah I agree with Wiz…there are millions of reasons one might sell a business. Also profitable or not doesn’t mean the buyer will be too once they get it.
Well my business is profitable, and I would love to sell it for the right price. That’s the whole point for me - build something of value and then sell it for much more than I paid for it. I’m not in this business for the love of pizza, I’m here to make money. Selling my business is my exit strategy, and profitable businesses sell for a lot more than non-profitable ones.
This really isn’t true George. My business is a corporation. If I were to sell my shares to somebody else it would take place in a lawyer’s office. The city that is responsible for code enforcement would never even know, nor would I be required to tell them, because the corporation is it’s own entity. There would not be a new business license issued, the EIN would stay the same, same sales tax account, etc.
Even if it’s not a business sale and is simply an asset sale, there’s still no guarantee that the new owners will have to do anything to bring the place up to any code. That’s up to the local jurisdiction’s building and health departments, which have final say on everything. The only thing there isn’t any leeway on is the ADA, because that’s federal. Other than that, there are no national building codes in the U.S. There are model codes that localities can choose to adopt (and usually do), and the locality has final say on interpretation and enforcement. They can pick and choose what to enforce and what not to enforce within their own jurisdiction.
Like building codes, NSF requirements are just standards and not laws. The local health department does not need to require NSF-7 compliant reefers. As a matter of fact, I had a non-NSF-7 prep table approved by my health department because it functioned just fine for our use. So no, if you buy a business the health department does not have to require you to bring everything up to current NSF-7 requirements.
There’s far too many variables to be making a huge blanket statement about this issue.
Time for me to spend way to many words (probably) making simple point that you gotta get as much information about as many different things as possible:
The 1st question has not been mentioned or answered . . . . do you and your husband have a business plan written out? My position is that unless you develop a plan that outlines the marketplace, competition, customer base/demographics, products, price point, goals, expectations, financing, projected sales and revenues, plus the whole other stuff, then this purchase makes no sense whatsoever.
Without knowing what you need for the business to accomplish, then nothing the owner says will tell you if this existing business in this location will accomplish it. One VERY REAL difference between current owner and the next owers is that new owners will have a honking big debt payment on top of any existing expenses. Will the business sustain that? You don’t know yet.
The information you or your husband will need is a pretty detailed picture of the physical and financial health of the business as it sits before you ‘adopt’ it:
What are the reported revenues for last 5 years? if it ain’t reported, it doesn’t exisit
What are reported labor expenses same 5 years?
What are food cost expenses same 5 years?
What are tax expenses same 5 years? Unemployment, sales tax, alcohol taxes, Workers’ Comp, Occupational, etc.
How much AC/HEAT is supplying business, and is it adequate (ask a professional) and in good repair?
Does current owner work daily shifts in the business or is it run by competant manager(s)?
Detailed list of all FREE AND CLEAR appliances and equipment that is owned and not collateral for current debt
Age of existing assets that are free and clear . . . a shop full of 25 year old coolers could be a time bomb
What equipment is leased or on loan from someone other party?
Maintanence records for last 3 years or more?
What are current city/state alcohol licensing costs?
What is economic health of area near store? Other businesses stable, growing or failing?
What restaurant/eateries opened in area in last 2 years/1 year/6 months that could be impacting this business?
LEASE: what items is landlord responsible to maintain, and what is business supposed to? What is current duration, and what extensions? Ask around with commercial realtors to find out accepted and reasonable rent rates in area. Consider getting a commercial realtor or agent to negotiate the lease with/for you. This can be make or break for the business cash flow and profitability.
All these above need to paint a pretty consistent picture and make sense. When the time comes, you will require from seller tax records, receipts, inoices and other documentation of all sorts on this stuff. It is pretty standard stuff when getting to serious business of purchase. Accountants and attorneys to review it all to make sure it is sensible. You gotta compare all this to your own independent business plan to see if it can all be done and done well.
REGARDING CITY/COUNTY and you purchasing
Does current grease trap meet expected specs for you?
Does current fire suppression meet expected requirements?
Are other current other fire code expectations met?
ZONING: do you have adequate parking for assuming this business?
Are any alcohol licenses legally transferrable? What are requirements?
What new requirements, if any, must be met for alcohol licenses? (zoning, signage, etc.)
What crime activity has been reported at or near the property in last 3 years?
What is population movement in town . . . moving in or moving out?
What is current zoing of parcel? Any limits that could impact your business goals?
There are tons of things to check on. Best bet is to meet with someone in Planning/Zoning and with fire marshall to get as much forewarning as possible. Surprises later will be expensive and potentially devestating.
And whatever the code officer tells you, get it in writing. I have opened two, and have learned the hard way, what they tell you on the initial walk through and what they want in the end are completely different
Much has been said and several useful points made.
I own a pizza restaurant (used to own two) and have owned it for 11 years now… but what I do for a living is business brokerage and leasing.
That lease sound high in relation to sales (which, in my opinion is the most valid snapshot for lease rates.) It comes to about 15% of sales which is more than most businesses support.
$200K for a business doing 3/4 million could be a VERY good deal or it could be more than it is worth. In the end, the relationship of the price to profit is where I would want to take the discussion. I can tell you that at that sales level, my business would make close to 200K profit which would make 200K a screaming deal for a purchase… but my rent (paid to myself) is 1/3 of that amount. If this business make a 6 figure income for the owner, I would take a good hard look at the deal and be inclined to consider it. If it makes much less than 80K I would walk away from it.
Short answer? 200K is NOT too much to pay for a pizza place. Whether it is to much for this one can not be answered from the info provided.
it has been in business 25 years
<— Doesn’t mean a thing to me: is it located in a DEAD shopping mall?
its 3500 sq feet and seats 124 people
<— V.nice size and fits my liking.
revenue is $775,000 a year
<---- VERY LOW for a store of this size. Should be twice that level.
lease is $10,000 a month
<----- INSANE!! Based on size/sales, lease should be NO MORE than $4-5K/mo.
If this store was in the RIGHT location, it could do 4X the volume of sales. But, since its at least 25 yo, it doesn’t appear to be in the right location. $10K/mo lease isn’t an issue if its in the right location, but given the current sales level of a business established for 25 yrs, its just obscene. You’re thinking you’re going to pocket some $100K+ profit a year, after investing $200K, but the only guy who will for sure pocket $100K+ will be the landlord AND the seller.
You should retain a professional to assist you with a proper investigation of this offer. Good Luck!