Should I buy this pizzeria?

The owner of this pizzeria is retiring next year and wants to sell. I worked with him for 5 years in high school and college. I now have my degree in restaurant management and am thinking of buying a pizzeria. I’m 25. I would be buying the business only, not a building. He will accept $70,000 for the business, includes good will, inventory, old equipment, and noncompete covenant. He will accept $20,000 down and hold $50,000 mortgage at 6% for five years, a payment of $966/month for me. Then I’ll have to take out a $30,000 loan to remodel, pay upfront costs, some more equipment.

His tax returns show he grosses $185,000 a year and nets about $23,000. He tells me it really grosses around $300,000 a year, and he takes home $1,000 a week, $52,000/year. He only claims 60% of his sales, and he also pays some employees off the books. I have seen last weeks register receipts showing $5500 for the week in sales. I’ve seen bills for his food suppliers for the one week - total of $2300. Wages are $1,100 a week, and at least $500 of that is under the table. That $500 a week is for the manager.

The pizzeria has not been well taken care of, it’s a little run down. Hasn’t been painted, greasy ceiling tiles, needs a new floor, new booths, that kind of thing. He’s missed out on some business because of this. I would have to put about $7500 into a remodel. Rent will be $1600 a month.

So he grosses $300K a year and nets $52K a year. After paying the mortgage and other loan, I would net about $27,000 a year. But if I don’t keep the manager, that would be an extra $500/week for me, or $18,000 a year, so a total of $42,000. I would be working 12 - 14 hour days at least 6, maybe 7 days a week.
After the loans are paid off, I would be making $60,000 a year, but still working long hours.

Should I be worried about him not claiming all of the money and paying people under the table? I would not want the IRS and creditors to come back on me for the money he should have paid.

Another pizzeria just went out of business this week. The seller of the pizzeria I’m thinking of buying thinks he will gross around $7,000/month, or $364,000/year, but there are no guarantees and there can always be more competition. This is a small village of around $6,000 people.

My parents would have to cosign for about $50,000 worth of loans.

What do you think about this deal? Go forward or pass. Either way, can you give me reasons why?

Thanks in advance.

Wow, where to start?
The problem with not claiming all your biz income, other than the illegality of it, is you have no proof of that income if you want to sell. So, in your case, you have to take his word on his real gross income. 5500 a week times 52 weeks is 286k per year, which is close to the claimed 300k per year - of course, March and April are OUR busiest months of the year, so the yearly 300k is in question.
The first thing you should do is talk to a lawyer about your liability for the current owners’ underreporting of his gross. Is there any? Or is there nothing for YOU to worry about?
The second thing to worry about is his paying employees under the table. The problem with that, other than the illegality of it, is those employees have you(him) by the balls! If they ever get mad, he is quite screwed! Which brings up that under the table manager you mentioned: If you get rid of him, he will be mad! So, if you want to do that, you must do it the first day you take over - before you are guilty of doing the same thing the current owner is doing.
I don’t have any real info, of course, but the 300k a year seems high for a village with just 6000 people, and the stated payroll seems low, too.

I would make an offer for what he can prove on the books. I could care less about what he’s not claiming since there is no proof of those sales. You can’t have it both ways. The other option is wait till he retires and take it over for even less.

I’m going to play devil’s advocate, take what you will from it…

When you buy a business you pay for verifiable sales, not what the seller tells you are the sales. Get the tax returns. He decided to cheat, so he doesn’t get paid for the skimmed money on the sale. Tough for him, that’s the price he pays. Netting $23,000 of verifiable sales… well, the place isn’t worth much. At that level, I’d say it’s worth the value of the equipment that you’ve said is run down.

Between that and paying the employees off the books, well, he’s a cheat. What makes you think he’s telling you the truth? Sorry, but I wouldn’t touch anything where the seller told me he’s involved in illegal activity. Major red flag and some of those problems may find a way to be yours.

So he grosses $300K a year and nets $52K a year. After paying the mortgage and other loan, I would net about $27,000 a year. But if I don’t keep the manager, that would be an extra $500/week for me, or $18,000 a year, so a total of $42,000. I would be working 12 - 14 hour days at least 6, maybe 7 days a week.
After the loans are paid off, I would be making $60,000 a year, but still working long hours.

With your college degree you can most likely go get a job making far more than $27,000 and within the five year loan term be making close to $50,000 (or maybe more) in the restaurant industry - with health insurance, retirement plan, paid vacation, sick time, probably a 50 hour work week, and advancement opportunities - all without having your own capital at risk.

Why do you want to buy a run down pizza shop? I ask because of my own personal experience, because I got into this business with the plans of becoming wealthy. After 10 years I make a very nice living, but with my degree and experience I would have done better financially staying in my previous career. I’m now in a position where I will be transitioning back to my career and it probably isn’t going to be easy. By the way, I was the same age as you when I started my restaurant.

Also, consider the possibility that the business fails. Based on your degree it sounds like you want to make a career in the restaurant industry. How would a failure in your own restaurant look on your resume?

Again, I’m just playing devil’s advocate but these are things I wasn’t thinking about at 25 but I certainly would at 35.

Should I be worried about him not claiming all of the money and paying people under the table? I would not want the IRS and creditors to come back on me for the money he should have paid.

Yes, you should be very concerned. I still recommend running from this deal, but if you were to get involved make sure you are NOT buying his business, just the assets. If you buy the business, all of the problems and issues are coming along with it.

My parents would have to cosign for about $50,000 worth of loans.

Really, really think this one through. Nothing will break up a family faster than a business. Get out your gloom and doom hat and imagine your parents being on the hook for $50k and maybe losing their house if you fail. Think about the additional stress that will put you under if times get bad. I speak from much personal experience on this issue.

Also, about that loan, the bank is only going to accept verifiable sales at that income level they probably aren’t going to give you a note based on cash flow. Your parents are going to have to put up some rock solid collateral (like real estate.)

I agree with everything Piper has said and would like to add that if you are working 12 hours a day for 6 days a week at $42,000 a year, you are making just over $11 per hour and at $60,000 a year you are at $16 an hour. My delivery drivers average over $20 (driving my cars so they have no vehicle expenses) and they have no financial risk. If it were me I would pass on the deal.

Run as fast as you can.

This business has no value, 200k A Year Gross Is A Joke And 300k isnt much Better

Maybe if it was Around 500k gross you could consider it

You don’t want to be working 70 hours a week for nothing and trying to fix a failed business

Find another town and build a new store for 70k and start fresh

This is advice coming from a guy who went from 2k a week in sales to over 40k a Week In 5 Years

It’s been a long hard rewarding road that I never thought was possible

But you couldn’t pay me to buy a store with that low of sales

I agree, finally I am making a profit but the road was long and challenging. If I were you, and of course I am not. I would NOT EVEN CONSIDER THIS!

If you are extremely gung ho on this, why not call the owner of the building and see what happened in the old pizzeria? MAYBE there is an opportunity there with out the HUGE amount of Risk. Most of all do not feel the need to rush to buy this place as NO ONE and I mean NO ONE would ever pay for what the owner “says” the business is doing. plus if he is doing like you say then its only a matter of time before something gets him caught up… Like uh credit card reporting that starts this year…How is he going to get around that?

Tax people are smart…If they smell something “fishy” they start looking into purchases of cheese and boxes…If things do not add up, they usually stay on the case until they find some cracks…

ha ha this is how the old school pizzeria owners judge a restaurant cuz they all fibbed on their taxes. My dad never asks whats their gross or net. the first thing that comes out of his mouth when we talk about a pizza place is always… “How many cases of cheese do they use a week?”

Short answer… No. Do not buy from untrustworthy people. By definition, people who will cheat will cheat anyone… and that includes cheating you.

No!!! If you are somehow in love with the pizza business, check out opportunities in nearby towns that are much larger (even if that means going heads-up with the big chains). But, unless you already have great, and proven, recipes, even that kind of a start-up will prove to be taxing. The pizza business just ain’t a no-brainer, and buying one from an acknowledged liar and cheat, who also has cheating employees on the “payroll”, in a very small town, is like starting with 4 strikes on you … and this is all without even addressing the aging equipment and failure to address the building needs. I agree with all that has been offered above, and beg you to run …fast.

Take it from someone that bought a trainwreck…im 2 years in now and just now not paying out of my own pocket to keep it a float… every time I had a chance to make a little profit someof the old worn out equipment would break down and screw me over. I look at this place everyday and think of how I could improve if I did it from scratch. New equipment…less headaches… If you are truley passionate about going into this business I would calculate the costs to do it all from scratch… Do up a good business plan and goto a dedicated small business loan outfit and see what you can do, all your costs for startup will still be in one nice monthly payment, you get a new clean shop that has no kind of reputation…good or bad! In a small town like that the options are limited so to see a new place come into town people will jump all over it…people get sick of the same old options over and over! I know the offer looks easy so its appealing but this isnt a decision to make on emotion, you will have enough other emotions to worry about going into business for your first time! :wink:

Thank you all for the great advice! The seller got back to me and said he would not take $70,000 for the business as he had told me. He said he got a full price offer of $79,900 and said he would rather sell it to me if I wanted to pay that price. He changed the terms of our discussion - he would want me to put $30,000 down instead of $20,000; pay 7% instead of 6%, pay it off in 4 years instead of five. Also, the lease had a relocation clause saying with 60 days notice, the lessor could move me to another space at his expense as long as it’s the same size space. Not good, since the pizzeria is on the main street. The landlord is known to be very difficult - will not fix anything. So after all the advice, the owner changing the price, and the lease, I decided to pass on this deal. Way too many issues with this place, although since the other pizzeria in town has closed, he is making about a thousand more a week. I really don’t think there’s another offer. He’s said to me he might keep working a few more years and collect social security when he’s 66. Probably all for the best this didn’t happen.

When the seller gets back to you, and he will, to let you know that his buyer couldn’t raise the cash and he has reconsidered and will accept your previous offer … still run. It was a bad deal before, and with the disclosed landlord issues it becomes a nightmare waiting to happen.