Finance for a Fish & Chip Shop?

ant_8u · Jan 27, 2010

Hi Guys

Hope you're all well and that I'm posting this in the right place

After spending all my working life employed I have decided I want to work for myself and would like to buy a Fish & Chip shop

I have viewed a number of shops and rather unsuprisingly the majority are unable (unwilling) to provide a copy of their accounts

After quite a bit of searching I have found a shop with reasonable accounts. From what the owners have told me they're also taking more than they're showing on their accounts. I'm sure this is probably true to a certain degree, but think they might be exaggerating slightly in order to make the shop sound more appealling

I have taken the accounts to my bank and they are happy to lend me 70% of the valuation, so the accounts aren't bad at all (not compared to some I've seen) I now need to find a 30% deposit which works out as £120,000

This is money I don't have and so I'm looking for advice and guidance on what may be possible in order to raise this money too

I have spoken to the vendors about a deferred consideration, but the bank say it's unaffordable based on the accounts

I told them the solicitors will be drawing up a contract stating that the money would only be repaid once the company turnover reaches 'X'
(with 'X' being the turnover the vendors are saying they currently generate but do not show on the accounts)
That way the loan is only repaid when it's affordable, and it gives me a little peace of mind that they're not inflating their turnover figures just to sell the place

Does anyone have any advice on what else I could do to fund my deposit?
I am aware this is a lifestyle business and therefore not the kind of thing a Business Angel or Venture Capitalist would want to look at

I have a mortgaged residence with around £40k equity, but cannot release this due to the current mortgage Loan To Value
I would be happy for the bank to take a second charge over the property, but this still leaves me with a considerable shortfall

Any suggestions you may have are greatly appreciated

Williams lester · Jan 27, 2010

This seems to be a huge amount to be paying for this kind of business, the turnover must be massive!

If you cant afford to fund 30% of the business, i would advise walking away.

ant_8u · Jan 27, 2010

Hi David

The Turnover is £180k pa on the accounts
The owners have stated they actually take £5,500pw

Gross profit is ~55%
Net profit is ~ 30%

The price is £400k for the freehold
I believe the premises to be worth around £200k

bwglaw · Jan 27, 2010

Has the lender stipulated in their offer as to where the 30% must come from or how you are required to prove it? In my view, 100% lending is very risky, especially for a fish/chip shop.

What about working capital when the business opens? More credit?

elaine@cheapaccounting · Jan 27, 2010

Confused £5500 pw = £286000 - so are you saying that they do not declare £100k!

So net profit is either £54000 or £85800

So you are doing two things here - buying a business and buying property. Great if you have starting capital but expensive and almost impossible without a deposit.

ant_8u · Jan 27, 2010

bwglaw said:
Has the lender stipulated in their offer as to where the 30% must come from or how you are required to prove it? In my view, 100% lending is very risky, especially for a fish/chip shop.

What about working capital when the business opens? More credit?

The lender has not stated where the deposit should come from
They don't care just as long as it's there

The only reason they said they don't like the vendor financing is because the accounts don't show enough to support it, if the accounts showed that it was servicable the bank would accept it. That's why the solicitors were going to stipulate how and when it would be repaid

ant_8u · Jan 27, 2010

elainec100 said:
Confused £5500 pw = £286000 - so are you saying that they do not declare £100k!

So net profit is either £54000 or £85800

So you are doing two things here - buying a business and buying property. Great if you have starting capital but expensive and almost impossible without a deposit.

Hi Elaine
Yes, as you stated it's the business and the property here, which can only be a good thing

The accounts show net profits as £55k and they have provided me with the last four years worth of accounts so I can check the details

Yep, they've told me there's £100k of unaccounted turnover!

I'm sure there is a certain amount not being declared, but that's just criminal

Having said that, I saw a shop a couple of weeks ago, advertised as £5k per week, accounts showed £97k per annum.
He's either "embelishing" his takings to help with the sale, or he needs locking up

elaine@cheapaccounting · Jan 27, 2010

Maybe a tax man will go undercover on these business sales. Their daily look at this forum might give them a few ideas.

ant_8u · Jan 27, 2010

Is there any way to evidence what they're actually taking? (short of a full blown investigation)

I have told them I would need to spend a couple of weeks in the shop before I sign any paperwork as I want to be sure what they're stating regarding the turnover is accurate

elaine@cheapaccounting · Jan 27, 2010

Have a look at this I received today:

http://www.accountingweb.co.uk/topic/tax/tax-warning-fish-and-chip-shops/400559

Beware !!!

ant_8u · Jan 27, 2010

Very interesting, and hardly suprising based on what I've seen recently

Displaycentreuk · Jan 27, 2010

If the current owners of the business are lying to the tax man then you have to assume that they will have no hesitation in treating you in the same way! You have to wonder what sort of business such people are likey to have built.

There seems to be alot of 'smoke and mirrors' put about when trying to value a business. But the bottom line is that if you take the declared (if it is not declared then it does not exist) net profit, subtract all running costs (including a reasonable wage for yourself and any other employess) and multiply by 3 that will give you a starting point. Then add the value of the freehold and you have a rough estimate for a well run and stable business.

The best way of verifying numbers is to look at supplier invoices, calculating cost of materials and then working back to GP and hence turnover. The other thing to look at would be VAT returns.

A good friend of mine was misled when he purchased a business. He lost alot of money and got virtually nothing in return. Please be careful.

Hope this helps

Chris

ant_8u · Jan 27, 2010

Thanks Chris

From what I have seen so far no Fish & Chip shop is telling the full truth to the tax man
This one just happens to be telling more of the truth than the others
(if that's actually possible)

The only way I can see to get around this problem would be to start up a business myself

I agree with you regarding your points that if it's not documented it didn't happen and also that I shouldn't trust them
That's why I was looking at buying it based on the figures shown on the accounts and only repaying the vendor loan when/if the business generates the "mythical" numbers which the vendors are telling me

Just to clarify
When you use the 3x profits example, do you minus a salary for myself from the net profit first?

accountancyextra · Jan 27, 2010

You need much more clarity before getting the cheque book out.

You think the property is worth £200k - get it checked by a commercial valuer

Then go get the accounts reviewed by an accountant. The bank will only look at particular things to make sure they get their money back. An accountants review will help you understand how the business is performing.

Forget the undeclared income - you can't buy somthing when you can't "see" it. It's a bit like those auctions where they put everything in a sealed bag and tell you that the contents are worth £x, but you can't look inside (not sure if they still have them, these days). People go crazy thinking they are getting a bargain, only to discover what they have bought is worthless.

ant_8u · Jan 27, 2010

Thanks Stuart

I'll get a valuation on the property and will speak with an accountant too
What in particular should I be asking with regards to the accounts?

I can read them myself to an extent and have a basic understanding, but what should I see that helps determine the strength of the business? (other than no brackets)

BTW - I know the auctions you mean, it's a good analogy, thank you
Not sure if they still exist, but I remember they used to do the same thing with lost baggage!

papverpoppies · Jan 27, 2010

Not the same and I apologies if taking it slightly off track.

I went to look at a boarding kennels last year.

The seller had very sketchy books, and was really loath to let us see anything.

He showed me the diary for the following year which seemed to indicate a reasonable business (it was being sold with scope to expand etc).

Anyway the bottom line was, the house was valued at less than what he was asking (£75.000 less) I was given the advice to walk away which I did.

At the end of the day even if the business was turning over a profit, that profit was down to him and his wife (there was no saying the clients would have stayed with me) so in effect, I really was not buying a business - had the house of covered the asking price, they would have had no problems (so I was told by several banks etc).

Although the 'goodwill and fixture and fittings' did amount to a small amount, they came to nothing like the sum the seller was asking for.

Even the company who was marketing the business for him, told me they advised him otherwise, but he refused to listen.

The business stayed on the market for well over a year, and I did hear that it was only sold as a residential property in the end, and not as a business.

Had the short fall been small, then I would have taken the risk, but that amount of money is a lot to have to try and make up, you are on the back foot from day one.

Good Luck.

Poppy

Tom McClelland · Jan 27, 2010

I'll second what some others have said... the undeclared income is utterly valueless when they come to sell the business. If they wanted it taken into account then they should have declared it.

Surely if their undeclared income is that high their expenditure on raw food and gas/electricity etc (which you take straight from PL invoices) would be way out of line and ring huge alarm bells in the declared accounts.

Take the declared net profit. Subtract the potentially undeclared wage costs of family members (ie in future you and your family) from that to arrive at a real net profit after all costs. Subtract the a notional value for the annual sinking cost of keeping fridges and fryers and the building in good order. (fixtures and the building don't last for ever without money being spent on them) That will give you a first approximation of the real annual net profit of the shop. Multiply that by between 2 and 5 depending on how much you love the business, and add the independent value of the freehold to the result to determine the value of the business. If they want more they should be told to pull the other one.

To put it another way. If they can't tell you their real takings, with evidence, and they can't tell you their real costs, with evidence, then they ain't actually got a business to sell, just a worthless load of promises.

ant_8u · Jan 27, 2010

Thank you Tom and Poppy

Despite being the best I've seen so far it seems this one's a no go too

I doubt I'll be proceeding now, but could someone clarify this anyway (just to educate me)

The bank said they could offer upto 70% based on the figures shown on the accounts

Assume I paid full price for this thing, I'd be borrowing £280k on an asking price of £400k, with the bricks and mortar being valued at around £200k

Wouldn't the bank therefore cap the lending due to the property value?
ie, 70% subject to affordability as long as it doesn't exceed the property's valuation?

If they lent £280k where is their security for the £80k over the property value?
Has a lightswitch just been turned on in my little head?
They wouldn't take my mushy peas from me would they?

Tom McClelland · Jan 27, 2010

ant_8u said:
Thank you Tom and Poppy

Despite being the best I've seen so far it seems this one's a no go too

I think that sounds sensible.

A business where there isn't full, detailed, and frank disclosure of income and costs isn't actually for sale as a business. Pay no more than the asset value.

Just my 2p. Someone who knew the fish and chip market in your town well might disagree.

Strontium Dog · Jan 27, 2010

There is a rule of thumb formula for determining the value of a fish and chip shop. I believe it is about 30 times weekly takings. You would then need to factor in the freehold. I think your idea of spending 2 weeks in the shop is a good one. It doesnt look to me as though it is worth anywhere near £400K

ant_8u · Jan 27, 2010

Thank you Strontium Dog

I have not heard of your 30x takings before

Based on this rule of thumb the value would be £308,000 (assuming £3.6k and £200k premises)
upto a maximum of £375k based on what they're saying

David Griffiths · Jan 27, 2010

Tom McClelland said:
Surely if their undeclared income is that high their expenditure on raw food and gas/electricity etc (which you take straight from PL invoices) would be way out of line and ring huge alarm bells in the declared accounts.

That assumes that the expenditure on raw food is being fully recorded and shown in the purchase invoices. The Revenue caught lots of people suppressing purchases, and of course the much higher takings, about 25 years ago. I'm sure that the tax dodgers have refined their methods to take account of what was caught out, but the Revenue move on as well.

For example, it was common practice for the Revenue to lik petrol purchases to takings for taxi drivers. The petrol gave a clue as to miles travelled, and after adjusting for variables such as private use and unengaged mileage you could have a fair stab at takings.

So the drivers hit on the wheeze of not claiming all the petrol, making sure that takings were in proportion to the receipts actually claimed. Great, until the Revenue went to the local authority to look at the plating records, proving that some taxi drivers, if their records were to be believed, were getting about 93 miles to the gallon!

ant_8u · Jan 27, 2010

More assumptions.....

Asking price is £400k
premises valuation is £200k
Accounts show net profits as ~£55k

If I split the business and premises and treat them as seperate entities I would need to take £20k off the net profits for a managers salary and maybe £15k for estimated premises rental

This would now leave a net profit of £20k

Using a PE of three would give a business valuation of £60k
Meaning I should only pay £260k for the freehold?

Spongebob · Jan 28, 2010

Fish and chip shops are notorious cash-cows. A well run one in a good location is a gold mine. I have known many chip shop proprietors over the years and they all appear to enjoy a lifestyle commensurate with that of a successful lawyer or accountant...

David Griffiths said:
That assumes that the expenditure on raw food is being fully recorded and shown in the purchase invoices. The Revenue caught lots of people suppressing purchases, and of course the much higher takings, about 25 years ago. I'm sure that the tax dodgers have refined their methods to take account of what was caught out, but the Revenue move on as well.

Clearly, anyone suppressing their level of sales must also suppress their recorded purchases in order to maintain a credible and consistant margin. Typically, this might be done by paying say one invoice in every five in cash and then binning the copy. Such practice probably pre-dates the Romans!

What puzzles me though, is why HMRC doesn't insist that fish and chip shops use a proper till to record sales, with the till roll kept as evidence. I can think of at least 3 or 4 chip shops locally who do not have a till, instead using a cash drawer under the counter, which is periodically emptied of high denomination notes by the proprietor.

While not suggesting that all such owners are on the fiddle, it is quite clear that there is no evidence whatsoever of the level of takings. I am old enough to remember when many pubs didn't have tills - that has all changed now, so why not chip shops?

I would hazard a guess that a typical fish and chip shop has a higher turnover than a typical pub these days anyway. The one nearest to my work is reputed to take £10k per week - from a little shop unit. The manager is on a grand a week plus free use of the flat upstairs.

We're all in the wrong business...

David Griffiths · Jan 28, 2010

Spongebob said:
What puzzles me though, is why HMRC doesn't insist that fish and chip shops use a proper till to record sales, with the till roll kept as evidence.

And who is to say that the till roll came from the till that is actually in the shop?

Tom McClelland · Jan 28, 2010

ant_8u said:
More assumptions.....

Asking price is £400k
premises valuation is £200k
Accounts show net profits as ~£55k

If I split the business and premises and treat them as seperate entities I would need to take £20k off the net profits for a managers salary and maybe £15k for estimated premises rental

This would now leave a net profit of £20k

Using a PE of three would give a business valuation of £60k
Meaning I should only pay £260k for the freehold?

That's my kind of reasoning, but perhaps based on other kinds of businesses.

Others have said that the value of a F&C business is c. 30x weekly takings, to which you would add the independent valuation of the freehold property.

I've certainly seen enough F&C shop owners driving Mercedes to know that it can be a very profitable business. But no point in buying your way in at a cost that makes the business unviable. Don't forget the cost of servicing your debt raised to buy the business comes straight off your bottom line.

ant_8u · Jan 28, 2010

Ok,
the vendors are now also offering the leasehold of the property for £220k

Am I therefore correct in saying the premises are valued at ~£180k

Alfs Ads · Jan 28, 2010

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