Buying existing pizza business

[BlueRay]

Hello,
I am planning to buy an existing pizza business (which has been in business for 20+ years).  I am new to retail food industry, so thought would get some tips & advice from here.

The owner is selling his business under a loan payment arrangement [50% down and rest of the payment to be paid at interest over 5 or 10 years]. He owns the property (place) and he will lease it for 10 or 15years and collect rent from us if we decide to buy his business.  I would like to understand the pros & cons of taking over a business before I can take the risk of running it.  

Questions & Concerns:

1) Property ownership / Lease Validity
a.   Seller owns the property where the business is located (and he lives in the same building up stair). How to insure against a situation when the property is sold to someone else or the property comes under foreclosure? At present, the business owner has taken a property loan.

b)  Just like bluebook value, is there a source where I can validate how much the business is worth? The tax-returns doesn’t reflect the actual revenue according to the seller.

2) Daily Operations:
a) How to prevent theft by the employees as it has been the case in the past? Does the “surveillance camera” arrangement really help?

b. For a business owner having multiple pizza stores, I am curious to know how he/she manages the daily operations without being there physically.

c.POS: He recommends installing a Point of Sale system to streamline order management. Can you recommend a good POS system?

3) Risk of Tax Audit (perceived by the current owner):
a. Seller has been audited in the past and he perceives that there is a further risk of audit if he continues to do the business in the same way (He deals with cash most of the time and his accountant urges him to show more revenue and run payroll which he avoided in the last three years due to his plans to quit the business). What are the risks if I were to take over this business?

b. Business entity: The business is operated under a Trade name and legal business entity is a Corp. The business purpose has been stated as ‘engage in retail business activity’. He said that because he didn’t state the business purpose specifically as ‘Pizzeria’, the business doesn’t come under IRS radar. Is that the case?

c.Seller recommends that I show a nominal value on the records as supposed to the origional sale value to take advantage of first 2 – 3 years where I can show loss. I understand that it can be true for new business but I am not sure if it will apply to an existing business when the ownership changes.

4)Customers perception with respect to a new owner taking over the business:
a.   How does the customer perceive when the ownership changes with respect to food quality, on-time delivery etc.  Seller will stay with the business for up to 6 months and he will help us with the transition. Seller recommends not to make changes to the existing menu drastically; maintain quality and offer same level of service to the regular clientele etc.,  


5)Pain points / Areas (as seen by the seller):

a.Dealing with the workers at the kitchen is seen as a major pain point by the seller. Though they are hard working but generally they are not that smart and are not attuned to the best customer service. Seller recommends that we employ experienced Chef at a slightly higher pay rate and put them on payroll and have back ups workforce in place as a contingency.  

b.Long working Hours: Seller spends 11 hours daily making dough, taking orders and directing the workers. Seller recommends that we employ workers for these activities and not to get hands-on.  

c.Risk of Theft:  With the history of thefts by employees at the register, he recommends that we install “surveillance camera” and POS system (can be leased to reduce upfront cost). Can you recommend a good one?


e.Though reluctant to sell his business in the last few years, Seller now finds it difficult in the recession times to find the right buyer. He fears that he will not be able to find trustworthy and hassle-free buyers. Also he fears he would have to spend brokerage & advertising fees for putting his business up for sale. How easy / difficult it is to sell such business in the current market?

6) Business Expertise (Exposure to new business):
a.As it is a new business area, seller agrees that I go through hands-on training in all areas of business -  Making pizzas, Sales, purchase, workforce management, accounting/finance, taxation, Marketing (direct mail coupons, PR etc). Specifically what does it take to succeed in this pizza business?    

7) Exit Plan
a.   As it is a new business for me, If, for some reasons, that I couldn’t continue with this business, I want to minimize the financial risks and want to have an exit plan. Any ideas will be appreciated.

Thank you very much.

[shango]

I can't be of much help except to say that there seem to be a lot of concerns/existing problems.  Sounds like the seller is trying to leave you at the helm of a sinking ship.

[Pete-zza]

BlueRay,

In parallel with your post and efforts here, I suggest that you also register and pose your questions to the membership of the PMQ Think Tank forum at http://thinktank.pmq.com/viewforum.php?f=6. The majority of the members at that forum are professional pizza operators, many of whom have dealt with problems like yours before.

Peter

[Bill/CDMX]

The tax-returns doesn’t reflect the actual revenue according to the seller.

You would do business with such a person? If he's willing to cheat the government (which can send him to jail), he wouldn't hesitate for an instant to rip you off.

[UnConundrum]

While you raise appropriate questions, are you prepared to operate such a business?  Seems to me that you should be able to answer most of your questions before you consider owning a restaurant.  At the very least, and contrary to what he advises you, be prepared to run any station in the restaurant yourself or you'll be held hostage, afraid to fire someone who deserves it out of fear that the restaurant will close as a result of the vacant position.

[Mo]

Run Away. Quickly.

Audits? Lying? Cheating? Stealing?

Come on, you're asking us to talk you out of what you know is a horrible idea, right? I'm right, right? God, I hope so.

[Deacon Volker]

BlueRay....listen carefully.  RUN! From just what you've posted so far this baby has stink all over it!  There are PLENTY of place you can find to get involved with if you wish to follow the pizza place dream...look further.

[Franky99205]

Some genereal information. Hope it helps a little.
You  SHOULD be buying the assests NOT the business. Assests is everything you need to start working.
Lease: I always hired a lawyer to write my lease. Lease is THE MOST IMPORTANT part of opning up a store (In this case an existing one). When I was a franchisee and I was buying another store from a franchisee although I had all the books and all the papers from the franchisor, I did my own lease. THat way I knew what I was getting into.
"""Seller tell you to show a nominal value""" as oppose to the real value. """"""Red Flag""" I am not a lawywer, but why would you wanna say that you paid less. See you and your accountant  would be able to depriciate the cost over years. The lessere the cost the lesser the depreciations. SO WHY would you do that.

I think there is a lot of varience and options you have that it is impossible to explain all in these pages.

Good luck 

[thezaman]

one way to figure a fair purchase price is 20 times weekly sales . you do not figure any income that is not on the books. that is the first thing a seller offers is the non reported sales . as others have said if he is cheating you do not want to know about it and you are not paying for it. get a good lawyer that will cover you in the event he has liens or other issues . to make sure he dosn't sell the property you must have right to first refusal. this is involved, a good lawyer will help with the proper formula and value.
  i can tell you that cameras keep  employees honest . employees are very challenging at times ,but pay above minimum and expect a good days work and you will get a lot from them. the other point is that you need to be involved ,being that you follow this forum pizza is important to you, i would think you want to be involved.
  one other thing if you are a working owner your able to reduce a lot of labor and can cover slow shifts without big labor costs.
  pizza can be profitable if your sales are high enough to make fix expenses a reasonable percentage of sales . you can net 25 percent before your salary if sales are at a reasonable level. 8 to 10 thousand a week is a pretty good store. pizza hut average store sales are 800,000.00 per year or 15 thousand a week.
  in closing you need to see his sales history, if it is declining look for reasons ,not his, but things you observe such as competition, changing demographics , poor food quality etc.
  small business has a reputation for hiding sales it is very wrong but it does happen. i can tell you that the irs is not dumb and they will catch you . they have stats on box usage, tip reports, acceptable food cost ect. and if you are not within industry parameters an audit will be done. 

[CaptSammy]

Hello,
I am planning to buy an existing pizza business

In answer to question A.  Have a lawyer who specializes in leases and business sales go over everything. They can address your concerns the best as well as protect and provide you with other advice concerning the business.  It will be the best money you spent whether you go through with buying the business or not.

In answer to question b. Yes and no.  All though tax returns can be a tool to help you, usually only if they have 4 or 5 years. Find out if the owner will stay on for six months to train and help you with transition.  If he says yes and does it, probably means everything he is tell you is true.  The other thing is as long as you can verify 20+ years that also tells you a lot; ask him why he is closing.  Other things you can ask him who supplies his take out containers, cheese and flour. If you can get those receipts check his menu prices and that will give you some kind of idea.  Ask him when his busiest time is and clock the store, talk to his suppliers ,  take inventory of his equipment and condition it’s in then compare it to what that equipment sales for and of course see your lawyer.

Question 2.  yes. Get a camera

Question b.  In most cases you use your collection of experiences from running your 1st store. 

Question c.  He’s right. A POS system will also help you with the theft problem.   Go to www.pmq.com  register for the forum and ask people their to recommend  a POS.  The site is a good resource for all your questions. 

Question 3.  Your lawyer or accountant can answer best.  If you are worried about getting audited don’t go into the restaurant business.  Because it’s not a matter of if you’ll get audited. . . it’s when

b. Question for your lawyer
c. question for your accountant

4. a.  How the customer perceives the new owner is up to you.  He’s also right about the menu. If it aint broker, don’t fix it.  It doesn’t’ sound to me like he is selling because of lack of business, more like age or health.  You can make your changes down the road, once people get use to you being there.


5)Pain points / Areas (as seen by the seller):
Welcome to business. Employees are as good or bad as you make them.  You may not need a chef, you may need an employee who will give you more because you pay them a decent wage. 

As far As not being hands on, you  should look for another business.  The restaurant business no matter what stage you’re at requires you to be hands on.  Or atleast know how to  be hands on.  If you want to be successful, you will have to know and be able to do every part of the operation.  Only when you can do it yourself can you start to duplicate yourself in certain parts of the operation.


5. Check your market and you can answer that one yourself. 

6.   To be successful you need to understand that there are 2 parts to being successful in business. The artist side, (making pizza’s, customer service, etc etc) and the Administration side (bookkeeping, employees, advertising etc) ; you need to pay attention to both equally. 

Exit Plan
Before you start draw up an extensive business plan.  Spend a couple of weeks in the business with the owner to see if you do like it.  But in the end, exit plan is simple. . . get out as quickly and as inexpensive to you as possible and take what you learned good and bad and use it for the next time.

Good luck
CaptSammy

[BlueRay]

Thank you Catsammy, thezaman, Franky and everyone for your valuable inputs.  Yes. the seller agrees to stay in business to train & help us for 6 months. As he has been doing this business for over 12 years full time (11 hours hands-on every day), he got quite tired of doing this and told my friend about the sale who has been working with him (delivering pizza) for about an year. Seller said that he made his money but he doesn't have the motivation anymore to continue and wants to do something else. He wants to give this business to someone whom he is comfortable with as the business is located in his property. Whoever that he sells it to, he will be collecting rental income. I will meet with his suppliers, accountant and spend some time at his store to learn and get a hands on training on every aspects of his business. Then I will decide whether this business is something that I like to pursue or not.

[Mo]

Blue, do two things if you do nothing else: 1) pay a lawyer that practices in business/corporations $500-1000 to draft/review lease terms and any other signed agreements; 2) pay an accountant that practices in business/corporate bookkeeping to review the financials. If something is rotten in Denmark (and it still stinks to me) they will tell you where and why...

[Mikes334]

That is a very good advice. I did this after I stated my business and I was in for a big shock.

[tcarlisle]

You need a lawyer and an accountant ot really cover you in this transaction.

But I am writing to respond to your question #4 about customer perception. I was a loyal customer to a local pizza shop that was in business for decades. One day I showed up for lunch and there is a new sign on the door and a new guy inside running the place, but the head guy in the kitchen was the same and it looked like the staff was the same. And the pizza was the same. Cool.

Well, it seemed the new owner was very anxious to tell anyone that asked him about buying the business how the previous owner ran it into the ground. I listened and thought it was inappropriate, but never said anything. I just thought to myself he should be more aware that his customer base are all loyal to the previous owner and negative talk like that could alienate some of his customers.

Anyways, I continued to go there for lunch quite often, and over time I started to see the pizza change. The crust was denser and overcooked, the cheese was changed to a cheaper blend, and the sauce got watered down. It clearly wasn't an improvement but a cost reduction measure. Probably changed to cheaper flour, cheaper cheese, and cheaper tomatoes.

What finally did it for me was I ordered a margherita style for delivery.In my area (Metro NY/NJ) if you run a pizza shop you better know how to make a margherita style. What showed up at my door was a square pie, with no fresh mozz just lumps of that cheap rubbery stuff, and no fresh basil --and it was burnt.

I drove to the place to take it back. They said they would remake it. They remade it the same way except round. I rejected the pizza and never went back. At the end of the day, all I could think about was how vocal the new owner was about the previous owners, but from my perspective at least they made quality pizza. A checked on the place a few months later -- the business changed hands again under new ownership.

If you complete this transaction, always realize your customer base is inherited. Don't make major changes.Any changes you make, if it isn't an improvement then don't make it. There is no doubt in my mind that owner had a financial problem that he probably inherited with the business.Thus he felt he needed to cut costs. What he failed to realize was the business he inherited was not the pizza shop you call for the cheapest pizza -- it is what you call for the best. Realizing this, he could have considered adjusting prices to balance the financials.