Looking at a potential buy

[JimmyAK]

Hi,
New user here, I’m in a different business now, have a little spare cash and was looking at a local place that I’ve been frequenting (and had run some deliveries some years ago to help out) for the last 10 years.
Solid place, excellent pizza, but definitely not doing the same business as some of the other big boys in town. No franchises in town or within 3 miles.
Having helped the owner out, I have witnessed the business he has been doing. I will stay and talk while picking up my orders, so I have a good knowledge of his business, how he runs it, and the consistent business.
But I’ve been doing some reading here and I’m trying to come up with a good number I should offer.
Here are the numbers I’ve been told. Of course, I’m going to verify them, much due diligence will be done:
Weekly between 5 and 8k. So I’m going to say 6k avg.
weekly payroll 600- the place is severely understaffed, he works too, but not enough, his commute is miserable and the one guy there is literally a workhorse 1-man army. The food is so good, that people will order delivery, then when told there’s not a driver, they will come pick it up.
He’s told me he orders about 1k/week food
rent/utilities 4400 per month
No debt or leased equipment
I’m not familiar with what other expenses there may be on top of taxes, service, insurance, etc.

Of course, I plan to do some major investigation, but I just wanted to hear some of your thoughts as to whether or not this would even be worth pursuing, and at what price.
I’ve known this business for years, and have seen the money the owner has pocketed (we’ve hung out a few times, I know a lot about him and his life). The “workhorse” does not have the finances to buy it, but he wishes he did, he feels the place could tweak some things here and there and do much better. And I know him well too, and I am confident he is telling the truth.

Well, I hope some of you can offer your advice, and I will keep reading here to gain more knowledge.
Thanks.
Jimmy

 

[JimmyAK]

I have more info but didn’t want to inundate you with a book for my first post.
The reasons the owner is selling are personal, and I believe them. It involves a grueling commute that has gotten worse in the last year, and potentially moving out of state within the next 12-18 months.
I verified the weekly take of 6k with the ‘workhorse’.
When the store had 2 full timers and 1 driver, the store was still profitable from what I witnessed popping up in my owner friend’s life.
OK, if you want to ask me questions, I can tell you what I know, and thanks again for any advice.

 

[Pizzamancer]

JimmyAK:

Weekly between 5 and 8k. So I’m going to say 6k avg.

He’s told me he orders about 1k/week food
rent/utilities 4400 per month

Those numbers don’t add up. Only spending $1k on food with $6k sales puts the food cost at 16.7%. The only way he could hit that is if he didn’t put cheese on his pizzas.

Labor cost of 600 on 6k sales is not that bad. Most stores have 12-15%, with the manager pulling 10-11%. Feasibly with crappy service those numbers aren’t that far off.

What is he spending on marketing? Is there a POS? If he is only spending 1k on food, his sales are probably much closer to 4k or less. That is in line with his rent as well (usually the goal is 10% of sales. Food cost is rarely below 25%, and usually falls between 26 and 33%. Looking at invoices and multiplying the total by 4 will give you a much better indication of his sales volume.

If he is only doing 16k a month, you are essentially buying yourself a job. A relatively low paying job at that. Now, if you can get some marketing going and the staff levels up, you might be able to increase sales and profits.

 

[bodegahwy]

I agree with pizzamancer… the numbers provided do not make sense.

$50K food per year and $30K labor both point to sales under 200K… $3500 to $4000 per week.

Rent and utilities of over 4K are not survivable at that sales level. That is double what a business doing 200K can afford.

 

[JimmyAK]

Thanks for the input, guys.

I do believe the sales numbers (to a certain extent, only because I’m getting it from someone who is not an owner nor has any interest in the sale of this pizzeria).
I think it’s possible that the owner may be lowering what his expenses are.
Are an inexperienced rookie, here’s how I’m initially interpreting the numbers, and I know it’s probably not right, but here goes:

Let’s say his food costs are really 1500
labor is 600
Rent/Utilities are 1100
insurance 100 but I’m not sure what it runs in this business

From that, I’m at $3,300/week or 171.6k per year

Sales of 4k grosses 208k. Not good.
Sales of 5k grosses 260k. Decent
Sales of 6k grosses 312k. That’s a nice profit to work with to get additional staff.

From what you see based on 1000/week on food, you’re saying he’s more likely doing 4k per week. So, knowing I can definitely make it better (he does little to 0 marketing, there is no POS), what should my offer be if it turns out to be 1500/week food? Because I’ll never have accurate numbers from his tax returns.

 

[system]

Just from a numbers side of things…it seems like everyone around the TT is hitting 30-35% or so on food cost these days. Food is expensive right now. Even before reading the other responses…the $1k per week food cost was a big red flag. If his numbers added up…and he was at a net of $200k+ then I would hire a good manager and just take the balance as an investment income…but the numbers do not work in reality. Before anyone can give you an educated number…I think you should sit down and discuss the real hard numbers with the owner and then go from there.

 

[Pizzamancer]

The place is worth $20,000. If sales are as low as they appear to be, that is it.

How long is the lease for? A guaranteed lease in writing will bring up the price, but even if you have a 3 year option, 20k is the tops.

 

[NicksPizza]

Just remember that in business transactions involving purchasing a business: If it cannot be documented, then it does not exist. Basically, if you cannot discern his true expenses from documentation that he is providing . . .then their is no value to the business, and you are buying his lease options and used equipment. The only reason to pay more than that is to buy out verifiable cash flow . . . . if it cannot be documented and verified on paper, then there is no way to determine and value that cash flow.

$20,000K is possibly a generous offer . . . that $4400 occupational costs will devastate a $250K business. I can speak from experience having operated one of those for 7+ years.

Sales of 6k grosses 312k. That’s a nice profit to work with to get additional staff.

NOt speaking to the accuracy at all. But saying it is profit, and then speaking to making the positive cash flow into labor costs are completely different things. “Nice Profit” goes into your bank account . . . period.

 

[RobT]

Ask to see sales tax returns, 941’s & 1040s for the previous years.
You can get a better understanding of price with these.

 

[Pizzamancer]

RobT:

Ask to see sales tax returns, 941’s & 1040s for the previous years.
You can get a better understanding of price with these.

I bet those are useless. They aren’t going to show a profit, and are probably as cooked as his pizza. Taking a look at food invoices will give you a much better idea.

Just an example: You know what a pizza costs, you know how much flour goes into a pizza. If you know how much flour they ordered, you can pretty much nail down the volume. It is a trick the IRS uses, and many chains also use to check for theft.

You are better off walking away. Even if he gives you the store. You will inherit the problems with it, and it doesn’t sound like you have the experience to deal with owning a low performing shop.

 

[Brunospizza]

With such a samll shop I would be worried about customers initial reaction to a new owner. I’m sure you would lose some business to faithfuls. And that will definetly cut into the profits. It’s not easy taking over a business. When I took over for someone people were just about mad when they came in. Like they lost a friend . All the food tasted differant to them. And I worked there for fifteen years

 

[JimmyAK]

Thanks again for all the input.
If anything happens, I’ll keep you posted so you’re not up all night worrying about me. :lol: