purchasing an existing shop

This is a red flag. No pos, no team. It takes a good team to be successful . Also, How much staff do you see there?

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I wasn’t making fun of you. That just made me laugh. Good, competent, reliable help is not so easy to find.

Sorry I missed this message, Rob.

I agree team is critical.

I see about 4 - 5 people per shift. There probably are 2 shifts. One between 11 AM - 8PM and 8PM to 2 AM.

But I dont know how long the staff has been there, or if it is a revolving door.

The owner only manages the cash and the front customer service. They have some one else who does the pizza. Which makes me feel that the product itself is not reliant on the owners.

D

Do you think it could be because of the (low) wages they are paid that doesnt motivate them enough?

4-5 staff per shift? Doing 1.35 million in sales, this is an even bigger red flag.
Questions:

1). Is there delivery
2). Dine in / table service
3). What kind of prep are they doing( making own dough , shredding cheese , making own sauce?). And how much prep are they doing?
4). What are fixed costs ? Rent , utilities , marketing , insurance, payroll taxes, etc…)
5). How many bags of flour do they get a week , how many cases of cheese per week. (This will give you a good idea of volume)

I️ don’t do anywhere the numbers that the place your looking at does, but I️ keep my staffing and vendors tight and I️ profit around 20%. I️ work 62 hours a week.

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Thank you for helping me dig into this further, Rob. Here are the answers.

850K of its revenues are accounted for via transactions from cash and credit card etc.

The rest of the 450K is cash sales that are not recorded. Bringing the total to 1.35K.

1). Is there delivery – They dont do delivery themselves. Only carry out. But they have a 3rd party company that handle delivery as and when needed. I also saw 3rd party app based delivery guys going in and out couple of times.

2). Dine in / table service - There is no table service as such. People order and pick up their slice pizzas at the counter and sit/stand to eat and leave. There are about 10 - 15 seats.

3). What kind of prep are they doing( making own dough , shredding cheese , making own sauce?). And how much prep are they doing?

I dont really know about the mechanics. But their website says they make the dough and topping in the kitchen daily. They dont use MSG, nitrates or any ready made seasoning in the dough or on the pizza.

4). What are fixed costs ? Rent , utilities , marketing , insurance, payroll taxes, etc…)

Rent: 30K
Utilities: 14,000
Marketing: 250
Insurance: 9000
Wages: 295000
Pension Plan: 11000
EI:4800
WCB (workers compensation board/insurance): 1400
Employee Benefits: 1200

Note: The 2 owners take 100K salary (50K salary each) which is included in the wages mentioned above. Between the 2 of them they are at the shop 90% of the time.

5). How many bags of flour do they get a week , how many cases of cheese per week. (This will give you a good idea of volume):
I dont have any information on that yet.

But I have the accountant’s financials for last 2 years and they show 885K/year in revenues and 45% food cost for year 2016. (Their claim is that 20% of food costs (approx 176K) go towards the supposed cash sales that are not recorded, which should generate 428K in additional revenue.)

(P.S: I had earlier errorneously written cogs as 39%, but as per Jan - Dec 2016’s accountants financials, the cogs were 45%. I have fixed that number)

The pizzas are premade and sold by the slice. Even people who order take out, mostly make a combo out of the all the different slices and dont really order “1 large specific pizza”.

Me thinks at best they’re doing 1mil. That would bring the food cost to 34%. I think a lot of people on this board would be happy with that food cost. If you’re alluding to a food cost of 25% (assuming $345 FC on $1.35k revenue) I think most people on this board would ask what you’re smoking…And whatever it is send it on over…

Thanks capecodder.

2016 numbers show 885k of recorded revenue and 45% cogs.

If we assume 34% cogs, then 11% of remaining cogs (45 - 34) should translate to approx 240k of additional rev, bringing total rev to $1.12M and net of 45k (reported) + 240k (deduced) = 280k.

Does that number look acceptable to you?

I would never accept the operating numbers from anyone who tries to justify their selling price by asking me to believe their under the table, off the record, beat the tax guy, cash sales puffing fiction. If they would obfuscate their sales numbers to cheat the tax guys, why wouldn’t they also mislead and cheat you with unverifiable cash sales numbers??? That’s not a question. Several responses here have encouraged you to use their purchases of flour to arive at a reasonable figure for gross sales, and that’s not nearly as difficult as it may sound … when they tell you they don’t keep those purchase numbers (and they will), simply ask if you can contact their food distributor who sells them flour … then call them and ask for the numbers (prefferably in writing) you need … distributors keep detailed records of everything that is sold to each of their accounts. And if they say they use multiple food distributors, call em all. It might be even better to have the sellers request those purchase numbers, in writting. Better that you should have to jump through hoops to justify paying them an off-the-books over-value amount, than later having to regret not being an informed buyer. Surely you’ve heard that it’s unwise to “buy a pig in a poke”.

I’m sure there are cash wages being paid also.

I’ll repeat : Ask for 1 year of payroll records (941s) & state if applicable & 3 months of vendor invoices. If they really want to sell , they will disclose it. If not, they are hiding something.

Doing that kind of volume , depending on their menu and stuff they offer , I️ would project around 15-25 bags of flour & 15-20 cases of cheese. (Don’t hold me to it)

You don’t sound stupid , so don’t make a mistake.
Industry averages:
Food cost - 30%
Labor - 20%-35%

Try to take a look at their storage area and look, ideally after their delivery comes in

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Great points PieDad.

I most probably wont pay for anything that is not on the record, or will pay 10 cents on the dollar for it.

But I like to have a good idea of what is going on in the business and how to investigate their claims.

Also I find this to be a good exercise, cause this sort of knowledge can be applied to other businesses (atleast food related ones), I may evaluate in the future.

Can you please clarify what do you mean by “cash wages are being paid”.

Is it that

a) wages are paid in cash and off the record, so there is under reporting of wages in the accountant’s financials, or
b) that cash wages being paid, that are recorded in the financials, but saves the owner from paying the extras (insurance, pension plan contributions etc) as mandated by the government?

I just want to make sure tthat I dont make blind assumptions and interpret things incorrectly.

Thank you very much for the flour and cheese bags numbers. That is tremendously helpful. Curious though, how much does a bag of flour and cheese weigh, according to your math?

Also with food cost being 30%, does that include food alone, or does it include wastage, paper/supplies etc.

Would you happen to have math for cogs (food, wastage, paper), preferably with a breakdown for each of the subitems, if possible?

Other points noted:

  1. Ask for 1 year of payroll records (941s) & state if applicable & 3 months of vendor invoices.
  2. Check their storage area

Thank you VERY much, RobT!

Hi Paul, Thanks for your input. Sorry I missed this post earlier too.

Looking at flour purchases over long period is a great idea. thanks.

I just received the financials for the full year and it looks like the cash component of the reported income is accounted for, because at the end of it all, after paying all operating expenses from the reported revenues (cash, visa etc), they pay taxes on net income of about $50,000.

If I purchase, I will be doing it as an asset purchase and not as a share sale, to avoid any liabilities being carried over to me.

as everyone else is saying not showing sales is a big red flag, but its not a deal breaker. It was also the norm a generation or two ago. all the old school family run pizza shops did it. nowadays with most business going through as credit cards it is impossible to hide sales. use the methods of checking how much cheese or flour they use. those are two ingredients of a pizza they can’t lie about.

also remember the owners are there all the time. that means the place most likely won’t run right without an owner present. you will have to put an all new set of processes in place to make it run smoothly without an owner present.

Yea these guys appear to be in their 50s and most likely not the tech savvy kind. I think they are there all the time cause it a lot of their transations are cash based and they dont have any systems, processes or tech in place to monitor that.

Curious, would you happen to know cogs for “pizza by slice” operation? I understand that we can expect higher food wastage etc, how much doyou think that would impact the cogs?

Cash wages could be either a or b.
If he’s hiding 400k , he is most likely paying under the table wages.

Standard flour bags are 50lbs. I’ve seen bakeries use 100lbs. Cheese cases range from 40-60lbs depending on the brand.

30% food cost can include Paper and other stuff. It depends how and where the restaurant categorizes it. Since it’s a slice operation , I assume their box cost isn’t too bad . 16inch-18inch boxes price in around 50 cents a piece depending on color and flute size. I’m not sure what kind of paper stuff they are using.

Also, There is probably a big waste amount from being a slice operation. Depending on the state health departments laws, Certain things can only be out for 2-4 hours before bacteria starts . Also , Pizza left out for long will lose it’s color and appeal. So you have to kinda keep it fresh.

Any word on vendor invoices and 941s?

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Thanks Rob.

They are willing to give me access to everything during my due diligence phase once I put in an offer. The offer contract will have contigencies that need to be removed before it becomes final and binding. Proving their claims to my satisfaction, will be one of the contingencies.

I have asked my broker to set up a meeting with the seller so I can get more info directly from the seller. I will ask the seller about how much flour & cheese he goes through weekly. All this knowledge I have learnt here from you guys, gives me confidence that I will have a productive meeting.

Do these numbers for a “pizza by slice” operation, look acceptable to you?

Food cost: 25%
Food Wastage : 5%
Supplies: 5%

Total cogs: 35%

Big thanks!

Exactly.

If they will cheat their own community and all the rest of us on tax they will cheat you too.

If I were that seller and I knew I was bluffing you on a 30%+ “unreported cash” income I would also beef up what I told you my cheese / flour consumption was in order to make the numbers jive. DO NOT believe him. If it were true get all invoices from his supplier from him. Obviously he has to keep those for the taxes he does file. If he “can’t find” them…well there’s your answer… If you go through with this please keep the board informed over the coming months what the real numbers turn out to be.

IF I go, I will most likely pay only for the reported numbers.

I might consider a reasonable cogs number (30%), instead of his 44% cogs and factor in the difference into the valuation.

But before I do that, I need to confirm cogs for “pizza by slice” operation. I understand that there will be wastage from unsold inventory in such an operation, so wonder how much that will impact the cogs.

A “pizza by slice” franchise I reviewed shows 37% cogs in their pro forma, while of one their actual store has close to 50% cogs. I dont know whom to believe.