Business opportunity

[ChefAdam]

An opportunity to buy an existing Italian takeaway business has came up and it all seems to good to be true and has made me weary.

It has been running 8 years with 8 years left on the lease. The turnover is 624,000 per year and this is backed up by the last 2 years full account history. The rent is 25,000 a year (it’s in a very nice area, with a lot of collection orders), business rates is 8000 a year, they spend 2800-3000 a week on stock, the staff wages is very high at 4,000 because the owner isn’t actually working there. I know there is other costs such as vat, water, gas, electric , justeat commission. But I can’t see all that adding up to another £1,000.
Even then there is 3000 a week profit before tax. They are selling the business for 150,000, does this seem to good to be true? Or should I snatch it before somebody else?

I asked the owner why he was selling and he said that he has a restaurant and bought it for his son and his son gave up and said it was too stressful for him juggling the late hours with family life . I am going to work there tomorrow night to see if it’s for me.

 

[El Bulli]

Just Eat commission is about 14% + vat (you will claim this back).

Vat is 20%, you buy your goods at 0% (fresh food). You cook it, VAT is problem.

Turnover is 624k , less the vat and just eat fees (assuming just eat is about 70% of sales, which is norm in this business).

So on 624k, we are looking at just eat fees of 87.6K just eat, 124.8k Vat, staff and NI contributions, Lets say optimistic 20% on 4k a week plus holiday and sick pay. 299.5k.

So far our Bills are 87.6k (just-eat)+ 124.8k (vat), staff 299.5k. Total: 511.9K

Now look at rent: 25k + 8k rates, another 33k on that.
Total Now, 544.9k!!

Food Costs: lets assumes 30% (or 70% GP)
624 x 30%.... Hmmm 187.2k, the op suggest 3k a week, which is low, but could be high margin, even then you are losing money, get GP to about 78-80% and it might be viable.

Now that total is 732.1k Per Year, You are now losing 100k per Year, stay away from that business.

If you did not rely upon just-eat you will be still be losing 10k plus per year, and the lease, that normally involves a guarantee (aka lose your house to a landlord), the business will need major streamlining if it needs to be made viable.

 

[Noah]

(assuming just eat is about 70% of sales, which is norm in this business)

I know you said doesn't work without Just Eat anyway, but I am surprised that the Just Eat %age of sales is that high. At least I would think it would vary with location - don't know any take-aways round here that use Just Eat for example (admittedly unrepresentative anecdote).

 

[Mark T Jones]

You say there is full accounts history; surely the costs are identified in this?

The most glaring omission to me is the cost of consumables.

You need to be looking in some depth at accounting information over several years - look at trends, not just bottom line figures.

Bank statements can also be very revealing.

Above all, use hard information not guesswork. Ask challenging questions and if you don't get straight answers, assume the worst.

 

[Agarwood]

I actually can understand the valuation even based on the quoted figures.

Although it feels plucked out - pretty much a years profit before tax.

And if the guy is genuine I suspect there's wiggle room.

He would be making 150K and walking away from 200k rent liability plus staff redundancy costs which for an 8 year old business could be significant if he had to close it today.

If it looks like an opportunity for you perhaps consider offering a drip element to the sale - 50k upfront and the rest over a couple of years - which actually could be more tax advantageous to him.

You could even potentially fund the first payment on the business using a merchant cash advance or similar.

But id also surreptitiously check his other restaurant. Companies house tripadvisor etc and ask around.

I actually knew a guy who did the same for his son with a restaurant - his lad worked in it from 16 and took over managing it for a year after uni then decided he wanted to do something else - so the guy just shuttered it.

He didn't want to manage it again but he had lots of other income and was semi retired then.

 

[Chris Ashdown]

Don't forget TUPE laws so you cannot just get rid of employees

Take a safe route offer to Manage the restaurant for a year and then consider buying it or renting it under a year or two lease

 

[ChefAdam]

Just Eat commission is about 14% + vat (you will claim this back).

Vat is 20%, you buy your goods at 0% (fresh food). You cook it, VAT is problem.

Turnover is 624k , less the vat and just eat fees (assuming just eat is about 70% of sales, which is norm in this business).

So on 624k, we are looking at just eat fees of 87.6K just eat, 124.8k Vat, staff and NI contributions, Lets say optimistic 20% on 4k a week plus holiday and sick pay. 299.5k.

So far our Bills are 87.6k (just-eat)+ 124.8k (vat), staff 299.5k. Total: 511.9K

Now look at rent: 25k + 8k rates, another 33k on that.
Total Now, 544.9k!!

Food Costs: lets assumes 30% (or 70% GP)
624 x 30%.... Hmmm 187.2k, the op suggest 3k a week, which is low, but could be high margin, even then you are losing money, get GP to about 78-80% and it might be viable.

Now that total is 732.1k Per Year, You are now losing 100k per Year, stay away from that business.

If you did not rely upon just-eat you will be still be losing 10k plus per year, and the lease, that normally involves a guarantee (aka lose your house to a landlord), the business will need major streamlining if it needs to be made viable.

I don’t understand that whole VAT amount was what I was considering profit. Don’t you claim VAT back? And based on 70% of orders being just eat, wouldn’t that be 61,000 at 14% commission?
I appreciate your very in depth answer, and need all the help I can get.
I’ve worked in this Industry years but running a business is a whole different ball game.

 

[Tracy Arkwright]

Looks like a decent opportunity

 

[Mr D]

A quarter of the turnover in profit. Over a quarter of the turnover in staff wages. A quarter of the turnover in food stock.
The figures all add up regarding the profit potential of this?

 

[mattk]

I don’t understand that whole VAT amount was what I was considering profit. Don’t you claim VAT back?

You can claim back VAT on items you purchase. However, as said above, most of what you buy will be zero-rated for VAT, so there may be very little to claim back.

When you sell a meal for £12, you get £10 and you have to pay HMRC the 20% VAT, which is £2.

Therefore, if the turnover is £624,000 a year, 20% will need to be paid to HMRC, which is £104,000. You can claim back the VAT on what you buy, but that is likely to be a lot less.

 

[Mr D]

You can claim back VAT on items you purchase. However, as said above, most of what you buy will be zero-rated for VAT, so there may be very little to claim back.

When you sell a meal for £12, you get £10 and you have to pay HMRC the 20% VAT, which is £2.

Therefore, if the turnover is £624,000 a year, 20% will need to be paid to HMRC, which is £104,000. You can claim back the VAT on what you buy, but that is likely to be a lot less.

Would the turnover be excluding VAT?

 

[El Bulli]

I know you said doesn't work without Just Eat anyway, but I am surprised that the Just Eat %age of sales is that high. At least I would think it would vary with location - don't know any take-aways round here that use Just Eat for example (admittedly unrepresentative anecdote).

Just eat charge us 14% on both our locations, new restaurants pay a massive 15%, they also charge vat upon those fees (including delivery charges, and the 50p surcharge), if you are lucky enough to be below the threshold expect about 20% of the order to be in just eat fees alone.

We are lucky in that we turn the machine off if there are customers in the restaurants, but the just eat fees are effectively a few members of staff.

 

[Noah]

Just eat charge us 14% on both our locations, new restaurants pay a massive 15%, they also charge vat upon those fees (including delivery charges, and the 50p surcharge), if you are lucky enough to be below the threshold expect about 20% of the order to be in just eat fees alone.

We are lucky in that we turn the machine off if there are customers in the restaurants, but the just eat fees are effectively a few members of staff.

Thanks. I was more puzzled about 70% of sales being generated through Just Eat though - surprised they are such a large proportion of the market already.

 

[Paul Kelly ICHYB]

You can claim back VAT on items you purchase.

No you cannnot. This is the biggest misconception about VAT that out there. 'Claim back' is the wrong description - 'offset' is probably more appropriate.

You claim back the difference in the sales tax collected and the purchase tax spent. In most companies, where you sell more than you buy (in value terms), you will always pay VAT but it will not be 20% of sales.

 

[ChefAdam]

Having seen the figures only 40% of business is coming through just eat. Thankyou eveyone for all your advice, it’s helped me reach a decision.

 

[El Bulli]

Did you decide to buy, or avoid?

The food business is a hard one to make work, but rewarding when done properly.

Get your GP high, look at why 40% of customers order from just eat, and offer them something better from your own order platform (freebies on orders over £20 that only cost £1 or less to make, put menus in each takeaway order with a link to your website/direct order portal)

 

[ChefAdam]

Did you decide to buy, or avoid?

The food business is a hard one to make work, but rewarding when done properly.

Get your GP high, look at why 40% of customers order from just eat, and offer them something better from your own order platform (freebies on orders over £20 that only cost £1 or less to make)

I decided to buy, but offered 130 and he said 140 so we met in the middle.

Yeah they currently have a loyalty scheme where they get points and it has lowered the amount that go through just eat.

I figured that I can get wages down to 3500 and open more hours (the location has lots of footfall), when there son ran it before he decided it wasn’t for him he was doing the hours i intend and making 14,000 and have been shown the figures to back that. Thank you for your help

 

[Chris Ashdown]

Good Luck

 

[KeithGreen]

Good luck with your purchase and for the future. I hope you've offered, subject to contract and due diligence. Ifo you haven't already done so I would get a heads of terms and exclusivity signed and in place, giving you a period of exclusivity to carry out your due diligence and legal checks etc.