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Buying existing pizza business

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Hello,
I am planning to buy an existing pizza business (which has been in business for 20+ years). I am new to retail food industry, so thought would get some tips & advice from here.

The owner is selling his business under a loan payment arrangement [50% down and rest of the payment to be paid at interest over 5 or 10 years]. He owns the property (place) and he will lease it for 10 or 15years and collect rent from us if we decide to buy his business. A plus point is that the Seller will stay in business with us for up to 6 months before transitioning out. I would like to understand the pros & cons of taking over a business before I can take the risk of running it.

Questions & Concerns:
  1. Property ownership / Lease Validity
    a. Seller owns the property where the business is located (and he lives in the same building up stair). How to insure against a situation when the property is sold to someone else or the property comes under foreclosure? At present, the business owner has taken a property loan.
b) Just like bluebook value, is there a source where I can validate how much the business is worth? The tax-returns doesn’t reflect the actual revenue according to the seller.
  1. Daily Operations:
    a) To prevent theft by the employees as it has been the case in the past, I am planning to use “surveillance camera†. Could you suggest a good one (that can be availed on lease basis)
b. For a business owner having multiple pizza stores, I am curious to know how he/she manages the daily operations without being there physically.

c.POS: He recommends installing a Point of Sale system to streamline order management. Can you recommend a good POS system?
  1. Risk of Tax Audit (perceived by the current owner):
    a. Seller has been audited in the past and he perceives that there is a further risk of audit if he continues to do the business in the same way (He deals with cash most of the time and his accountant urges him to show more revenue and run payroll which he avoided in the last three years due to his plans to quit the business). What are the risks if I were to take over this business?
b. Business entity: The business is operated under a Trade name and legal business entity is a Corp. The business purpose has been stated as ‘engage in retail business activity’. He said that because he didn’t state the business purpose specifically as ‘Pizzeria’, the business doesn’t come under IRS radar. Is that the case?

c.Seller recommends that I show a nominal value on the records as supposed to the origional sale value to take advantage of first 2 – 3 years where I can show loss. I understand that it can be true for new business but I am not sure if it will apply to an existing business when the ownership changes.
  1. Exit Plan
    a. As it is a new business for me, If, for some reasons, that I couldn’t continue with this business, I want to minimize the financial risks and want to have an exit plan. Any ideas will be appreciated.
Thank you very much.
 
Run away!
One question…If you lease the building from him and he does some other stuff the irs doesn’t like, what happens to you if they take all his assets.
The pizza biz is tough enough without all the sh!t this owner is doing. I don’t like the any of the info you posted about the owner.The fools tax may be to high to really be worth taking this risk.What
 
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BlueRay:
Hello,
I am planning to buy an existing pizza business (which has been in business for 20+ years). I am new to retail food industry, so thought would get some tips & advice from here.

The owner is selling his business under a loan payment arrangement [50% down and rest of the payment to be paid at interest over 5 or 10 years]. He owns the property (place) and he will lease it for 10 or 15years and collect rent from us if we decide to buy his business. A plus point is that the Seller will stay in business with us for up to 6 months before transitioning out. I would like to understand the pros & cons of taking over a business before I can take the risk of running it.

Questions & Concerns:
  1. Property ownership / Lease Validity
    a. Seller owns the property where the business is located (and he lives in the same building up stair). How to insure against a situation when the property is sold to someone else or the property comes under foreclosure? At present, the business owner has taken a property loan.
b) Just like bluebook value, is there a source where I can validate how much the business is worth? The tax-returns doesn’t reflect the actual revenue according to the seller.
  1. Daily Operations:
    a) To prevent theft by the employees as it has been the case in the past, I am planning to use “surveillance camera†. Could you suggest a good one (that can be availed on lease basis)
b. For a business owner having multiple pizza stores, I am curious to know how he/she manages the daily operations without being there physically.

c.POS: He recommends installing a Point of Sale system to streamline order management. Can you recommend a good POS system?
  1. Risk of Tax Audit (perceived by the current owner):
    a. Seller has been audited in the past and he perceives that there is a further risk of audit if he continues to do the business in the same way (He deals with cash most of the time and his accountant urges him to show more revenue and run payroll which he avoided in the last three years due to his plans to quit the business). What are the risks if I were to take over this business?
b. Business entity: The business is operated under a Trade name and legal business entity is a Corp. The business purpose has been stated as ‘engage in retail business activity’. He said that because he didn’t state the business purpose specifically as ‘Pizzeria’, the business doesn’t come under IRS radar. Is that the case?

c.Seller recommends that I show a nominal value on the records as supposed to the origional sale value to take advantage of first 2 – 3 years where I can show loss. I understand that it can be true for new business but I am not sure if it will apply to an existing business when the ownership changes.
  1. Exit Plan
    a. As it is a new business for me, If, for some reasons, that I couldn’t continue with this business, I want to minimize the financial risks and want to have an exit plan. Any ideas will be appreciated.
Thank you very much.
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There s no problem leasing the property. If you have a proper lease, it will remain in effect even if the property is sold or foreclosed on.

There is no “book value” for a business. Some would say you should pay 2-3 times annual earnings. This could be higher for an extremely profitable place with newer equipment or lower for a marginally profitable place with old equipment. The problem here is you don’t know what the profit really is. If a seller is willing to cheat the government you can bet he is willing to lie and cheat you!

If you were to buy the business you could very well be liable for any debts or obligations of the business. This could include tax liabilities.

If you buy the business, it would be wise to show the actual profit or loss rather than take shady advice from the seller. By all means take every tax deduction allowed by law.
 
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Thank you and appreciate your advise. If I were to take this business, I would like to run within the confines of Tax regulations. As he hasn’t reported actual revenue, what if say, IRS audits for year 2007 revenue reports and find any discrepancies, and assuming that we buy the business by the time IRS does the audit, - Is there any legal protection for the new owner against the mistakes done by the previous owner (in terms of revenue reporting, tax)
 
RUN AWAY!!!

DON’T EVEN THINK ABOUT BUYING HIS BUSINESS!!! YOU DO NOT WANT TO BUY HIS SHADY HISTORY AND BE SUBJECT TO PAYING BACK TAXES AND PENALTIES/INTEREST ON ALL THOSE YEARS OF UNREPORTED INCOME!!!

RUN AWAY!!!
 
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Since the business is operated under a trade name, to minimize any risk of tax, can I register a new legal business, however, run under the same trade name. For e.g. trade name is ‘Mike pizza’ and legal company name is ‘Mike Food Services Inc’; Now I register a new business as a ‘Ray Organics Inc’ but buy the trade name ‘Mike Pizza’ and have the seller dissolve the old business name. People know the pizzeria by the trade name ‘Mike Pizza’
 
BlueRay,

It sounds like you want this really bad. WHY??? I suppose this operator makes $200K/yr… (please excuse my sarcasm)
I challenge you to spend a week researching PMQ’s Think Tank about slow sales, new business, the FAQ, going out of business, etc… And then evaluate what you’ve researched.

At any rate, by all means consult an attorney and tax professional.
 
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Let me be the another voice to say RUN AWAY.
From some of your questions I get the impression you do not trust this guy or his staff which makes it all the more reason to turn your back on the deal.

If the man has been up front with you telling you he is cheating you (and your fellow citizens) by not paying his fair share of taxes, how else is he going to cheat you? I am all for avoiding taxes through any LEGAL means but it sounds like this guy is bad news.

I am bewildered by some of the questions you ask so I would like to know. Do you have any pizza experience? or even business experience? Most of the questions and concerns you raise are answered many times in the various threads here.
 
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I’m with Daddio on this one.

Just reading your (many) questions makes me think you have not looked into this very deep at all; i.e. if you are interested in ‘leased’ CCTV then look up ‘leased cctv’ on google and see what there is.

It seems to me that instead of spending time looking at the VAST amount of info available on this site and others you’ve simple listed all your questions hoping for someone to come and give you all the answers - sorry that ain’t gonna happen!

If you’re genuinely interested in working in this industry I suggest you spend a few days browsing this site and you’ll learn a lot I know I did (several years ago) as have many others.

Re the tax stuff - run away from this deal. If this guy is happy to mess with the IRS just can’t think what other shady stuff has been going on!
 
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Running away from this deal is probably not necessary, I would simply walk away (I haven’t run anywhere since high school :D). This guy sounds like he is a shrewd business man who knows how to find the angles to help himself and isn’t afraid to bend the rules or the law in doing it. What’s to say he doesn’t turn that acumen against you to rip you off? I was always under the impression that business that are skimming usually put everything on the books towards the end to increase the sale price. Who would buy a business on someone’s word about sales? Upon further review I would suggest that you RUN AWAY.
 
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Thunderman:
Who would buy a business on someone’s word about sales?
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Well bearing in mind that we see this kind of question asked on a regular basis I’d say an awful lot!

What better way to explain poor sales than a nudge and a wink and reference to keeping the IRS’s hands of ‘their’ cash!

Good advice given previously is to sit outside and watch the number of deliveries/carry out’s over a few nights to get an idea of sales.

But as said before if this guy isn’t afraid of defrauding the IRS who is he scared of?
 
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Just another voice to echo what’s already been said.

There are likely many more issues that you will become aware of once you are “stuck”. I would not count on CCTV to manage a business ever, but certainly not right away. This man is unethical and therefore has likely has an unethical staff. Your lack of pizza business experience will not come in handy as you “clean out the stables”.

I have made my share of mistakes and I can always see the signs in hindsight that said “Danger”.

Of course, I’m sure it could make for some interesting reading in about six months. Go for it if you’re up for providing entertainment for the rest of us! 😃

Seriously, walk away from this deal.
 
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I’m not going to hop on the wagon yet to say run away. I am tempted, but you seem very interested in the deal and deserve to get the information you need to make an informed decision. I have reservations about the situation and details you’ve given on the business at hand, and offer several things for you to consider. All of this stuff, by the way, has been covered in the FAQ thread, with lots more info and other perspectives.
  1. He can’t have it both ways. ONLY consider buying the business on the merit of documentable financials. People play games with finances to dodge expenses. The risk is that he has to sell for the documented value. DO NOT under any circumstances consider the word of someone who admits to cheating to dodge taxes (let alone someone who has been audited). Without proof that them money existed, there is nothing to negotiate. He is not going to be working in YOUR best interests in the negotiations. That’s on you.
  2. Once you get to a point in the negotiations, offer to sign a non-disclosure and look at all of the actual, written records. You want to see corporate tax returns, persinal tax returns, workers’ compensations reports/returns, 12 months of invoices from his food vendors, sales tax documentation, et al. When you put all this stuff side by side, you can draw a picture of what this business actual did. What they were like in the “glory days” 10 years ago isn’t all that meaningful. The last 3 to 5 years may be useful. How much food did they order each month? Figure 25% to 32% food costs and you can estimate a range of possible monthly sales.
  3. Once you get all the relevant information together, consult a CPA and an attorney for how to proceed. Your state may have legal implications for various business entity forms that they will know about. They can also advise you how to complete the sale without exposing yourself to previous liabilities. Just stop and think, though how much concern you have over what current owner has lurking around. That should tell you that you need caution and professional assistance.
  4. Once again, “The tax-returns doesn’t reflect the actual revenue according to the seller.†The one and only value of a business is found on the tax and other officially filed documents. He played games with his taxes and now wants to avoid the real-world penalty. There are lots of pitfalls to be avoided here, and you REALLY need to get an experienced advocate to look at this on your behalf.
You may decide to run away. You may not. But you need to be informed before falling in love with any business purchase in the middle of a significantly slow market in the restaurant industry. The business ain’t worth what it was 12 months ago, at the very least.
 
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