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Need expert advice: What would you pay for this pizzeria?

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Greetings,

I have run across an oppty to buy a pizzeria, but the asking price (200k)is too high IMHO. Here are the facts for this NY style store. WHAT WOULD YOU OFFER?

  • 1000 sq ft store, mostly slices,whole pies
    Next to a University, and in upperincome area of homes/demographics
    Only open 2 years
    Sales in the 225-300 range. Owner claims alot of cash sales not reported
    COGS is 32%
    annual Seller Cash Flow 121k
    NOI 40k
    Labor 15.6%

    Cons:
    No POS
    Limited marketing done
    not open for lunch
    open late for \college kids to buy slices after the bars close
    limited menu
    inconsistent hours

  • Upside:
    Great neighborhoods surround store with upper income families.
    Low rent with long lease
    Caters to rich college kids
    solid NY style recipes

Any input is welcome. Also if anyone can suggest a CPA who specializes in pizza places, I would love their contact info.

Thank you in advance for your advice on an offering price.
 
Re: Need expert advice: What would you pay for this pizzeria

5280Pizza,

A couple of glaring inconsistencies I’ve noticed about this situation:

1. Sales in the 225-300 range. Owner claims alot of cash sales not reported
  1. annual Seller Cash Flow 121k
  2. Labor 15.6
Here’s why they’re obvious red flags:
  1. When an owner tells you he’s not reporting some sales, a huge flag should pop up because you already know he’s a swindler. Also, if I had a dollar for every owner who’s made that very false statement while trying to sell a store, well, I’d only have about 40 bucks but I’ve heard it a lot.
  2. Cash flow of 50% on $4800/week? I’ve got 3 words for you: NO FRIGGIN WAY. He’s full of crap. Just typical line items from a P&L
Food%…32%
Labor%(in his words)…15.6%
Payroll taxes…2.3%
Limited marketing…2%

His salary(he doesn’t work for free)…$3,200/month
Rent(let’s say it’s cheap)…$1,000/month
Utilities…$1,000/month
Phone…$200/month
Insurance…$600/month

Based on a $20,000 month in sales, just these few line items have him paying out $16,380 per month, already limiting his cash flow to $43,440/year.
  1. Labor % at 15.6%? Let me guess, he’s also paying people under the table, too. At 15.6% labor, his payroll is around $750/week. If you pay just 3 people to work 40 hours a week at $6.20/hour you are already at the Labor% this guy says he’s running.
Here’s the deal:

When you buy a store it should be based on proven cash flow. If this guy says he’s not reporting some sales then he needs to take the fall on the sale price. He can’t have the best of both worlds. Also, if the store is cash flowing $150k/year, why in the Hell would he sell it?

Let’s just take into consideration the numbers that I posted a little earlier. Let’s also take into consideration that this restaurant has no other bills at all:

Reported cash flow…$43,440
x formula (2x’s cash flow)
= Sale price of store…$86,880

With that being said, there’s no way I would pay this much for a store without solid financial statements for the past 3 years. Unfortunately for him, he wants to under-report and over-price. It’s not happening unless you’re a fool.

Chances are, and I’m sorry to be the one to tell you this, this store is worth the cost of the equipment. -J_r0kk
 
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Re: Need expert advice: What would you pay for this pizzeria

Thankyou J_Rokk! for your analysis.

Anyone else want to chime in? don’t be shy!
 
Re: Need expert advice: What would you pay for this pizzeria
5280Pizza:
Thankyou J_Rokk! for your analysis.

Anyone else want to chime in? don’t be shy!
Click to expand...
J_Rokk pretty much nailed it. It did look like he subtracted out the owner’s salary in his analysis which I do not think you should do. Afterall, the owners salary is your salary and you should be paying based of a multiple of cash that will be going into your pocket.

That being said, I would bet everything I will ever own that this guy is not making 50% net profit. That is only possible at crazy high sales volumes which this guy is several hundreds of thousand short of per year. I would be considered quite cheap by most on the board, and I’ve never sniffed a 50% profit margin and I have had sales levels much higher than him which helps.

I would run, not walk, far away from this deal.
 
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Re: Need expert advice: What would you pay for this pizzeria

DFW PizzaMan writes:
I would run, not walk, far away from this deal.
Click to expand...
That’s funny. On another note:

5280Pizza, let me know who actually does buy this place for $200k. I’ll be expanding in about 6 months and want to know who I can buy some cheap equipment from. -J_r0kk
 
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Re: Need expert advice: What would you pay for this pizzeria
DFW PizzaMan:
That being said, I would bet everything I will ever own that this guy is not making 50% net profit. That is only possible at crazy high sales volumes which this guy is several hundreds of thousand short of per year. I would be considered quite cheap by most on the board, and I’ve never sniffed a 50% profit margin and I have had sales levels much higher than him which helps.
Click to expand...
We consider ourselves pretty good operators and we run a 50% margin after food and labor. 50% Net? He’s definitely dreaming. I know I’m reiterating DFW and j_r0kk, but he’s really dreaming.

I guess he could be cash-flowing that much if he’s really robbing the place of cash… and that will most likely become your problem with the IRS after you buy it.

And let me also reiterate, that you already knows he’s a swindler. He’s openly admitted to being a criminal to you.
 
Re: Need expert advice: What would you pay for this pizzeria

All the above being stated, is there a way to estiamte what a realistic gross sales figure is required to approach 50% owner benefit?

For a 85% pizza, 15% other sales (parms, fountain beverages) business, is it reasonable to assume a gross profit margin of 75%?
 
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Re: Need expert advice: What would you pay for this pizzeria

jackstraw,

The reasonable way to estimate sales is not to estimate. Look at sales tax reports. 75% gross is possible, but high, if you are only counting food cost. You will find that most of us count food and labor to calculate gross margin.

In my business, (more than double the one described here) I run 29% food/paper/supplies.
 
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Re: Need expert advice: What would you pay for this pizzeria

5280,

No-one makes 120K on 250K in sales. That is BS. Labor is not 15% unless he sells slices all day for about $8 each. Food cost at 32% is realistic if a little on the high side. That would argue against the 15% labor.

A 225K store is doing bopkess. It is worth about 20K for the equipment in place.

Does your 5280 indicates a Denver address? I am in Colorado too.
 
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Re: Need expert advice: What would you pay for this pizzeria

Thanks for the input bodegahwy. I certainly agree w/ the estimating comment.

Info I have thus far indicates COGS is pure food (aforementioned 85% pizza, 15% other food / beverage breakdown; dine-in about 35-40% (all counter / no wait svc) / take-out about 60%-65%; no delivery). Labor and supplies are itemized Op Exp items below the GP line. I guess it depends on sales mix and the margin on pizza given sales are weighted to that product. Given you are at 71% including supplies and labor, the representation appears to be at least feasible.

Haven’t gotten to the stage where sales tax info is available to assess and I’m trying to ball park whether the representation of approx 40% owner benefit is reasonable based on info I’ve stated in these posts (sales are represented to be > 3x described in this thread; reasonable rent).
 
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Re: Need expert advice: What would you pay for this pizzeria

Jack, I must not have written clearly. I am at 71% NOT including labor; Just supplies and food.

Food supplies ~30%
Labor is another ~30%

There is no way I could run on 250K sales. I would have no profit at all.
 
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Re: Need expert advice: What would you pay for this pizzeria
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jackistraw:
All the above being stated, is there a way to estiamte what a realistic gross sales figure is required to approach 50% owner benefit?

For a 85% pizza, 15% other sales (parms, fountain beverages) business, is it reasonable to assume a gross profit margin of 75%?
Click to expand...
The pizza industry term would be “a metric butt-load”. I’ve seen lots of claims of net profit, but cannot remember anyone ever claiming to take 50% away from a real-live, legitimate, legal product, functioning business.

I assume it is very possible, and DFW Pizzaman would have a decent clue where you would need to be. I cannot fathom the sort of numbers it would take to hit that sort of numbers as net owner profit (however you define it).
 
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Re: Need expert advice: What would you pay for this pizzeria

Make him an offer for 90 k.Tell him when you make all of this 'undocumented’cash you’ll throw him another 20k.If he wants you to believe him then he’ll have to believe you 😉
Niccademo
 
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Re: Need expert advice: What would you pay for this pizzeria

bodegahwy / nick (nick - like your ‘metric butt-load’ industry terminology) - thanks for the feedback. This is exactly why I’m putting up questions and very much appreciate your feedback.

To try to be specific, the seller in my instance is stating his COGS are 25% (no labor). If you include what he states is his labor, excluding his salary, the profit margin is 53%, then subtracting insurance, maint, supplies, rubbish, etc., he represents the ‘owner’s benefit margin’ to be 40% (apologize for my inference that it was approaching 50%, understand the difference btw 40% and %50% is enormous).

I guess at the end of the day what I’m asking is…in an already validated high traffic, very densely popoulated area, where biz has been established for 20+ years doing 85% pizza / 15% other parm / beverage biz w/ no delivery, does 40% owner benefit seem doable? Or if I am to believe this margin, am I looking to acqiure one of the most profitable pizzerias in existance?

thanks in advance for your impressions…
 
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Re: Need expert advice: What would you pay for this pizzeria

:twisted:

If he hasnt promoted, advertised, been open for lunch and just counted most on drinking folks–you would do better renting across the street, and start your own place for a whole lot less , better equipment and a new reputation. you’d save lots and not buy someone elses problems
 
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Re: Need expert advice: What would you pay for this pizzeria
5280Pizza:
Thankyou J_Rokk! for your analysis.

Anyone else want to chime in? don’t be shy!
Click to expand...
The only thing J-r0kk left out was the “FOOL’S TAX” and man do I know about that. It sounds like the guy I bought from is selling to you 😃 Understated wages, skimming off the top, not paying employees entitlements etc, etc.

The old adage “if sounds too good to be true then it probably is” rings out loud and clear.

Step back and take off the rose tinted glasses we all wear when looking for our first pizza shop and get cold hard factual figures. If they can’t supply them in black and white accountant and taxation verified then run fast because you will be slugged a huge “FOOL’S TAX” and man it’s not good.

I took on a shop with verified sales figures of $8k per week but with understated expenses and got burned for the first 9 months until I got everything under control and sales up by 15%, then I started making small wages. I did what I thought was extremely good due dilligence and I got burned.

Remove all emotion and lead by the head and not the heart and re-read every word in every reply on your post and then go to the vast resource posts on this subject and read them. I bet you will look at the sale in different way then. Only wish I knew of this site before I purchased. :cry:

Dave
 
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Re: Need expert advice: What would you pay for this pizzeria

Just logged in after a long absence and wanted to thank all off the great advice from the seasoned vets here. I decided to RUN from this deal. I did stay in touch with the business broker and apparantly someone did buy the place for 200k. Reminds me of PT Barnum’s quote " a fool and his money are soon parted"

Anyway…my search continues for a fair deal on a profitable store.
 
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