Looking for some guidance

I have been posting a few things here and there lately on this forum and the answers that I have received are worth a thousand hours of research. I have been doing SO much research for my business plan but coming up short on answers. That being said I believe I have read every single posting in this forum! I still have answers and I am sure most of them will only come in time but I am stuck on finding answers to a few.

When doing market research I find EVERYONE’S market is different. I have read everything on here about getting a rough idea of how much business to expect but with so many factors in play I can not seem to narrow anything down in a “fact” based number. For example here is my general demographic of my area…

Total household …1 mile-2,994…3 mile-10,105…5 mile-17,527

Average house hold age 39
Average house hold income $62,000
Average house hold size 2.3

Food expenditures away from home is - $2,756.14 per year per household

Competitors in a 3 mile radius (Pizza competitors, NOT all restaurants)

P Hut
LC (big dinning area with a buffet)
John’s Pizzeria (independent) sit in and carry out only
Pizza Co (Independent) Delco only
Jets
Hungry Howies

My concept…Wood fired pizza, NO delivery (at least not in the beginning). Locally sourced when available. VERY VERY heavily community based business. (no others are taking this route in our area) All fresh and “customize your pizza” approach. Have a service line with the drop in cooler wells in front of the customer (like subway). I make my own dough (most everyone does now) I make my own sauce and know how to make my own cheese.

Now with ALL that yacking I just did. Do I take a percentage to figure market share? Do I use the old $17 per house hold (which I have NO idea where that number even came from)?? $1-2$ per address?? .50 cents per address?? Shoot from the hip and make numbers up?? (just kidding, not what I am looking for!) For a business plan how should I come up with a market share number?

I understand that to find out if this is a viable business that I will need to do a break even analysis, which I am doing, but I need something to compare it to, to at least see if there is a market to have. Everyone in my area that I have tried to talk to in the business are all locked-traps with any info. My favorite place to eat in town (the Pizza Co) the delivery driver said they do about 150-200 orders a day. With a report my SBA counselor helped me find says they average $170,000 a year in sales, something does NOT add up. I think I just may be confused.

I’m just curious of what others have done, ANY advice on this is greatly appreciated.

Thanks in advance…

Josh

170K in sales and they would be out of business. At 100 orders per day and a $15 average they would be doing over a half million per year.

Yes, there is a market to have. You have a population of close to 20K in a likely delivery area (should you ever decide to deliver) but a relatively low household income. This is also a reasonable area to assume you can reach effectively with local marketing and represents the area you can be seen to be convenient to. Not every part of town will have the same average household income. Can you choose a location that puts you nearer the “better” part of town where there is more disposable income?

I do not believe in the model you propose of market “share”. In a market the size of yours, your “share” is not going to be some automatic calculation. The population count, income and food spend stats you quote is a fine way to determine if the market is big enough… but the fact that there are a bunch of restaurants pretty much settles that question anyway. Your market is large enough that your success or failure will the result of the choices you make: Is your product good? Is your service good? Does your location work? Are you using effective marketing and enough of it?

More thoughts:

  1. Pizza restaurants do NOT just compete with other pizza restaurants. This kind of myopic view of things understates both competition and opportunity. Counting all types of restaurants you must have a good number of restaurants in the area. They ALL compete for the same pool of dollars. In fact, in a residential market (as opposed to commercial, vacation or travel) dining dollars also compete with other forms of entertainment. i.e. does the customer choose to spend money on dining out or going on vacation? Golf? Hobbies? Good news, it is never difficult to do a better job of execution and marketing than a good number of the other restaurants in any given area.

  2. To build a sales estimate for a sit-down operation I think you would be better off to count tables and use a turn rate assumption and average ticket assumption. Ask around and find out what kind of turn restaurants are achieving. Do NOT assume you will exceed the local average any time soon. For example, if restaurants of the size you are proposing have table turn of .7 to 1.5 with an median of 1.0 you might assume that you will build to .9 in a reasonable time. That might not sound like much, but you have to take the dead nights/seasons into account as well as the better seasons or nights of the week. If you build a good lunch business too you might be able to bump your turn up a bit (typically with a somewhat lower average ticket) Can we assume you will sell beer and wine at least?

  3. Your description calls for highly customized individual pizzas. In order to attract groups of customers, you are going to need to have some non-pizzas choices available too. You can lead with pizza, but there is a group and someone in the group does not like or will not eat pizza you are not going to get the group.

  4. Your marketing budget will have a lot to do with how fast you build your business and how far you get. You will need to spend a good amount of money on an ongoing basis as well as have a healthy opening marketing budget. For a business planning to do 500K per year (after a year or two) My own plan would be to spend 25-35K per year on marketing with an ADDITIONAL 20-25K to spend in the first year or two. (Yes, that is 40+K the first year)

30 tables with 100 total seats assuming one turn and open 350 days per year: 30 tickets X $40 ticket X 350 days = 420K. At the very least this is an excellent way to pressure check estimates you come up with in other ways. i.e. if your sales estimate would require you to achieve 2.5 turns based on the number of tables you have and the local market averages 1.5 turns, something is wrong with your estimate. A friend of mine that owns several different sit-down restaurants told that he NEVER assumes more than one turn when creating the proforma for a new restaurant even though he has locations that well exceed that rate.

That is some excellent info. I knew if I asked I would get some answers I am unable to research.

On that note, I am taking into consideration of ALL eating establishments. Our area has had NO restaurants go under in well as long as I can remember. The turn count is a great idea. I need to visit some of the local restaurants and see if I can get an idea of a turn count during lunch and dinner times, just for a count. Great idea…

The area I am looking to go is in the dead center of action. It is where the majority of my competition is and the highest income level, local business’s AND traffic count…

I am not planning on doing beer/wine in the beginning only because of start up cost purposes. If needed I will add it.

Menu…I am planning not only doing pizzas but “build your own” salads and different breads as well. I really like Live Basil Pizza’s menu, and that is the same idea I have as far as menu goes. Going to add fresh house made smoothies as well. ( big deal in my area)

As far as assumptions go I am only going to assume the worse case scenario and if it is better then great. I ONLY want to be realistic in this venture. This is not something I want to go into with my head in the clouds. The more realistic I can be the better I can plan.

Thanks for ALL the info, greatly appreciated…

Give some thought to the beer and wine thing. As a sit down place, you do not want to be known as a place where you can’t have a drink with dinner! I know my wife and I would never go and a LOT of customers are the same way. You are walking away from 25-30% of the revenue potential in a sit-down.

I live in a town with about 100 restaurants. There is exactly one sit-down place that does not serve at least beer and wine. They will be closing at the end of their lease later this year.

I agree, I believe that some booze would help with our revenue I was just hoping to take a “family” approach since that is a great part of our market.

If we are missing the boat on not offering alcohol then we shall sail that boat if need be.

Another “weird” question…My wife works as a Director of Operations for a company now and makes enough to support our 6 person family quite well and we are hoping that just me running the biz for a year or so should open up a spot for her to come on full time. So with that front loading my question, I am not planning on taking any profit from the business for at least 3 years. What I am planning on doing is taking a salary as an employee. I was going to pay myself a small wage around $15 an hour and then pay my wife a management consulting fee. (reasonable fee, nothing outlandish) This would help offset to allow her to transition from her current job to our restaurant.

Thoughts or concerns on that craziness??

Last questions first … you will likely take only what your business will allow you to take. It’s not a question of how much would be appropriate, or even what the market might dictate, but is instead the product of how many dollars remain in the till after all food costs, labor and overhead have been satisfied.

Bodegahwy’s hearty suggestion regarding your offering at least beer and wine is something I echo. You responded that you want this to be a “family” approach, and I encourage you to indeed target families, but offering a beer with pizza is like watching a movie while eating a big tub of popcorn or downing cookies with a glass of milk. The public does not look down it’s nose at those who have a beer with pizza. This is the 21st century, and those old beer joints, with nightly fistfights and the smell of beer on the wood floors, are a thing of the past. Most pizza joints that encourage families, while offering beer and wine, still get more than their share of pizza party birthday parties for kids, if they have really good pizza … and in your case, that big ol wood-fired oven is going to fascinate kids of all ages (like me). If you have some sort of moral opposition to alcohol consumption, I understand your reluctance … but if it’s an economic variable, please reconsider, because you will give yourself a bigger average check, and some people (like me and Bodegahwy) would just look for another joint with good pizza and a few craft beers or draft offerings to take our money. Good luck.

After posting my reply (above), I decided to checkout the place you want to use as a model … Live Basil Pizza. And guess what? They serve beer. As a matter of fact their website includes a short video that features a customer saying " … and they have beer too". So Live Basil Pizza wants the public to know that beer is an option there, and I can assure you that they wouldn’t feature it in a marketing video if they didn’t think it attracts customers.

Piedad, I appreciate the info. When and if money comes in is the only reliable method I suppose. I’m really just trying to get all my ducks in a row before they start getting shot down. Hopefully in the end I will have a few left and I will be “somewhat” on track.

The alcohol thing does have a moral position with me, which I’m sure you could tell, but in the end if it is a matter of taking my business to a either needed or wanted level, we would do it.

Thanks again.

I’m sure your right about the alcohol. It may be something we will have to put our personal beliefs to the side for the sake of business.

Talk to your accountant about taking income from the business. Assuming that you are fortunate enough to take any $$ at all in the first year (yes that includes even a wage of $15/hour) my guess is that the account will tell you that A. You should be incorporated and taxed as an “S” corp and B. That you take no W2 wages at all for some time. Any income from the business will flow to you in any case and in this way you will save 15% tax. Based on your assumption of there being $15 per hour available to you that savings would amount to 4-5K per year less taxes.

Assuming typical profitability, paying yourself and your wife enough to live on and replaced her professional income, my guess is you need to be looking at doing over a million in sales. I have no idea if this is reasonable in your market or if your location plans will provide a location capable of that volume but it is something to consider while you build your financial model.

As a thought exercise, take the amount of income you want to derive from the business at that point in the future and divide it by .15 that will give you a good working target for top line revenue. (Yes, some businesses achieve better than that… but I would not want to count on it!) You could then back-check that figure against your location plans by dividing by an assumed average ticket and turn rate and arrive at how many tables you need.

I hesitate to say never… but I certainly can not remember the last time I took our family to a sit down restaurant that did not serve at least beer and wine. We have been to plenty that did not feature a bar, but they all serve drinks. The local place in our town that will be closing (where we have never gone for dinner) does not serve beer or wine and is seen as a “kiddie” place. Adults do not go there to eat unless they have small kids and are looking for a cheap place where the kids can run around.

I will talk to my accountant about that. No wage lower tax sounds better to me, but I will call him.

When I say replace I do not mean dollar for dollar. I mean enough to live on until we get running to a point of more money. We have calculated the we can live on 60k a year for 4 years. If we are employees of our own business that will free up some labor costs to help aid toward that money. If we paid ourselves each $15 an hour as employees (just using this figure because together it calculates out as about 60k) and took no profit, we could make it work. Or we could not W2 ourselves at all (like you suggested) and take our 60k another way. Just was curious your thoughts on it.

I truly appreciate the banter back and forth from someone that has been there and doing it, it helps a TON!

Blaze fast fired pizza is a franchise that has expanded to Michigan (where I am). They offer NO alcohol, at least to the one my family and I visited about an hour and a half away from home. They are springing up everywhere! Not saying that alcohol wouldn’t take this place to a whole new level, I’m just weighting out what is and is not working for others.

Regardless I don’t want to prevent business nor do I want to aid in forcing myself out of business.

I took your thought exercise and played it out. To make 60k we need 400k annually in business. If I take the “hypothetical” numbers your threw around earlier I would need a 1 turn rate to pop my $400k. So this gives me a TON of data to compress, check and evaluate. I just wish I had a mentor local that I could make this much head way! Amazing info.

A couple thoughts about some of whats being discussed here. If serving alcohol violates a moral position of yours, then create a plan without it and don’t consider it at a later date. Once you open without it, you’ll have a hard time getting word out that you have it if you add it later anyway. Secondly, while I’m not an accountant, it is my belief that a working owner of an S-corp must take a “reasonable” salary, and the rest can be taken in dividends. What’s considered reasonable? I pay myself a salary similar to what I would pay someone else doing my job. Not paying a “reasonable” salary might get you unwanted IRS scrutiny. If the IRS determines that your dividends in whole or in part should have been considered salary, you’ll be facing stiff penalties and late fees on the payroll taxes that should have been paid.

Paul, 2 very good points. Looks like a very serious talk needs to happen about alcohol. Secondly I think I need to talk to my accountant about this “salary” point. I am VERY much about biding by the rules. Maybe a different approach is an LLC… Not sure, I will need to find out.

I believe that an LLC taxed as an S corp will have the same requirements. If 60K is what you need to live on, you could probably take a 30K salary and receive 30K in dividends, saving around $4500 in payroll taxes and still be within the “reasonable” guidelines.

That is what I will look into. That sounds more realistic.

Thanks.

Yes, there is a “reasonable” test but it is also recognized that a new business often is not profitable for some time. It will raise no eyebrows if the owner takes no wage for a while. Talk to your accountant about it.

An LLC that elects to be taxed as an S-corp has exactly the same rules. Generally active income is better taken in a corp and passive income (things like rent or income from a business where you do not work but are simply an investor) is better done through an LLC. There is NO difference at all in the legal protection between the two entities… don’t be distracted by the “Limited Liability” part of the name. There is one important difference though, in an S-corp all profit or loss is allocated exactly in proportion to ownership. (if there is a 60/40 ownership split any profit or loss is allocated 60/40 for example) In an LLC, like a partnership, it is possible to have a disproportionate distribution of profit and loss. So, for example a 20% owner could have a 40% share of profit if that is what was agreed to. A useful tool if you have a non-active investor and are looking for a way to raise or lower the rate of return in the deal.