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5% profit myth

T

TexasPizza

New member
I know a lot of people read this board from their boring desk jobs in corp. America day dreaming of being independent one day. Every week I see postings asking how much can I expect to earn? And I always see a veteran pizza guy say 5%. Well I say this cannot be correct, at least not correct in the way that the guy is asking the question. Sure the profit for the business at the end of the year was 5% and the IRS sees 5% and the Income Statement shows 5%, but the total dollar ammount in the owners pocket after 365 days is more than 5%. If mom and pop shops average 250,000 per year then your saying they are only making 12,500 take home- no way, not goining to buy that. That is only 5 or 6 dollars and hour. I worked in a multi-unit cafateria style business owned by my mother during college. The entire four years I was there she never showed a profit but in her pocket she was making well over 150,000 a year. Heck as a student working for her 20 -30 hours a week I was getting 500 cash every week.
So I think what us non-pizza business owners are asking when we ask this question is what percentage of the gross sales ends up paying for the owners personal interests, be it car payments, rent, salary for the owner plus the profit etc… from my humble calculations it is around 20%. I mean if you follow the breakdown of a single dollar and where it goes- 22% labor, 30% fc, operating costs i think are labor and fixed operating costs together like rent right? Add all these up and you still have a nice chunk left. But the most telling sign is that when you say a pizza place only profits 5% I am taking that as I the owner am only getting 5% of gross sales which cannot be the case becasue the average pizza owner does not make 12,500 a year.
So now that you can see I am bored at work what is the real number (%) a pizza guy / gal can expect to put in his / her pocket of gross sales?
 
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5% is the profit after paying all the costs. If the owner works in the restaurant, their payroll is included in the payroll costs. An absent owner would get only the 5%.

“Personal” costs cannot be paid through the business. Every pizzeria is going to be organized as a corporation or an LLC for financial liability protection. Paying personal costs from the business can result in what legal-types call “piercing the corporate veil” which will make the owner personally responsible for something like an auto accident where someone is severely injured or dies. The owner can be reimbursed for personal expenses related to the business, but personal expenses cannot be paid by the business.

An owner can have reasonable business expenses for perks like a trip to Las Vegas for the Pizza Expo or a week on the Pizza Cruise. This can’t really be a lot of money or it could raise red flags and be disallowed as a business expense if the company were to be audited.

There is also the issue of pocketing cash or paying marginally qualified expenses through the business. This affects the financial reports for the business and, in the opinion of restaurant industry financial experts, reduces the value of the restaurant if you were to sell it. Many people say that the real profit in a restaurant comes when you sell it, but you’ll get less if the restaurant is less profitable on paper.

Your best bet is to talk to a CPA or tax consultant if you have questions about what an owner can expect to get from the business and what can be paid by the business.
 
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You’ve discovered our secret! We are all pulling 6-digit incomes and warn everyone to stay out of this industry because we don’t want to have to share the wealth.

The disturbing failure rate for new restaurants in their 1st five years of operation has nothing to do with unrealistic expectations and a lack of financial planning - they just all cash out and retire early with all the money they’ve made! Why would anyone want to work 9-5 and pull a steady paycheck when they can put in twice the hours and reap the staggering rewards that a 1/4 million in sales will generate once they stop taking weekends and holidays off from working.

I cant’ wait for tax season when I get to write off the losses from my 3rd location as it loses money and drains even more cash for a 3rd straight year - I’m living fast and retiring young! You could be too!!!
 
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TexasPizza:
from my humble calculations it is around 20%. I mean if you follow the breakdown of a single dollar and where it goes- 22% labor, 30% fc, operating costs i think are labor and fixed operating costs together like rent right? Add all these up and you still have a nice chunk left. But the most telling sign is that when you say a pizza place only profits 5% I am taking that as I the owner am only getting 5% of gross sales which cannot be the case becasue the average pizza owner does not make 12,500 a year.
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Profit is one of those “slippery slope” things. If you sell 100k of pizza a year, you’ll be hard pressed to find ANY profit. At 250k, 5% may be a good number. At 2 million, 5% is way low.

But you’re also not “accounting” properly. The building and equipment did not just appear. Someone, somewhere has to be paid for that (even if it’s the owner). In addition, equipment breaks down, employees steal, remodelling, repairs, etc all come into play. Then there’s marketing and other costs.

If you own a franchise, you’re easily giving up 4-10 percent off the top.

If a pizza joint really made 20% annual profit, there would be far more of them.
 
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Okay thanks for the responses. Snowman you made a valid point that as sales increase your profit also increases as a percent of each new dollar coming in after a certain point. But by all accounts you all agree that the average sales of a m & p shop is around 250k and that at 5% the owner is bringing in 12,500 profit from the business and his salary of what 30k for a total of 42,500. So the myth lives on I guess. Might as well lease a defunct reastaurant space open a Mexican place with great margaritas and retire rich. Although on a side note Manny from Brother’s in The Woodlands and Paul from Pauls pizza in Houston and the guys over at Double Daves all seem to be making quite a bit more than 5%.
 
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And they are more than likely doing alot more than 250k…right? 10% is the norm.

Russ
 
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Texas, the IRS makes the rules about Depreciation and Amortization, and that’s what’s really at the heart of your comments. I don’t “pay” depreciation, but it does come off my profit. I really paid that up front, or took out a loan.

Yes, there is a big difference between “profit” and “cash”.

My stores legitimately have made no profit in 5 years, yet I make a living (not a great one, but it beats working). I have had friends show a “profit” and go out of business because they had no cash.

The fact is, no one can tell what anyone is going to make in this business, but all these rookies want an answer, so we give them a pat answer, and it is a good one to start with.

The simple fact of the matter is that this IS a tough business that lots of people THINK is a goldmine. I laugh at every one of my competitors when they are bought/sold by another bored housewife or couple of guys with too much money on their hands thinking they’ll make a quick buck. They are always unhappy, and after 6 months can’t wait to get rid of the place.

I was in this business for years before striking out on my own. I know what it takes, and I know what I’ve got. We can all do the people thinking they want to open a pizza place a favor by discouraging them from getting into the business. The ones that REALLY want it, the ones that have a chance, will ignore our negative advice and do it anyways, and those are the ones that just MIGHT make it. If we go out and say “yeah, you can make a boatload” we encourage people to foolishly throw away their money.
 
texas, i have to agree with your theory but you may be looking at it the wrong way. i think the 5% everyone says is NET profit which is totallydifferent from gross profit . a pizzeria is normally a corporation and most have to pay themselves a fair salary if the money is there of course.say 30,000-40,000 a year. then after everything and everything the net is what you have left say the 12,500. but i found and have been in bussiness for 19 years and are going into the pizza bussiness soon after 3 years of research and experience . that about 250000-400000 10% net. then as gross sales increases 750000-1000000 then you gat around 5-7% net. we do about 100000 in sales in a totally different bussiness and were around a net of 15%. the more you make gross the lower your net.
 
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JJ…gotta disagree with you…all things being equal, the more sales, the more profits (unless the business is not run properly or you are discounting in order to achieve the increased sales). Your fixed costs are what they are and every pizza you sell more than your current volume will only add to your bottom line. That is why some of those big volume places are making big bucks.

That is also not to say the mom and pop places that have low fixed costs and low labor (if the owner works their a$$ off) cant make a good living either, but nowadays with the high startup costs, increased competition, and unstable economy it is a crapshoot.

PS i started working at my family’s mom & pop shop biz at 8yrs and quit my job as an auditor when my dad was sick. We expanded the biz to a full service restaurant so i can relate to both scenarios

Not trying to scare anybody here, but I think if you were looking at 20% returns you would see WALL ST PIZZA on every corner. 10% is an IDEAL % in my opinion

I would say “Good Luck”, but it has nothing to do with it.
 
If everything else stays the same, the more you sell, the more you make! Period! Once your fixed costs are paid you no longer have a portion of each and every sale going to pay them. That money can now go right to the bottom line.

I am a corporation as well, but I pay myself as little as I can possibly get away with legally! I want to make my money on dividends so that I save money on payroll taxes! You don’t pay social security taxes on dividends!!! That makes a huge difference!
 
To address the “5% myth” it is multifaceted. First, you must play within the rules of the IRS. Don’t break them, but use the rules they have in place and take advantage of deductions. They are there for a reason. The less you show as profit, the less tax you pay on that profit. Second, part of your expenses is the owner’s salary. If you really want the undevided attention of the IRS, don’t pay yourself one. What you pay in salaries comes off of the profit margin. Loans to shareholders comes off of the profit margin. If your company has a liability, like a loan to a shareholder (the owner) the company takes the loss off of the profit. Do you see the pattern? This isn’t free money, because the owner must report it as a distribution and is subject to tax. The reason this is done is to save 15% payroll tax, social security etc. I can find a better way to invest 15% of my distribution than social security, don’t you agree?

So, follow the advice of an accountant, they are worth the money. Find one that knows the restaurant business, in fact, find one that deals exclusively in restaurant business. They get paid to save you money within the parameters of the IRS.

Finally, the previous owner of my place recieved a modest paycheck every 2 weeks ( a few hundred ) but was still able to support his wife who doesn’t work, their 5 kids. Yes, 5 kids, 2 car payments, 3 investment properties and primary mortgage. All of this on 5%? I don’t think so. There is money, but it comes at great expense to your family, your mental and physical health, and the time lost with loved ones that can never be replaced. It isn’t for everyone. But, for those who can make the sacrifices, you can make a decent living for your family.
 
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I’ve been looking now for 2 months( 10K+week) and the way alot of these owners kept their books is amazing. My accountant couldn’t make heads or tails out of one place. All I know is the owner drove a Ferrari 355. LOL
 
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“cpkaszak” said:
Loans to shareholders comes off of the profit margin. If your company has a liability, like a loan to a shareholder (the owner) the company takes the loss off of the profit. quote]

A loan payment is not an expense. Only the portion of the payment that is interest would be an expense. The principle payment is a Balance Sheet transaction only. It should never touch the Income Statement. Doing this will definitely get the hammer dropped should you ever be audited.
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That is what I meant to say and I stand corrected. Only a poriton of the payment would be a deduction.

The bottom line with money is that for the most part, it is all accounted for one way or the other. With POS, pretty much every dollar coming in is accounted for. When you take cash out of the register instead of depositing it, the POS still counted that money as sales, even if the cash never gets to the bank. This shortage in cash will cause your cost of goods sold percentage to increase come accounting time. Too high a COGS percentage will also raise red flags. Our accountants should be doing everything they can to protect us from paying too much in taxes, however, when the business owner plays outside of the rules too much for too long, there is little your accountant can do.
 
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You know why franchisors collect royalties on gross sales?

Pizza store owner A pays herself a salary of $130,000 and has $0 profit.

Pizza store owner B with the exact same COG and fixed expenses pays herself a salary of $30,000 but she has approx $81,885 (depending on hwo she files taxes)

Here’s a story that might explain the 5% myth of Pizza shops around America.
The Travel channel years back did a story on Las Vegas. One segment features some of our beautiful cocktail waitresses.

The reporter asked her if she liked her job and did it pay well. She said she loved her job and the pay was great.

The reporter asked just how great could it be with a low hourly and relying on tips. She snipped off something about making over 50k in tips a year.

When the show aired it got the attention of the IRS. They did some case studies and found hardly any cocktail waitress “reported” those type of earnings! As you can guess several big investigations occurred and many people were cutting deals.

About 3 years ago the travel channel was doing a show on Las Vegas. One segment featured some of our beautiful cocktail waitresses. The reporter asked her if she liked her job and did it pay well. She replied, “It’s a fun job and I manage to get my bills payed.”
 
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Im an accountant looking at a pizza biz , Im very good at cost accounting, pizza hut regularly shows a gross margin of 30% after all cost both fixed and variable, Yum P/E is over 25 and growth rate is in the high teens. Are you guys telling me that you have that much of a volume variance?? don’t think so, but I would love to hear it anyway

Tom in NYC
 
There is a HUGE difference between PH and an independent, PH makes that 30% not off of pizza, but off of FRANCHISING, LICENSING, and WHOLESALING.

PH, PJs and others get 5% more or less of the gross sales of a franchisee, and spend almost nothing in return. (That’s NOT counting advertising which is another 5-6%)

Most franchisors also have a food and equipment division. They negotiate bulk deals on the food products, and sell to franchisees and licensees at a near market price. These divisions make HUGE profits for the franchisors. Look at their annual reports. Domino’s for example make more off their food division than they did off the operations of all their company stores, and as much or more than they did off franchisee royalties.

The volume of a store can make a HUGE difference, as well as the location. There is a big difference in a $6,000 a week store and a $8,000 a week store. AND while a $6,000 a week store can make you money in rural Iowa, it won’t even pay rent in downtown Chicago!
 
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