Few more thoughts … - Posted by Frank Chin
Posted by Frank Chin on June 17, 2005 at 08:29:36:
I had a few more thoughts since the last post. And you asked a few more questions off board about ?what’s wrong with running in to Quiznos a few times a day, and then go about your REI business, instead of working a job and have your boss looking to see if you’re surfing the net?.
I’ll place my comments here, so others could add their insights.
First, you mentioned a figure of ?making $700.00/day?. It sounds like a GROSS figure to me. In other words, that’s the amount you ring up at the register, from which you pay salaries, insurance, rent etc?? You’re NOT netting $700/day, right??
Because if it was net, then the Quiznos would NET about 7x$700 or $4,900/week (round it off to $5,000, and it’ll net $250,000/year. Surely, the seller is not selling the place for only $150,000, i.e. the $100,000 down payment and $50,000 seller financing you described.
I don?t know if you checked the books carefully, but through the years, I known people to use a valuation formula of THREE x NET to arrive at a selling price, at least up in these parts for most service businesses, with inventory additional, and always counting the owner?s earnings as part of the net. With this formula, the OWNER would POCKET $50,000/year, or about $1,000/week before taxes. If you had to pay someone $5.15 to $6.00/hour to work behind the counter, that?ll be deducted from the $50,000.00. For instance, if the Quiznos is open 7 days a week, and you?ll need someone to cover 6 days a week that the owner was working, then it?ll be 6 days x 8 hours x $6.00 or x 52 weeks or about $15,000/year. Add another 20% counting employment taxes. That?ll will run you about $18,000/year, netting the owner ONLY $32,000/year.
And you?re putting $100,000 down to make $32,000/year, not counting benefits???
Off course, many businesses make more than this, but it?ll cost a lot more to purchase. Not all businesses lend itself to leaving the place to a few workers, i.e. running it absentee, as it?ll have to be a certain size, for you to be able to have the systems in place. A few thoughts about this:
-Quiznos will be a cash business. Since it?ll be a franchsise, you?ll probably have a better handle on costs, since the franchisor would insist you make purchase at a certain place, keep books a certain way so you?ll know if the workers are ringing up every purchase or not. For instance, if you hired someone new, and suddenly your purchases remain the same, but sales went down, you?ll know you?re making the same amount of sandwiches, but selling less of them.
If you think having security cameras will deter this, I?m sorry to say some workers don?t care, and don?t think they?ll get caught, and don?t think much will happen when they do.
I spoke to the owner of a local Chinese takeout and he?s no longer open on Sundays because he was tired of working 7 days a week, and when he left the place to run absentee, they only do 15 ?take order sales? on Sundays, as compared to the usual 40 to 50. He said he hid out in the parking lot several Sundays and counted the deliveryman actually making over 40 deliveries, but only found 15 of them were rung up.
Unfortunately, his place is a bit small to have a separate management and records kept for the kitchen that some larger restaurants employ. When my dad was the ?Dining Room Manager? at a larger restaurant, besides tallying up the cash register each night, the management of the kitchen kept separate records of meals prepared and its retail price. Thus, meals prepared should equal meals paid at the end of the day, and the owners have a control over sales being collected.
-Do you plan to be in charge of Purchases?? A truly absentee business relies on staff to know when to make purchases, and have the authority to make the purchases when needed. On the other hand, you might have a problem of ?vendors? overbilling, and staff receiving ?kickbacks? that adds to cost if excessive and not detected. Some owners reserve the right to make purchases themselves, while other keep careful tabs on their ?unit costs?.
-How do you maintain friendly customer service?? I have a ?Carvel? franchise, and a ?Hagen Daz? franchise in my area, a few blocks from one another. The Carvel franchisee owner is there 6 days a week, has a helper most days, and have two young teenagers working the place on Sundays. He?s open from 10:00AM to 11:00PM 7 days a week, and on all holidays ? almost 365 days a year.
I started patronizing Carvel after the Hagen Daz franchise closed. I started taking my daughter to Hagen Daz since she was 2 years of age, as you can buy something there, sit down and eat. Carvel has no sitting area.
But before the end, ?Hagen Daz? employed a young man who was on the phone every single time I walk in there, and kept the phone in his ears while scooping ice cream, and sometimes gets the order wrong because he?s talking on the phone while listening to my order. I noticed less and less customers going there. I know the Hagen Daz is a franchise since it was run by an older man (who told me this), the owner?s brother in law till he left, and I don?t know how much the owner lost in the deal, but I can tell the problem arose from lack of management, and poor customer service.
-A small retail business can be doomed by outside factors. Had a tenant of mine who owned a gas station at a busy location. Then, a road project came about, and knocked his business down by over 50%. Keep in mind most retail businesses have high overhead, such as rent, insurance, and salaries particularly if it?s absentee. He tried to compensate opening the station 24 hours, but his cousin who covers the night shift, was seriously injured in a nighttime robbery attempt.
In fact, I mentioned before my dad lost most of his business when (had the business over 30 years) when he got sick, and went to the hospital for several months. I talked him out of reopening the place as I heard of robberies of small store in the neighborhood, and since cash businesses are vulnerable, he?s better renting the store out as he owned the place.
Just to add, a major highway overpass collapsed several blocks from my dad?s location, and this overpass is adjacent to a major shopping area. It goes without saying that business in the area is dead right now.
I had my own experience with this. About a year ago, they decided to dig up the road in front of my business, dig up trolley tracks that was there over 40 years, and repave the road. The project started in May, and lasted thru October. I noticed a drop in retail business, but fortunately our commercial business increased, and kept us going. Then they were one or two Saturdays that I noticed no customers coming in. Went around the neighborhood the check, and found out they closed the road on both ends to do some repair work, without notifying any businesses.
Getting a TRUE absentee business is great. But unless you can really run it absentee without workers running off with your money (my local Chinese takeout), or have rude discourteous staff run away your customers (my local Hagen Daz), or your managers inflate bills and get kickbacks (manager at a large company I worked for did that), you?ll be in for a big surprise.
Sometimes, thinking back, sitting there 9:00 to 5:00, getting fringes, not worrying about road closings, is not all that bad.