Which Of These Two Pizzerias would YOU buy?

Discussion in 'The Think Tank' started by 3domfighter, May 11, 2011.

  1. 3domfighter

    3domfighter New Member

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    If you were looking at these two options, which would you choose:

    OPTION A:
    -10 years established pizzeria
    -Gross Rev - $750k, net $90k
    -Very high profile plaza loc w/major national anchors and 28,000 visits per day
    -10 year old (or more) equipment, 5 year old POS
    -fair to poor reputation indicates potential for growth
    -Limited competition--one other pizzeria in 1 mi radius, 5 in a 3 mi radius
    -Serves a population of 85,000
    -5 year lease with 2 5 year options and one month rent abatement
    -Lease rate of $5800/month plus $600/mo CAMs = $6400/mo gross
    -1600 sq ft with large patio area, seats 80
    -Highlights of the area include little league fields adjacent, new ice rink going in adjacent, movie theater next door, strong lunch crowd in the plaza, 20,000 college students within 2 miles
    -This location is 3 miles, about a 5 minute drive, from my house
    -Price: Asked $390,000, agreed to $300,000

    OPTION B:
    -2 years established pizzeria
    -Gross rev - $454,000, it is just breaking even under current absentee ownership
    -High profile location with CVS and grocery anchors, but not as busy as option A
    -Almost all equip was brand new in 2009, equipment list is extensive and build is clean
    -Positive reputation
    -4 competitors within a 1 mi radius, 12 within a three mile radius
    -Serves a population of 115,000
    -Lease term is currently 5 years, but options would need to be negotiated
    -Gross lease payment of $6,000
    -2116 sq ft including a patio, seats 99
    -I do not know much about the specific highlights of the area, I'm told lunch is strong
    -This location is 47 miles from my house, about a 55 minute drive
    -Price: Asking $129,000, about half what it would cost to build it out

    So there is is, as nutshelled as I can make it. I didn't mention much about the establishments themselves because in either case I'd bring the menu, name, and branding from an existing location. I believe I know the answer, but which would you choose?
     
  2. Registered Guest

    Registered Guest Well-Known Member

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    $6000+ in rent? :shock:

    How does a place doing $454,000 and paying $72,000 in rent even come close to breaking even?
     
  3. 3domfighter

    3domfighter New Member

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    I just learned of the listing yesterday, so I can't speak authoritatively on their numbers, but when I speak in terms of "gross revenue" I typically back out sales tax and discounts since those items aren't true revenue. The business grossed $609k including tax and discounts, but took in $454k actual cash in 2010. My question was: "at a sales tax rate of 8.75%, that means they discounted over $100k, or 19% of their overall sales--is this right?? That seems astounding and I would be looking into theft if it was my restaurant.

    So, if you take the $454k and back out another 2% for CC processing you're at about $445k. Labor could be 25-30%, but let's call it 33% including employer contributions. Let's do the same for food cost. That's going to leave $154k to cover operating costs, excluding labor, which we've already factored in. $72k of that goes to cover the rent, leaving $82k ($6,833/mo) for utilities, insurance, marketing, linen service, repairs and maintenance, payroll service, etc. Keep in mind these are rough numbers off the top of my head, and I've omitted several variables, but I think break-even is reasonable, and there is even room for profit under an efficient manager.

    The rent is currently high as a percentage of gross, but considering the operator is a new entrant into a crowded market with only two years of operation and the output capacity to grow business, I see hard work for the new owner in the near-term, upside potential long-term. The price is certainly attractive. If it wasn't for the hour drive I'd be seriously interested.

    Thoughts?
     
  4. bodegahwy

    bodegahwy Well-Known Member

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    Gross sales does not include discounts or tax. Tax is not yours and discounts are vapor. BTW, 19% discounts is not an uncommon number in a market where coupon use is widespread and competitive.

    In this instance 450 sales and 72K rent is roughly 16% rent. This is a level that is generally considered to be unsustainable.

    On those sales ands rent numbers I would expect to see profit of about 30-35K after paying a manager 40-45K. An owner operator should be able to take out 80K. I think the price is pretty good, but the rent is crazy. It is high by 30K.
     
  5. qcfmike

    qcfmike New Member

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    What city are you in, if we can ask? We all realize that certain markets get a premium lease rates but $48 sq ft is an extreme in all but maybe Main St Disney! Just curious. Also...1600 sq ft with seating for 80? That seems tight. Is this inside and patio total or just inside? It is hard to count outside seating as climate variables are always at play.
     
  6. 3domfighter

    3domfighter New Member

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    I am in Santa Barbara. Rent doesn't get much higher than it is here. I completely agree with you that $48/ft is ridiculous, even in Santa Barbara, but this power center draws the traffic to warrant it. The center was built in 2001 and every restaurant that started there (all local, no chains) is still there. The only unit that has seen any turnover is an ice cream store that became a candy store. The only chain is a Starbucks.

    About 1/3 of the seating is patio seating in the 80-person location. In our area there are going to be few days of the year, even in winter, that people aren't happy to sit outside in the daytime. Nights can require heaters.
     
  7. 3domfighter

    3domfighter New Member

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    I agree, though someone ought to tell this to every single person out there trying to sell their pizzeria. It seems like the first question you have to ask is if they are including sales tax in their gross, and the answer is always yes. The broker told me this place (option B) was "grossing over $600k." In this case that was an overstatement of almost 33%. Insane.
     
  8. bodegahwy

    bodegahwy Well-Known Member

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    I know that area pretty well since I used to work for a company in Ventura and fly in and out of SB. Nice place! You are right. Rents are crazy out there.
     
  9. jokergerm

    jokergerm Active Member

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    i love the rent where i am

    we pay 900 bucks for 2200 feet at my busy store and gross about 700k a year and my other store is 1600 a month for 850 feet and it does 500k
     
  10. 3domfighter

    3domfighter New Member

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    Comments like this remind me how much I need to move. It's nearly impossible to do business in CA between the rents, all the taxes & bureaucracy, high unemployment, and an exodus of residents to greener pastures. $900 for a location that can support $700k sounds terrific!
     
  11. GT

    GT Member

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    I would much prefer option b if it was a reasonable rent rate. Also you are going to
    take 2 hours a day drive time and won't be much help if they call when you are
    not there to help with rushes. Then again, the rents in both spaces are similar and
    you are bringining in a different concept from your other location either way so
    what they do in sales doesn't necessarily matter as much. Maybe option b is the better
    Choice.
     
  12. George Mills

    George Mills Well-Known Member

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    HI Freedom:

    My comment in all these situations and in this instance mostly concerning the 10 year operation.

    Have the Building and Health inspectors plus the fire Marshall check the shop for violations.

    Nothing is grand fathered in for a new owner you will be required to bring everything up to code.

    George Mills
     
  13. gbomb

    gbomb Member

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    Isn't this just similar to everyones paycheck. Gross is before tax and net is after tax. Just ask them what they net right?
     
  14. bodegahwy

    bodegahwy Well-Known Member

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    gbomb, no, what he was talking about was the gross sales figure not the net profit and the practice of some sellers of including sales taxes in gross sales.