What Does It Really Involve? (Long)

Business By saberger Updated 2 Jun 2009 , 8:28pm by saberger

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Tomoore Posted 31 May 2009 , 5:32am
post #121 of 135

Very eye opening thread! I'm only half way thru, but can't wait to finish. Thanks so much!

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mewmew Posted 31 May 2009 , 6:57am
post #122 of 135

Well, since everyone is being blunt...I will be blunt, too.

It isn't that I don't think you can run a successful bakery. I think that the costs involved in this one are so high that THIS bakery has to fail.

First, what exactly are you getting for the $125,000 besides a $500 a month expense for the next 30 years? So she is going to sell you her used equipment that cannot possibly be worth more than $25,000. So for $100,000 you get her client list and you get her to walk you through her business for two weeks? Seriously, do you REALLY think that is worth $100,000? I wouldn't pay her even $3000 for that. And she is going to sell you her recipes. How do you know her recipes aren't worthless? She could have gotten them out of any baking book or from any internet site.

You know what you are getting for $100,000? Exactly nothing. Would you pay $100,000 in tuition to go to the best culinary arts school in the world for one year? In comparison, what is this woman really giving you for $100,000? Her business? No, some used equipment, a client list (the local 7-11 has clients, too, so what), and a promise of two weeks of showing you the ropes. Why do I have a gut feeling that two weeks will not be worth $100,000?

And then on top of paying off $100,000 for the next 30 years of your life, you get the additional pleasure of paying off her badly negotiated lease for the next 7 years. So you sign yourself up for 30 years of debt and agree to take over her debts for the next 7.

Let me do some math for you. Seven years at $3700 per month is $310,800. And all you are doing is renting!!!!!! At the end of 7 years you have paid more than $300,000 with nothing to show for it (except probably a bankruptcy). You won't own that building!! You will have made a huge investment in a building that you don't own and may have to find a new place to run your business and lose all your previous clients because the owner of the building can decide to raise the rent to an even more ridiculous price or rent to someone else or sell the property to Donald Trump to make hotels and then what are you left with? Starting over elsewhere with her rotten old equipment?

If her business costs $125,000 then any bank is going to ask you to put down at least 10% and since the loan is not secured by anything but some old equipment worth less than $25,000 then the bank is going to ask you to secure the loan with your home.

This is a very foolish venture. And I am saying this to be kind because I don't want to see you divorced, broke, with bad credit and either no house or paying $500 a month for 30 years on your business loan.

Do not under any circumstances consider paying this kind of money to be renting a place. You should be spending about half of this money to own a piece of commericial real estate. Buy a smaller building commercially zoned, outfit it with used equipment and later when you need to expand--you can sell that and use it to purchase something larger.

But throwing away $300,000 per year on leasing a building is just helping the owner of the building pay his mortgage and at a pretty penny for him, too, may I add. No way should you do any of this.

And not to be offensive although I am sure I am, but if your husband and sister have not told you this already, then neither of them really have a good enough business head to keep your head above water. And this is coming from somebody who did the research to get a 15 year mortgage at 4.25 percent interest for just $300 per month more than it would have cost a month to be paying a mortgage for the next 30 years. In other words, I saved us huge money. Huge. Instead of having to make a house payment for the next 30 years, my fiance can retire in 15 because he will have almost no bills.

Don't even start me on the deal I got on our propane tank that has cost our yearly expenditures by several hundred and will save us tens of thousands in the next 20 years.

You don't have to listen to me but my ex-boyfriend didn't listen to me about the housing bubble when I tried to tell him about it in 2005. I told him about how Greenspan had artificially inflated the housing market and I told him about how when the war ended, we were going to have huge national debts and a recession but he thought I was an idiot and didn't listen. He said that wars always make the country have an economic boom. I tried to explain that only happens when you get pillages along with war like the Romans used to pillage every place they conquered or like we basically pillaged Europe after WWII but he said that wasn't true. Well, apparently it was true. So he bought a second house (almost had his first paid off.) Now he is in foreclosure and going to lose them both when he was sitting pretty before.

I have a serious gift for forecasting this kind of crap. And by the way, I waited and bought AFTER the market crash. Don't listen at your own peril.

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mewmew Posted 31 May 2009 , 7:08am
post #123 of 135

Correction--I meant $300,000 in 7 years not 1 year.

Don't do this.

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saberger Posted 31 May 2009 , 12:43pm
post #124 of 135

I don't know what else to say but "whoa". I have to think about this one.

I go on Tuesday for a walk through with the inventory list and a 'tour' of the place.

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snarkybaker Posted 31 May 2009 , 2:37pm
post #125 of 135
Originally Posted by saberger

I don't know what else to say but "whoa". I have to think about this one.

I go on Tuesday for a walk through with the inventory list and a 'tour' of the place.

I own a shop. We do about $700,000 a year with a kitchen staff of three to four plus me. We spent about $250,000 in hard upfit costs, plus have another 100 to 200 thousand in machinery.

When you go to buy a business, they give you a packet of information, which should include both sales figures and a P&L and an inventory of all the hard goods you are buying. You know that rent is 3700, which should be about 10% of your gross revenue, so right there, you know you will need sales of at least $37,000 per month to work a successful business model.

I second the PP notion that you are being taking for a ride. Her recipes aren't worth didly, unless she has the original recipe for Dr. Pepper or something. The most famous bakeries in the world will sell you their recipes for $25...it's called a cookbook. The client list is also worthless, because a bakery isn't typically a business where you do a lot of "outbound" sales calls.

The three things that are of value are 1- the equipment, which is worth 10 to 20 cents on the dollar of new equipment. 2- The physical establishment. The fact that she has already converted the space into a bakery saves you a lot of money and heartache. 3- The " Goodwill" the business has. This really means how valuable is the name of her business. If you could buy " Nike" or " Izod" the most expensive part of the purchase would be the " goodwill" portion, because let's face it, the same tennies without the swoosh sell for 19.95 at Marshalls. The swoosh is worth more than the shoe. Ditto that damn little alligator...
Can you charge more for your cake because it comes from her bakery, or is it a tradition in your town to get some iconic something for special events ? If not, then the "goodwill" as it is called in the industry is also of little value.

Get those numbers, and spend sometime figuring out what the business is worth. Then make an offer if you think you can make it work.

Not to frost my own cookies here, but I am a bangin' fast caker/baker and I can produce about $2000-$2500 of product per day BY MYSELF. But I also have to be the accountant, marketing manager, human resource department, and sales consultant, so I only work in the kitchen on Friday and Saturday. Your average $12- $15 an hour baker ( in my market, 20-30% more in yours) can make about $1200 worth of quality baked goods a day.
To get to the $1500 to $1800 you need to make 37,000 a month ( some stuff will be donated, some stuff will get stale before it sells, etc...) you will need a staff of three plus two dishwashers. That alone will cost you $10,000 a month. Rent you know, your supplies should run around 20% ( bakery is a low food cost, high labor cost business) or $7400. With just rent, labor and food you are at $20,000 a month, so don't think you are going to get rich. An average business nets about 20% when all is said and done, so if you do your job well you can expect to make about 7000 a month. Hardly a fortune for the amount of hours.

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saberger Posted 31 May 2009 , 3:44pm
post #126 of 135

Thank you Snarkybaker for breaking it down and sharing it with me. I really appreciate it and it is VERY helpful. Lots to think about.

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taxnerd Posted 31 May 2009 , 4:55pm
post #127 of 135

I don't remember who made the post regarding a tax return being the same thing as an audited profit & loss statement, but they are most definitely not the same.

In the tax and accounting world, tax return preparation is considered a compilation, which basically means that the preparer uses the numbers provided by the client in order to prepare the return. Unless something seems really out of line or strange, the numbers are not usually verified or questioned. Additionally, there is no license required to prepare and sign tax returns (at least not in PA - don't know if this could vary by state). You could pay your neighbor with no accounting or tax experience to do your tax return if you so choose. I'm not saying this is a wise option, but it is legal.

Audited financial statements (balance sheet, income statement, etc..) are completely different. Only a CPA can issue an audit opinion on a set of financial statements. With an audit, the numbers are verified so you essentially have some assurance that they are correct. In this scenario, the auditor doesn't just take the client's word for what balances in their accounts are - they need verification. Needless to say, the client pays alot more for a set of audited financials than they would for just tax return preparation.

If you think something is strange with the numbers she's giving you, you probably want audited financials, but if the current owner doesn't already have them prepared she's going to balk at the cost of having them done.

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FromScratch Posted 1 Jun 2009 , 3:36am
post #128 of 135

I think mewmew (and snarkybaker too) nailed it on the head... these are my thoughts too. I would run.. not walk.. from this. It doesn't make good financial sense.

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FromScratch Posted 1 Jun 2009 , 3:41am
post #129 of 135

Oh... and to answer about your thoughts on a taking on a partner... It is really hard to find someone with whom you can work well and resolve issues (that WILL come up no matter what). You really need to be confident that you can work with someone... I don't think you will have time to do that unless you have someone you aready know who wants to take on this enormous risk.

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saberger Posted 2 Jun 2009 , 12:40pm
post #130 of 135

I don't remember if I had mentioned this or not, but I had found a place that used to be a bakery, then turned, grill, and now available for rent. All I know at this point is that it is $1500/month and that it needs another sink to be up o code. The owner said that he wanted to move out the grill and that the oven doesn't work very well. So my question is this: am I responsible for gutting the place, getting rid of the equipment, and then putting in mine? What is he responsible for doing? I am going to give him a call today to see if I can take a look at it. Also, I have the tour of the bakery tonight.
Hope everyone had a good weekend!

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tiggy2 Posted 2 Jun 2009 , 1:31pm
post #131 of 135

I would negotiate with the owner. I work for a commercial real estate development company and we build and rent retail and office space. The tenants are responsible for their own equipment but we negotiate the build out. We give them an incentive ($$$) to move into our buildings. If the plumbing and electrical is already there I wouldn't think the build out would cost that much unless the building is really old and needs a lot of updating and needs to be brought up to code.

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FromScratch Posted 2 Jun 2009 , 2:39pm
post #132 of 135

$1500/month is WAY more resonable. icon_smile.gif And you would be building up your own business and not having to have that $125K monkey on your back. This option is worth exploring. icon_biggrin.gif

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-K8memphis Posted 2 Jun 2009 , 3:04pm
post #133 of 135

So according to Snarks' figures, (I knew there was 10% dealio about something to use as a guideline but couldn't remember what it was) you're gonna generate $150,000 a year. Because she said your rent is about 10% of your yearly gross.

So that's $12500 a month--so that's like 3 one thousand dollar cakes every week give or take a coupla cupcakes.

Sure that sounds more reasonable but that's a ton!
I'm happily a small potatoes girl --I don't have the noive (nerve) to start that ambitiously steep. If I did that I'd have to be a business woman first and a caker second.

I would not have enough brain (or time) left to be creative but I know I'm mortal too (dang it).

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kettlevalleygirl Posted 2 Jun 2009 , 4:35pm
post #134 of 135

I have been lurking in the wings, reading and learning. I agree with the fact that this is a lot of money, on rent, good will, recipes and some equipment. I think you are better off starting small, with small space and small bills because it seems very overwhelming to me to jump in over your head this big and this fast.
Business partners are very tough to deal with especially when they are family....
Good Luck with your decision....

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saberger Posted 2 Jun 2009 , 8:28pm
post #135 of 135

Here you go everyone: http://cakecentral.com/cake-decorating-ftopicp-6414873.html#6414873 I am getting excited about this, since it seems a better way to start.

Let me know what you think. I figured I would start a separate thread for this part. Off for the tour of the bakery. Will check in later. icon_smile.gif

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