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hedgefunded

Buying A Pizza Business

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Here's the deal:

I've never bought a business, and I know nothing about making pizza. I'm a very good learner though.

The business is for sale at 80k, and has been for some time.

Turnover is 175k. Profit after ALL expenditure is £1k per week.

It opens from 4pm to 10pm every day of the week. I'd open lunchtimes too.

Lease is 13 years, £990/month. Business rates £95/month.

I'll be employing my brother to work 5 days per week. I'll be working the other 2. (I have other jobs)

I know that working with family is possibly a bad idea.

We'll employ three other people. Hopefully someone experienced, plus a delivery rider and one other.

OK so far?

Questions? If they want 80k, what should I end up paying?

1k/week clear profit seems amazing and they have the books to prove it. What am I missing here?

How could it all go horribly wrong?

That's all for now.

Ta.

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Guest X-QUORK
I'll be employing my brother to work 5 days per week. I'll be working the other 2. (I have other jobs)

I know that working with family is possibly a bad idea.

We'll employ three other people. Hopefully someone experienced, plus a delivery rider and one other.

So are you employing more people than the existing business?

Have you drawn up your own business plan and what is YOUR expected net profit? Forget what the current owners are making.

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Determine roughly how much profit they make on a pizza and then do some monitoring. Either ask if you can "hang around" for a day or two (pick them at random) to determine if the orders are actually coming in and do the math on that.

You could also count all the pizzas leaving the business for a couple of days and use that as a very basic guideline. You should soon get a feel for if they are trying to trip you up or not.

If it is a limited company then order the financials off the company’s house web site.

Go and see the accountant that did the accounts and have a chat with him?

Basically do as much homework as you can upfront and ask yourself, why would someone want to sell a profitable business at the moment? Don’t be afraid to ask probing questions, it is in your interest to do so.

Have a read of these also to ensure that the valuation is in the correct ballpark.

http://www.businesslink.gov.uk/bdotg/actio...emId=1074411173

http://www.businesslink.gov.uk/bdotg/actio...emId=1074411241

If it all adds up, go for it and good luck.

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Thanks so far.

It's a very local business to me and I use it occasionally. When I use it it's very busy, and it's the only place in town selling fresh pizzas. Their product is very good, and I have no doubts whatsoever that the level of business claimed is right.

£175k is 3.5k per week. £500/day, or about £85 for every hour they are open.

I can easily believe that to be honest. That's only 9 pizzas per hour, and that disregards chips/burgers/drinks etc...

The figure they have given me, and which has been confirmed by a friend who's in the industry, is that the ingredients cost about 25% of the price a pizza is sold for. That's a good profit margin.

They are selling because the owner would like to return to his native Birmingham (he's Asian) and the staff would be returning with him. A bit of a close nit family/friends business I think.

They don't open at lunchtime. I would. I reckon a quarter slice of pizza, a bit of salad and a drink is always going to sell, regardless of local alternatives.

POssible drawbacks are that someone else might open a pizza place, and there's always the worry that Dominos will come to town. Their pizzas are not good though, and I'd be determined to make certain that ours continued to be.

Loads more to be discussed of course, I'm just doing my reasearch and HPC is a valuable place to do some of it.

Cheers all.

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I would need a fair bit more information to make an informed decision, both quantitative and qualitative.

On the quantitative side:

- When they say profit after ALL expenditures, does that include tax?

- Do the current owners work in the business (on the front line) and do they draw salaries?

- The books you have seen are their own ones (common for cash businesses to diddle the taxman). See what they actually report and assess whether you might be on the hook for backtaxes if you ever get investigated.

On the qualitative side:

- Why are they selling up? Retirement?

- £3,400 a week is decent for a takeaway, especially without lunch. Is this because it's got a good catchment area with no competition? Or are they much better than the competition? An experienced operator would prefer the latter because it shows a decent trade in spite of the competition. A first-timer would prefer the former in case business turns down.

- You want to start a lunch trade. Is it a largely residential area? If so, there won't be much lunch trade.

- Is the owner willing to stay on for a while to show you and your brother the ropes? (this is a usual condition)

- How old is the equipment and does the place need a spruce up or refit?

Typical prices for these businesses are 1x pre-tax profit (assuming the owner works but does not draw a salary) if it doesn't include any property so the asking price looks to be fair to a little high depending on any adjustments you need to do.

Hope this helps.

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The fact that the current owners want to sell a successful business should be ringing very loud alarm bells.

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Thanks so far.

It's a very local business to me and I use it occasionally. When I use it it's very busy, and it's the only place in town selling fresh pizzas. Their product is very good, and I have no doubts whatsoever that the level of business claimed is right.

£175k is 3.5k per week. £500/day, or about £85 for every hour they are open.

I can easily believe that to be honest. That's only 9 pizzas per hour, and that disregards chips/burgers/drinks etc...

The figure they have given me, and which has been confirmed by a friend who's in the industry, is that the ingredients cost about 25% of the price a pizza is sold for. That's a good profit margin.

They are selling because the owner would like to return to his native Birmingham (he's Asian) and the staff would be returning with him. A bit of a close nit family/friends business I think.

They don't open at lunchtime. I would. I reckon a quarter slice of pizza, a bit of salad and a drink is always going to sell, regardless of local alternatives.

POssible drawbacks are that someone else might open a pizza place, and there's always the worry that Dominos will come to town. Their pizzas are not good though, and I'd be determined to make certain that ours continued to be.

Loads more to be discussed of course, I'm just doing my reasearch and HPC is a valuable place to do some of it.

Cheers all.

Will you be able to make as good a pizza as these people? Will people be as willing to buy pizza from you as from them. They could have a lot of personal goodwill that leaves the business when they do.

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The figure they have given me, and which has been confirmed by a friend who's in the industry, is that the ingredients cost about 25% of the price a pizza is sold for. That's a good profit margin.

I worked on KFC's billing system once and 25% was about what the were charging the franchises for things like the beans. Pizza's do cost FA to make compared to their selling price, so I think the figures are bang on.

Lots of competition for Pizza business though - do they have a wood burning oven? although expensive to run, if you have a lot of business already it may be a good way of protecting your market share.

Be careful though - there is a fire risk with the chimneys - a horizontal one keeps catching fire at a local Pizzeria and shutting the place down for months.

I would assess the feasibility's for a wood burning oven before buying.

(Incidently, the payback time for the capital to build a Little Chef was 3 years. very profitably business - now almost worthless)

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The fact that the current owners want to sell a successful business should be ringing very loud alarm bells.

Not necessarily. Lots of people sell successful businesses.

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The fact that the current owners want to sell a successful business should be ringing very loud alarm bells.

That would depend on the owner's circumstances, and enquiring as to what these are would probably be a good idea. They might just want to pack up and ****** off somewhere.

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If the owners take all the family and staff with them, how do you know you and your staff will be able to make pizza that A - is as good as theirs, and B - will keep people coming back for more in the same way as currently?

Will they take their 'recipe' with them?

Will this be your only business, or are you going to run this as a an addition to your existing business or occupation?

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Thanks for all of the help so far. I will try and answer a few of those questions:

Residential? - No, it's in the middle of a small town and right next to a public school. The public school sixth formers use it all the time and reckon they'd use it at lunch too. The Chinese/Chippy opposite is always busy at lunchtime.

Why selling? - As I said, they are returning to Birmingham through personal choice. I imagine that after a good few years of making a decent wedge they feel it's time to move on. Nothing so far feels 'dodgy'. I'm VERY cautious and if there's anything a little untoward I won't be proceeding.

Can I make pizza that good? - It's all in the quality of the bases. Good fresh dough and good fresh ingredients makes a good pizza. Obviously there's still a bit of talent involved, but seriously, how hard can it be? They don't use a wood oven, just an industry standard one. (Don't know if it's electric or gas, haven't investigated).

Local goodwill because they are nice people? Agreed, it's a popular place because they are helpful, friendly and efficient. I'd be that good to. They are of foreign origin, Eastern European I think, but as I said, Birmingham is home. The town is almost entirely white British, so it's not as if there's a huge Eastern European custom using it because they are fellow countrymen.

I've never run a business before, but then even The Dragons started somewhere. My other 'job' is website management. I run about 60 websites for people, and I can be very flexible with that. It's not too demanding.

With regards to staff, I'm still mulling that one over. It's my brother who will be the main full timer.

The other marginally interesting bit is that I have a friend who sells electric motorcycles. They cost zero to run, and I reckon there's a bit of newspaper publicity to be had via an eco-friendly pizza delivery. He'd provide the bike(s) with his and my advertising on them. Nice quiet bikes doing free delivery of top notch pizza feels good to me.

The books? Haven't seen them yet. However, I've no reason to doubt what I've been told, and I've got an accountant who'd get involved if I decide to proceed.

Once again, thanks for all the help so far.

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The books? Haven't seen them yet. However, I've no reason to doubt what I've been told, and I've got an accountant who'd get involved if I decide to proceed.

Are you going to draw up a business plan?

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Are you going to draw up a business plan?

Well yes, but I'll need advice on this too.

I don't need it to secure financing as I've got the money, but I know it's something I have to do.

Again, these are VERY early stages.

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Are you going to draw up a business plan?

Get some due diligence done by a reputable firm of accountants and lawyers before you even think about investing your cash. Without this there's no telling what you might be letting yourself in for.

The accountants should be able to put together your business plan or look at the one you've done and uncover any irregularities in the historical figures (e.g. bumping up recent profits by taking certain expenses off the books - a common practice in such scenarios).

The lawyers should be able to highlight any lurking nasties (e.g. commitments to future lease payments - imagine that the vendor's brother owns the property, and the lease that you take over has 15% increases for the next 5 years - big hole in your business plan)

I'm not meaning to scare you, but as an accountant myself with some experience in this area, CAVEAT EMPTOR is the phrase to bear in mind.

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Once you've completed all due diligence and drawn up your business plan, ask yourself if you'd be happy with one third of the returns you expect. If not, walk away. Expected returns in business plans are always very much on the high side.

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Profit after ALL expenditure is £1k per week.

Questions? If they want 80k, what should I end up paying?

1k/week clear profit seems amazing and they have the books to prove it. What am I missing here?

If they really are making 50k a year on this business, why sell it for 80K??? - that lets you recoup your entire investment in 1 and a half years.

For me, this falls into the 'too good to be true' category.

If I was selling this business, and it really was making 50k a year, I would be asking for 250k, and accepting 150k upward depending on my situation.

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Seems like good advice although I'm commenting from a position of ignorance.

One thing is rule with your head so e.g. will electric bikes be cheaper than mopeds to buy and run

and will any publicity or goodwill cover that possible extra cost.

Also once all the lease review, accounts, competition supplier questions advised here have been cleared

don't be too scared of taking some risk and going for it. You don't have to be Sir John Harvey-Jones to

make a sucess of it.

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I'd be particularly concerned about trends in sales. How do sales in May 09 compare with 08. Ideally get a chart showing weekly sales over the last few years - by units and by value. You'd be able to see if there's a slow drop-off in sales due to recession.

A few other thoughts:

- food inflation?

- when does lease get reviewed, can they put the rent up every year?

- what are business rates locally and are they due to go up?

- is the equipment paid for or leased?

- entering the local market is very easy - can you still make money if a couple of other pizza parlours open

- any changes in local planning/parking due which might stop passing trade?

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If they really are making 50k a year on this business, why sell it for 80K??? - that lets you recoup your entire investment in 1 and a half years.

For me, this falls into the 'too good to be true' category.

If I was selling this business, and it really was making 50k a year, I would be asking for 250k, and accepting 150k upward depending on my situation.

The price isn't particularly low and has built in fixed costs. Anyone could setup a new pizzeria with that £80K going towards equipment.

He has to run the business and it can very easily die, successful restaurants die quite quickly after a change of ownership. My brother sold a food delivery business for £25K; whats difficult about selling eggs, veg and and milk? well..after many successful years in my brothers hands its was bust within a year with the new owner.

Its also a recession and ever present potential competition to account for.

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Put in the time sitting opposite and counting customers and what they bring out of the shop. Sample mornings and afternoons and definitely all day Saturday. Pay someone to do shifts with you.

I don't believe anyone's accounts. What's the wage bill for three people? No-one sells £50K a year net income for a one off 80K pavement. An Asian guy will always have a friend or relation eager to jump into a going business.

I smell a rat, and I owned a retail business for 17 years (not food)

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I'm not taking the rise or anything, but that seems like quite a lot of dough for a pizza bar. Not something to be entered into lightly, not by a long shot.

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