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Owner of pizza store asking me to buy. Questions...

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edgarhansen

New member
Greetings everyone. This is my first time posting here, though I have been lurking on these forums for quite some time. I have been a delivery driver for a small franchise (10-20 locations) in Ohio for 6 years and am now the 'top" driver for the store I work in. I will break down some facts:

Gross Sales for the past 5-10 years ~400K/year (open since 1990-ish).
Rent is 1,000/month.
Royalties are 5% of gross sales.
Owner has an asking price of 150K, which I find to be decent (he says it is what he bought it for 4 years ago.)

Unfortunately at this time, I do not possess much more pertinent info/sales records/costs and such.

I believe his bi-weekly payroll, including matching taxes, and paying himself is 4500$. So thats 9000$-ish per Month for 32000/month in sales. He pays himself on his bi-weekly paychecks 1400$ but additionally, he takes a payout of 3-400/wk from the cash register. He drinks and smokes heavily. He has a family of 5, one of which is starting college. He claims he is “floating by” right now, which could possibly be true, but he fails to recognize the costs he incures on himself such as
  1. Smoking 300$/month in cigarettes.
  2. Drinking ???/month (probably 500) in booze.
  3. He became 30,000$ behind on his food order from our distributor last year when he was hardly working, and thus is now paying an “extra” 400/wk to “catch up.” (He should be close to being out of debt.)
We have 3 managers, one manager is on salary and he pays her 925/bi weekly. The other 2 managers are just short of 10/hour. The drivers are all making 7/hr + .50 delivery + tips. I am of course a driver, working 35-40 hours a week and making 600/wk (which is probably more than the owner is making, if he wasn’t so dumb with his money.)

Other facts:
  1. Walk in cooler that has brand new fans, should last a lifetime.
  2. (2) 3 door coolers have brand new compressors on them (which cost him 3,000, and his possible negative outlook/reason for wanting to leave.)
  3. (2) carousel type ovens, both have been rebuilt in the past 5 years.
  4. 4 deep fryers, 2 of which were bought 3 years ago.
  5. Mixer is probably 10-15 years old, but works flawlessly.
  6. Dough rounder is a family heirloom of the Corporate Owner, but works ok.
  7. Pop Cooler is about 6 years old and works just fine.
I have 55K available to put down on the business, if I were to buy today. I am 26 years old, with 9 years pizza experience. My credit score is 780. I have a girlfriend of similar age and we both have no plans of having kids for at least 5 more years. My only concern is being tied down to this area for 5+ years (assuming, if I became owner.) I have a good knack for cutting costs, I majored in Business Management, and I plan on cleaning up and brightening the mood of the store.

What do any of you experts think based on this limited knowledge ? (sorry, I will try to update with add’n info when I get actual NUMBERS).
 
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Don’t take his word for anything he says.

You should get copies of tax returns for the 4 years in business he has been, copies of 941’s , copies of sales taxes.

Don’t buy anything until you verify all the information.

There is a wealth of info on this in the sticky on the top of this board.

Best of Luck.
 
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I know the sales are valid because I look at his daily sales sheet almost every day I work. It is around 8K/wk.

As for his payroll, I looked at that too (the 4500$ figure bi weekly) because I went to get my paycheck inside the confidential envelope, and it had a breakdown of the payroll, including, of course, the total (taxes included.)
 
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Definatly take your time and check all numbers! Lets look at your payroll assumptions. $4500 biweekly including owners pay and matching taxes. 1400 owners pay + 925 managers pay + two hourly managers pay $1140 (two managers 30 hours per week, $9.50 per hour) + your pay $490 ($7/hr X 35 hours /week). Doesn’t leave a whole lot to pay the other drivers, any other instore employees and match taxes. This is just one example of needing more disclosure than a peek in a confidential envelope.

How would you judge the business now compared to four years ago when the current owner purchased it? Is it as busy? If not as busy, or busier now than then, I would say it’s hard to justify the same price for the store. Profit margins are generally lower today than 4 years ago. How about the lease? Is it transferable, with at least a few years left? How well thought of is the franchise? Is the franchisor finacially stable? What do they do for their 5% of sales. Hopefully more than just let you use the name and recipes. The list can go on and on. Point is don’t jump into this without doing the proper research.

BTW wasn’t edgarhansen the guy from Deadliest Catch? You’ll probably make more money crab fishing than owning a pizza shop :lol:
 
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I agree, I need to learn quite a bit more about then what i already do regarding the payroll. By the way, how do I determine how much I pay myself, if I became owner? I live very minimalist, and can scrap by. Ideally I would try to pay off the loan ASAP; its how I am wired.

The business now is perhaps 3-4% down from 4 years ago, when the new owner bought it. It could be the economy, the economy around Cleveland is horrible. Jobs/Small businesses leaving left and right. It could be the recession looming, who knows. I do know it is a consistent store, with sales in the 400K range.

I can see him having a hard time selling me the store for less than what he bought it for, even if sales are slightly down, and should normally be a feasible option. As for transfer of lease, I am fairly confident I can take over the remainder of his lease. Just an assumption however…

The franchise has been around since the 1960’s. It has since grew to about 10-20 franchises. This one I am working at is the 2nd oldest one, and the customer base is proven (at least in my mind/experience.)

Your question “What do they do for their 5% of sales?” I am not sure what that means. The 5% royalty just goes straight to the corporate owner’s pocket. He is on top of the pyramid. He gets 5% from all the shops. By using the name of HIS pizza shop franchise, I get the special sauce, dough recipes, and so forth. Individual stores sometimes have a few things they add to their menu, as per the approval of the corporate owner (if he sees it as profitable.)

I guess I would like to know what people’s gut feeling is on this. If no one can make any, then I will provide more info so I can get more help. I appreciate the help already given.

P.S. Yes, edgarhansen is from Deadliest Catch, I love the show and that guy is the BOSS.
 
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If i recall,

I think it was JRok who had a formula of $15 times weekly sales= buying price.

If the store is doing $400,000 a year, $7700 a week X $15 would bring the price to $115,500.

Also, 2 or 2.5 times cash flow is another method.

If your cash flow is $40,000, then you would be right in that ballpark.
 
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edgarhansen
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Edgar Hansen seriously rules. Seeing him light himself on fire was the best TV moment for the past several years 🙂 Actually, Deadliest Catch is the best show I’ve seen in several years.

For a true valuation you need to get a hold of his Cash Flow. You can do that with a good Income Statement if he has one, or go to the tax returns. I know there are some that use a “rule of thumb” to value a business by sales, but it’s really not the way you should do it. You could have a store doing $20,000 losing $5,000 per week or a store doing $8,000 that turns a profit of $1,000 per week. Which do you think would be more valuable?

If you’re going to be going in and working the place everyday, I think 2 to 2.5 is reasonable. However, because sales have declined since he bought it I think it would be closer to 2. I’d assign 2.5 to 3 for a growing business.

I’m concerned about him taking $300-$400 out of the register. He could be properly accounting for it or he could be skimming. I would never think of buying a place where the books weren’t on the up and up.

Basically, you need more information before people here can be of much help. He could be bleeding cash or turning a nice profit… the only way to find out is to get a full disclosure of the financials.
 
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The 3-400 a week he takes, is accounted for. He writes a payout on a little slip of paper and then it shows up on the weekly sales sheet, every day he takes out money, like “Monday sales, etc etc etc, then (name of owner) 80$ payout.”

Im not sure why he takes out additional money out of the register, maybe his bi weekly paychecks aren’t enough to support himself and family, but I would question whether at the end of the year if he claims his register money to be taxed.

I also believe he told another manager he makes 30K a year after its all said and done. Who knows how much truth their is to this.

By the way, I have loaned him money numerous times, at 10% interest, for a 6 month payback. He must be horrible with money. The business itself I think is good, and I can find ways to cut costs. (He always goes home early to let other managers close for him–hence a higher payroll.)
 
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  1. Get the tax returns. If he will not share them, walk away.
  2. Make sure you understand the numbers on the return and are satisfied with the reliability of the earnings.
  3. Check out the lease. Look at how much time is left, available options, rent escallation terms and the lease assignment clause.
  4. Contact the franchising company and confirm that they will accept you as a franchisee.
  5. The numbers provided in the posts above for valuation are all ways that people use. There is no “ONE RIGHT WAY” to do this. In the end, YOU have to decide what you can live with.
  6. Make sure that every last detail of the deal is in writing, get the advice of an attorney.
 
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Hi Edgarhansin:

There are lots of operators offering good financial advise. I can just offer my usual comment when someone is thinking of purchasing a business. As a new operator you will have to bring everything in the shop up to the latest building codes, NSF, and Fire marshals rules. Nothing is grand fathered in for a new operator.

It may be wise, If you can, to get those three agencies in to check everything and let you know any improvements you may have to make.

George Mills
 
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So the store I work at is 17 years old, and has a nice customer base, and its a consistent seller. Any reason I should pass up the offer (as per the poster before this post?)

Or should I stay away from the pizza industry altogether? It would be a nice addition to my resume` having been an owner no?
 
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I should have fleshed out my opinion. But why do you want to buy his operation when you could build your own? 400K in sales is just buying yourself a job. You are not encumbered with kids or debt so you can move to whatever geographic market in the country that you want to. You have a fantastic credit score and a nice nest egg for someone your age which means you have your act together and can do much, much better than buying some run down operation. Don’t waste yourself buying the hidden messes of this guy.

Put your management degree to work and make a business plan for a new location ANYWHERE in Ohio or elsewhere where you determine the market conditions are right.

You may not have another opportunity like this.
 
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Well first off, no matter how great of a guy you are…quit lending your boss money. Crazy!

As for the “deal” I would be patient. Ride it out a bit, continue to save and give him time to realize just because he thinks it is worth 150,000 doesn’t make it worth that.

Clearly by his “lifestyle” the books will be in shambles so determining the value is going to be difficult. Also always keep in mind when you buy a business you are buying the debt also and I am sure he has lots of unpaid debt.

I think in time you will be able to get it for 1/2 that. We are in the processes of selling our real estate and equipment (not the business) for one of our locations, and I have learned just because I think it is worth $$$$ it is only worth what someone is willing to pay. When we first put it up for sale, we thought it would be quick, no way would we think of budging from the sale price…as time goes on with no sale it is losing value to us now we just want offers. He will get there too. Make sense?

Kris
 
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To touch on Dewars point that you are buying yourself a job, lets look at this in a slightly different perspective. Pizza shops in general profit in the 10% range. Thats not to say that there’s not many exceptions to the rule, there are many making 25% profit, and there are many causing their owners to declare bankruptcy. But if this store is average, it would be reasonable to expect to profit around $40,000 per year out of the $400K in sales. Unless you think you can make serious increases in sales, which seems unlikely since this store has remained fairly steady for years, why would you want to work twice as much to barely earn more than you do as a driver. If you do think you will be able to increase sales significantly, create a written plan detailing how you will do it. Don’t just tell yourself you will market the store better or more, create a specific plan of what you will do, the cost of doing it, the response you expect, the retention rate you expect from each campaign ect ect. Do the same with you expenses. Don’t just tell yourself that you will save money, or that you will save by not paying someone to close for you, put it in writing. You’ll cut payroll by X hours saving you $XYZ money ect ect. Put it in writing and do your best to stick to it. If you can’t stick to it, change the plan, and stick to the new one.
 
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Your question “What do they do for their 5% of sales?” I am not sure what that means. The 5% royalty just goes straight to the corporate owner’s pocket. He is . He gets 5% from all the shops. By using the name of HIS pizza shop franchise, I get the special sauce, dough recipes, and so forth. Individual stores sometimes have a few things they add to their menu, as per the approval of the corporate owner (if he sees it as profitable.)
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Franchises have a contract wherein the are obligated to provide certain services, supports, products (regional marketing, training services and materials, merchandising materials, manuals, setup and operations support, purchasing discounts, etc.) in exchange for the franchise fee. This is the really good measure of value of a franchise agreement. . . if all you get is the right to smack their logo all over everything, then start your own shop and use that 5% for your monthly marketing budget. What is the and so forth that is really worth $20K a year? AND how long is that franchise contract still in effect before you can opt out or re-negotiate?

No on will ever get 5% of my hard work just for being “on top of the pyramid”.

Find out other contractual obligations, debts to vendors (could effect your relationships with them), and George’s admonition about building code surprises.
 
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I really appreciate all the feedback given here on this site, from those who know what they are talking about. I have my gut feeling and my gut feeling varies, but right now it has a negative outlook–hence, i Shouldnt do it.

I have other things I can do. My friend who sells skis on eBay, (he buys them in bulk from ski resorts–last year models, and resells them on eBay for a nice 30% profit margin) we are looking to buy a house in Virginia to rent out to people we know who will need the house., My friend has his MBA and has a very good knack for business, and I may just opt out of the pizza shop ownership offer. With nationwide sales in pizza declining at the moment, a shift for probably more healthy food, plus the fact my boss is a glorified retard (i have loaned him probably 5 times over 3 years, he is good about paying back) and I am not sure I want to be tied down to the area for a least 5 more years (to have the decision be a good one if I took over).

There are a couple people I would also want to fire right away after become owner, because I can not stand them, even if they are good workers.

I dont know , I dont know.

Keep the advice comin’ though, you have no idea how it sways my opinion.

Thanks
 
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I net over $1,500 a month from eBay. It came to a little over $60 an hour for my time. But it did not build any long-term wealth. Sure was fun though.

You are so very young. Take some interesting risks. Make something fun and interesting.
 
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i was a driver, then at 26 i got the place i was working at, it was doing around 400K… same story, (i am 28 now). My thoughts here: one of the best advices you heard - u must know cash flow, it will make you happy or destroy your life for a few years. now, it doesnt have to be all “on paper”, like 941s etc, but why would this guy just explain you everything on piece of napkin, as what matters is if the business is making money or not, no matter what your tax return says, it’s just if something is napkin-written - it will give you fuller picture, i assume you can varify everything on it, plus if thats the case - this place should be a little discounted for that reason. Now let’s say there is no napkin numbers - i dont see a reason to buy this business, i agree with previous posts - its not profitable. Why u filling comfortable buying it is because u worked there forever and know everything - and thats the mistake i made, actually i heard about 25% of business transitions are current owner-current employee, and i’ll tell you whats wrong with this picture. The owner already spoke to brokers, he got the quote, its less than 150K, he maybe even put it for sale, but no interest, now he offers it to you- someone who is comfortable there, and didnt shop around. yes - didnt shop around! - go to local business broker, and ask him what he has to offer for 150K - u might get something better, much better. Dont be affraid to get different location - its a whole new project, and you must be ready to do it, but may be you should print the list of pizzas for sale in your area for the same money and bring it to your boss , so he can see that it not him doing you a favour by letting you take over, but other way around (“I may just opt out of the pizza shop ownership offer”- thats the wrong attitude - you are on the boat right now and he is drowning , so you should understand the picture. Now, whats the food cost? Also, if you feel like owning a business - go for it, its awesome and it will teach you a lot of life lessons, and after succeding here - u’ll succeed in many other life and business ventures, but do it smart. get some books on buying-selling restaurants, do more research… you are getting there. google “business for sale” - there should be a web site, specializing in local businesses for sale, you’ll see many pizzas for sale with some basic info (sales, asking price). Bottom line- at this point buying this place for 150K, would be a rushed, not well researched desicion. Now, call your biggest local restaurant broker - you will benefit from meeting him - i guarantee it.
 
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Thanks again everyone for the replys. I also talked to a former driver of the pizza shop, who is one of my good friends, and he picked my brain for a while. He made me realize I probably should let this offer go by and keep some doors open. He said “well if the business is so good, then why is he selling it?” Among other things of course…

Also, I have been on bizbuysell website to search for pizza shops, but have one major question…

Why is there such big discrepencies with cash flow and asking price?

Ive seen pizza shops listed for 50K when the cash flow was 68K, and Ive seen shops listed for 240K with a cash flow of 110k. Even with both those I just listed, how is that well within a realistic range of assumingly 12-15% of gross sales as the “cash flow” or owners profit at the end of the year. Am I missing something?
 
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