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Buying a business

Discussion in 'Small Business' started by SammyD, 25th Sep, 2016.

  1. SammyD

    SammyD New Member

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    Hi All,

    I am new here and just want your input, we are looking to buy a business and it is cash business - a non franchisee food business (fish & chips), they are showing around $20,000 pw sales but on the accounts they show somewhere around $15 k and the COGS is more $$ on P & L compared to what they say the COGS are. Is there a way to find out what the business is actually making before actually getting a trial period ? Have any of you experienced something like this. Thanks in anticipation.
     
  2. pinkboy

    pinkboy Well-Known Member Premium Member

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  3. D.T.

    D.T. Adelaide Property Manager Business Member

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    Its quite common for books not to match actuals, especially in a business that has cash transactions.

    Its expected these days for a business to be presented well for sale. You wouldn't make it look slack, who would buy it then?

    I think you need to do your own homework on what their customer base consists of, whether that's profitable and whether there's any avenues available to expand or grow.
     
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  4. Blacky

    Blacky Well-Known Member

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    Get a copy of the bank statements.
    For this type of business it is possible that not all the cash makes it into the account, however, I wouldnt base any of my decision on that.
    Also be careful of the accounts payable. When selling it is common for companies to delay payments to show higher cashflows. When you take it over you discover a lot of unpaid accounts.

    Blacky
     
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  5. SammyD

    SammyD New Member

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    Thanks for the suggestions, I was hoping that the COGS in the P&L mostly should be accurate, this business is showing more COGS in PNL then in business summary from the broker, was thinking if I can rely on the COGS then can work backwards to the sales number, but this difference in PNL and Business summary has confused me. Does anyone know the COGS % in Fish and chips shop that also sells raw fish. ( His summary shows 30% COGS and PNL shows 50% with around $100,000 more COGS in PNL)
     
  6. Blacky

    Blacky Well-Known Member

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    It is possible that neither will be correct/accurate.
    I will go out on a limb and say they have provided you with 2years of financials?
    Ask for 5 (I can nearly guarantee they wont be available).

    Why?
    Because this business has been 'dressed up' for sale. It has taken them 2 financial years to get the books into a saleable shape. 5years of financials will tell you a different story.

    I dont know much about fish and chip shops, but the ATO does. 40-50% seems about average. Slighty higher for raw fish products. NP around 10-15%
    Fish and chips shops | Australian Taxation Office
    Fish and seafood retailing - fresh | Australian Taxation Office

    Blacky
     
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  7. Biz

    Biz Well-Known Member

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    Hang around for a month, count the till at the end of the day.
     
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  8. Special order

    Special order Well-Known Member

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    If you can park a car near the entrance to the shop and set up a camera and leave it recording for whatever the trading duration is. This will give you aprox customer count

    To establish cogs, if you can Aquire a menu, simply cost it out yourself, I imagine for a fish and chip shop most pre cooked items will come straight off the shelf from suppliers like bidvest. For fresh fish you can take a drive to the trawlers and ask for wholesale quotes.
    For rent just phone the local Commercial rea office and for staff wages you can get that off the fair work website.
    Don't forget about gst
    Ideally if your purchasing a food business you will want to have a menu and roster costed before you start, so determine your own cogs and labour beforehand, 20k for a chippy is good turnover, we have a food business which does similar and converts at 15%
     
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  9. SammyD

    SammyD New Member

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    Thanks everyone, this is really helpful. Which business has the most net profit %, is 15 % a good benchmark to run across any food business? I have around $200k cash what would you suggest if I wanted to start something? How about Play center in QLD.
     
  10. sanj

    sanj Well-Known Member

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    a very good business can be turned into a crap one pretty quickly if the person buying it doesnt have the skillset and vice versa so id suggest you work out the plan first and executon (ie what exactly to buy), after.

    have you run a business before? even a small one?
     
  11. Greyghost

    Greyghost Well-Known Member

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    If sales are only 75% (15k vs 20k) of what they should be, it makes sense that COGS will also be reduced on paper, usually to keep the gross profit margin consistent. Otherwise your gross profit margin will be rubbish and flag an audit with the ATO. This is why I say to tradies, when you do cash jobs don't put the bloody materials on your Reece/Bunnings account.

    Obviously if they have half a brain they are not banking the additional $5k cash, that would be a home run for the ATO audit team.

    One way to possibly find out is to ask them how they take the cash. Are they using the cash register correctly to take it, or are they hitting nil sale to open the register and manually calculating the sale and change.. If they are doing it properly on the register but simply not recording all of the sales, you may be able to ask them for the register printout or history to review the sales..

    On a long shot possibly look to have a performance condition put into the contract if you can't verify the sales/profitability of the business. Say in 9 months (3 quarters) if they business is taking what they stated then a final payment is due to the original vendor. They will not like the idea of this as it gives you the opportunity to manipulate the numbers so to not pay them the final payment but methods like this are not uncommon.
     
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  12. Ted Varrick

    Ted Varrick Well-Known Member

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    Sammy, why don't you re-read this thread and substitute your name for mine?

    Then would you kindly consider a post suggesting that the amount of risk involved is high. The seller has provided very ambiguous figures that are at best unreliable and at worst, how is it said in legalese... factually incorrect.

    If you still decide to purchase their business, when you might consider just opening your own fish and chip shop, keeping in mind that the "existing supplier and customer relationships" might not actually be worth that much, then get them to give you a 3 year profit projection. Sure, it will probably look like a hockey stick graph, but then insert a claw-back clause that will make sure they refund the difference.

    On the other hand, see if they are open to a 40% discount (let's not be too mean...) on their asking price right now....
     
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