Need opinions

Pizza Shop Talk The Think Tank
1

An opportunity has arose in which me and two fellow partners are seriously contemplating opening up our first pizzeria. I have been in the business for 15 years, working for family, from working in the line to now finally managing a place myself and making a decent amount of money. 1 of my partners has been managing some of the busiest places in our area, sales exceeding $40,000 a week in gross and higher. He feels he is being underpaid for basically running the store on his own(the owner shows up for between 3-7 hours a week, my guys handles all of the backoffice himself which is why he feels he is owed more for what he does). Our third partner has not nearly us much experience or knowledge as the two of us but he does have a good amount to invest in this project.

We have found a new developing high end condo building who is willing to sign a minimum of a 5 year lease for around 45$ a sq foot. We are looking at around 6200-6700 in rent for this place. It is located in the city on two of the most traveled streets, and very close to everything the city has to offer.

Hypothetically speaking, how hard is it to handle 3 partners in a pizzeria? We all seem to be on the same page as far as ideas and what not, but actually putting up the money and doing this might change everything. I am looking for any type of advice, we have already been approved to sign a lease and begin construction and outfitting (which will cost anywhere from 200-500 thousand depending on our layout and whether or not we will offer waiter service). Does this seem like a good idea? For 3 of us to be able to make a decent amount of money off of one store, we believe this is as good as it gets. Any advice is welcomed.

2

1700 square feet is a good size for a delco but you mention waiter service… and this is not a large space to include a dining room of any size. You will need to be doing 900K-1,000K to make those numbers work. Without knowing your market I have no way to comment on whether that is a realistic goal. I CAN tell you that it can be done out of that size space for a delco if it is well designed and equipped as long as the business is steady through the year.

Questions on the partnership arrangement:

Will everyone be working there? If so, it can be challenging for everyone to feel that the “partners” are all contributing. Having a carefully thought out division of responsibilities can help.

Ownership: Is ownership divided by financial contribution? Is there someone that owns 51% or more of the business? If that is the case, that person is the “owner”. There needs to be a buy/sell, termination agreement, made in advance while you all are still friends, that defines what happens when someone is fired (yes, that majority person can fire a partner) or wants to leave. It should spell out how the business will be valued so the departing partner can be bought out.

How are proceeds of the business to be divided? Are each of you paid by hours worked? Salaried? How is profit divided? I can tell you that if I were the “money” partner, I would want more of the profit. To me, pay is for work, profit is for investment.

Last, if these numbers are realistic, 1M sales is not a big operation to have three partners.

Are you sure the rent you are contemplating is fair for your market? How much is the landlord putting into the build-out? If you are building out new space, I would expect the LL to take care of most of the mechanical requirements such as plumbing, electrical, HVAC, hoods, grease trap etc. If he is not you should keep looking. That stuff stays with the property as a long term value when your lease/tenancy is over. I do not think any market is so hot right now that LL’s can pass those things to new tenants. Were you represented by a competent commercial broker in your lease?

If not, take a deep breath and pause for thought BEFORE you sign anything!!

3

Bodega makes great points in his reply. In addition, it’s probably important that you remember that old story about the 2 vacant seats in heaven on either side of God that Saint Peter said were reserved for the first partners who manage to “get along”. Partnerships have a way of souring over time, and, as Bodega points out, you will want to make sure that you have an agreement in place, before spending your first nickel on the buildout, that specifies in exacting terms what happens if someone leaves, is fired, dies or just want’s to be bought out. You mentioned $45 per foot for retail space…several questions…is that the market for premium space in this market, is the space really premium, is there street and signage exposure, are there escalators in the proposed lease (and are they reasonable), does the condo association have some say in approving your proposed operation (and the hours of operation, etc.), will the lease be conditioned on your success in gaining a liquor license (for $45 per foot you will need to offer beer, wine, liquor with your food in order to maximize sales), will the $45 include real estate taxes, common area maintainance, etc. etc…is there someone who can lead you through the commercial leasing process? Also, have you searched this area for alternative locations that might be more affordable? You haven’t told us the city, but $45 is steep for most. I can’t imagine a “partnership” being functional without naming one of the partners as the “managing partner” (or managing member if it’s an LLC), with the final say in virtually every situation, otherwise you end up with 3 opinions that, at best, vary, and, at worst, lead to legal battles and frienships lost.

I also agree with Bodega about investments being rewarded with earnings, while operating partners are rewarded with saleries or hourly rates. Maybe the partners with the capital needed to get this operation off the ground should inject those amounts as “capital loans” with specific guidelines regarding repayment from all, or portions, of profits…with subsequent profits split however the three of you feel is appropriate (just be sure to lay all of this out IN WRITTING before you get started).

It sounds like you have the experience levels needed to do well. Just make sure that you also begin with the right written understanding of who will lead and what will happen as the business matures.

4

You say there would be 3 of you right? But are all of you willing to work? And I mean putting in 80+ hours a week. Because im sure you know what it takes espcially in the beggining. 6200 in rent is more than the best prime location in my area, so youd have to do some good buisness to be able to pay everybody enough for it to be worth it.

My opinion is three people is great and I believe establishing a pizza place needs atleast 3 solid people minimum this way each person gets some time away from the store and can rest easy and know things are in good hands. Not having time away from the store will create resentment over time and really strain any relationship you have weather it be your spouse, children whatever. Just think long and hard if this is what you truly want to do.

5

I’ll just be blunt - 3 partners in one pizza restaurant sounds like a recipe for disaster. This is especially true if all three want to make their living at it. I’m just going to guess that none of you want to make less than $50,000 a year. That’s $150k.

If you don’t want to work at all and assume a 10% margin - you need 1.5 million in sales to hit that number. Very unlikely. (and, BTW, I’d eliminate all thoughts of that $40,000 week from your mind, that’s off the charts for an Indy pizza place with a single location).

Let’s assume, though that you don’t make a profit but, instead, pay yourself for labor. Assuming 33% labor, you’d have to hit $450k just to pay your salary and that would be the three of you doing 100% of the labor - not reasonable. Let’s assume ownership can do HALF the labor (somewhat reasonable), now your payroll is $300,000 or so. Now you have to gross $1,000,000.

I think most pizzerias that gross $600=$800 ks supply the owner with a good job with long hours. Splitting that good pay in thirds seems undoable.

Finally, think about how much in sales you’d have to have for 3 people to be “successful” financially. It’s REALLY hard to get to that number.

And all of that assumes your revenue is successful. Believe me, when your revenue fails to meet expectations, you will disagree about everything.

Speaking of Revenue, what are your projections? At $6700 rent (let’s call it $7500 cost of occupancy) let’s assume that market rate gravitates toward the industry standard of 8%-12% cost of occupancy as a percentage of gross revenue. Revenue would be, roughly, between 700k and $1,000,000. That sounds pretty good. But, restated, that means you have to do at least 700,000 for rent to be “reasonable” by industry standards. I bet there are a lot more indy shops doing less than 700k than are doing more.

If it were me, I would consider scaling back your plans and doing something yourself. Own your own failures and successes and all that. Sorry if this wasn’t what you wanted to hear, but I think some of the other posters were pulling their punches a little bit…

I know my numbers are all very sketchy, but I was just trying to make some points :slight_smile:

Hope this helps.

Patrick Cuezze
Next Door Pizza

6

Thanks for the opinions fellas, it turns out that another indy was also very interested in the space and they made their move before we did. the rent may seem high but it was a corner retail property in a new development in center city philadelphia. 80+ luxury lofts/condos. Regaurdless the space is taken, we were estimating 200k to start up but the architect considered 200 to be very low, he priced it out at 225 just for construction although we would have had a non disclosed amount available to us from the landlord himself for upgrades. again thanks for your comments and we will continue to look for another opportunity.

7

If you can’t net 20-23% of gross with 800k in sales, your doing something very wrong

8

Now that’s just hogwash. :shock:

Joker - are you assuming paying yourself first or not? 20-23% is an extremely high profit margin for a restaurant. Of the chains, only Subway even comes close. Now, if you’re not paying yourself a salary, then yes you could claim (although inaccurately) a 20% margin.

According to a Sageworks study published by Forbes Magazine, the average Full Service Restaurant had a 5.01% margin in 2012. And that was the highest in 10 years (most years profits were ~2%).

If you go into the restaurant business 20-23% profit, your expectations need adjusting…

Patrick

9

Right around 20% with out me working in the store. Thats total of what I make so it would include any salarys I may or may not take.

What im trying to say is, if I didnt take anything out fornmy self there would be a 20% net profit roughly

ive been doing pizza for 12 year and its been very good to me. I do agree that my case is an exception and you should not plan on 20% margins

10-15% is realistic for pizza

10

pcuezze,

I am a 15 year owner of a pizza business, but what I do for work is business brokerage and appraisal. Perhaps I can shed some light on the earnings question being discussed above. Part of the issue is clarifying what typically counts as earnings.

In indy restaurants, discussions of earnings INCLUDE all the owners income whether taken as W2 earnings, S-corp dividends, personal health insurance, company car and non cash expenses (depreciation and amortization)… you name it. It is called discretionary earnings. Yes, it makes comparisons to national chains very difficult but that is how it is done. It might be compared to ebitda + some assumption for manager salary in a chain but really trying to compare the two is apples and oranges.

Second, earnings over 20% for high volume locations is not uncommon. In the case of delcos, I would put high volume at around 600K and up. Getting to that level of earnings generally does require occupancy costs that make sense. You will find advocates on the TT for very low costs (Wouldn’t we all like to have them!) but as long as occupancy is under 10% that should not stand in the way of success.

My business, in the 2005-2008 period was doing 600K and we took 16%-18% during those years AFTER paying a manager, since I do not work in the store, with 8-9% occupancy costs. If I had replaced the manager myself earnings would have been nearly 25% in the best year and over 20% every year. Even at lower sales today we hit 20% looked at in this way with occupancy at about 10%.

11

^^ finally someone that knows what im talking about

I can’t even imagine A 2% net margin. I would shoot my self