purchasing an existing shop

I had this posted on pizza making and got some great information. Thought I also post it here.

I am considering purchasing a shop that it for sale and would love to get some input from experienced folks here.

Reported revenues for the biz are $800,000+/yr
Cogs are 40% - $300,000
Wages(including owner/mangers) are about $300,000
rent is about 30000/year

owner claims there is additional 40% revenues as unreported cash, bringing the total revenue to 1.35 million and if you include that, he claims the net income to be $600k+
Factoring in this unreported cash, would bring the food cost down to 25% of revenues from 40%

There are 2 owners, who probably split between morning and night shift and they run a very hands on operation

Asking price is close to 600k

The owners purchased this from another person 3 years back.
The reason given for the sale, is that the owners (husband and wife) are exausted and barely get to see each other cause of the splitting of shifts and feel they have made enough to cash out.

I have been to the shop. It appears busy and popular in the neighborhood

What do you guys make of this opportunity?

Thank you very much in advance!

You can’t just take their word for unreported cash. The sale should be for whatever is reported on tax returns and 941s, otherwise you are subject to a fools tax.

If they want top dollar for a sale , they would have to show documented proof.

Sent from my iPhone using Tapatalk

Yup I agree RobT. I can only pay for what is reported, tracked.

I read about fool’s tax some place else too on these forums.

What are some other things to watch out for?

Weekly purchase orders , 941 and state quarter docs , sales tax returns.

Go there on a Friday and watch the operation. How many employees are working there , watch what comes and goes.

If they are lying to the government , most likely they are lying to you.

Usually food cost hovers around 30% as an average.

Sent from my iPhone using Tapatalk

Sounds shady. Let me guess, it’s “for sale by owner”? Owner is hoping to dupe someone with the “fools rush in” mentality and don’t go for it. If he doesn’t want to sell it for what’s reported, let someone else be the fool.

Plus the pizza business (non-slice operations) is mostly credit cards these days. He’s saying he’s taking in all the cash and not reporting it, therefore 40% of his revenue is cash? I can’t speak for everyone here, but I’ve been doing this for 15 years and revenue is usually about 20% cash on a good year and it’s been declining more and more for the past decade. Sadly for us business owners, very few pay cash anymore.

We average about 45% cash, but that is decreasing every month

Joe: This is for sale through a business broker not directly by the owner.
Also, this is pizza by sllice business.

durbancic: do you run pizza by slice or whole pizza?

Thanks for the input guys.

Whole pizzas, delivery and carryout.

Sent from my SM-G900V using Tapatalk

durbancic: may be I watched too many mafia movies. But with such high cash business, do you think you attract any gangssters, criminals or any negative company?

With this biz that I am evaluating, that is one of my concerns…

No, there is a Walgreens across the street. They have much more traffic than we do. Any gangster would hit them first.
Make frequent drops into your safe, if you are so busy you could make a day deposit to the bank to get some cash out of the store if it makes you that uncomfortable. Sure, the thought has crossed my mind that I could happen to us, but what can I do about it? We have cameras in our lobby, lock the doors to the lobby later on in the evening, etc. If they hit us, they hit us, but we have nowhere near the cash that some other places may have on them - depending on their policies.

I wasnt speaking about robbery, but about attracting gangsters who would want/coerce you into using your pizza business to launder their dirty money etc, considering high number of cash transactions at your business.

Uhhh…maybe you have been watching too many mafia movies :wink:
Maybe I am naive, but this is probably not going on as much as in years past

Sent from my SM-G900V using Tapatalk

Why is this a concern for this business? The area that it is in? The owners? The possibility it’s already going on?

Sent from my SM-G900V using Tapatalk

A bit of everything at play here … the area, my paranoia, the owners wanting to sell after just 3 yrs of owning shop, even though shop appears doing well.

Apparently the owners are tired of working… but wouldnt it be easy to get a manager?

May be I am over thinking…

My take is this- some of their under-reported income is probably legit- maybe it’s more, maybe less.
That said, understand it and get a vibe for the place by observation, questions, numbers, data, etc.
Don’t assume that the under-reported income statement is legitimate to the degree that if it is NOT, you are screwed.

… but wouldnt it be easy to get a manager?

Ha Ha… that was funny!

I am not from the food or pizza industry… can you please clarify why it is hard to have a manager?

If you are not from the food or pizza industry why would you want to buy this shop? PLEASE don’t tell me that you thought you could buy a business like this, put a manager in charge and sit back and collect a check. Oh man. THAT would be so typical. Good luck man.
Can you trust your manager? How much will you pay them? What about benefits? What future do they have working for you? Are you absolutely sure they aren’t stealing from you? Are they actually going to put forth the maximum effort to make a profit for YOU? There’s a big reason that most owners are very hands on in this business, you’ll learn it soon enough if you buy this business.

The reason is the the shop appears to have a good product, good sales and profit margins. The downside is that owners are there ALL the time, they have no team (revolving door of workers), no POS etc.

I dont want to be super hands on being at the shop 12 hrs a day.

Also I figured if I hire a trust worthy person and paid the manager a reasonable good wage + bonus for performance, then they would have no reason to steal.

I also will have POS and video cameras to ensure things are trackable and discourage temptation for theft, plus I will be at the shop for few hours every day atleast to ensure I am in the loop on everything (reviewing inventory, sales, staff schedule, bills, customer feedback/complaints etc). I also will ensure that I know to do all the tasks competently (making pizza, washing/cleaning). I just dont want to have to do it everyday for extra long hours.

Can you please spell out the reasons most owners are hands on in the business. Also define “hands on” in terms of effort/duties/number of hours etc.

Thank you for your input.

pizzaboi, determining actual revenue should be pretty easy. It should be pretty straight forward to look at their dough recipe/procedure and figure out how many pizzas they go through based upon their flour purchases over time. Look at their invoices over a relatively long period of time, not just last week. If they are doing that much in unreported sales, you may decide to put a value on those but keep in mind there may be some liability for unpaid sales taxes if an audit happens.

Looking at the numbers posted, I’d be pretty suspicious of someone claiming 40% profit from a pizza business. I’ll do about 50% more than this stores revenue with their unreported sales and I won’t profit near the 600K they claim.

I agree with the other posters as far as the cash vs credit card breakdown. It would seem far fetched to have that much cash sales. Last month credit card sales and credit card tips amounted to 78% of my sales. 100% of my cash wouldn’t equal the $550K that this place supposedly hides. That brings up the question do they deposit any cash in the $800K of declared revenue? If not, I would say this place must be ripe for an audit by the state and/or the feds.

Lastly, the credit card companies will take more of your money than armed robbers will. My credit card fees will be over $40K this year. You can minimize the risk of armed robberies with video cameras, safes and cash handling procedures. The less vigilant you are, the more likely you’ll become a target. Your staff knows your weaknesses and my experience is that burglary and robbery are related to current or former staff more often than not .