Takeaway business - Fish and Chips

Chippy_chappy

Hi all

I'm considering selling my house and buying a chip shop. No experience but keen to learn.

I aim to stay below the VAT threshhold (£64K).

Now, I will seek professional advice but, is it better to take as large a mortgage or business loan as possible to offset interest payments against income tax? I would invest any surplus cash in ISAs etc.

Any other tips of what to look for when the accounts arrive?

What is a takeaway with £64K turnover worth purely as a business. Is there a formula?

Finally, is 50% about the right margin to use.

Before you slate me, it is early days and I will seek professional advice. I also intend to do the 3-day course with NFFF and have friends in the business who will be bored with my million questions!

TIA

chippy chappy

blue_monkey_2

Hmmm.....

Just a quick thought on staying below the threshold really, everything else I do not have a specific answer on really.

Staying under the threshold is really hard to do, do you shut for the day or turn away customers if you suddenly reach the limit? Remember the 64k is your TOTAL TURNOVER, not your profit, so that is everything that goes into your till has to be kept under 64k pa.

Food is non-vatable but I am not sure this applies to cooked food so check this out. Remember you would have to bring in enough money to pay your rent/mortgage/business rates/electric/staff costs and the costs for food to sell as well as having to earn money to live on - and you would have to pay your taxes on that as well and also employers NI. I personally can't see you staying under that threshold in all honesty if you are running a fast food takeaway, you would have to 'earn' a maximum of £1200 a week (ish) and that would mean if your 'average' customer spent £10 you could only have 120 customers a week, or 20 customers a day opening 6 days a week, which really is a bit daft, what do you intend to do if you go over the threshold? Close your doors and shut up shop for the rest of the week if you have too many customers?

Maybe you should speak to Business Link for more advice.

Do you know what the current annual turnover is on the shop, you should never buy a business without finding out what the current turnover is and why the current owners want to sell because you could be buying a failing business.

Sorry I could not be more help but I really cannot see that you can run a business bringing in under 64k.

Chippy_chappy

Hello

Tax is levied at a flat rate of 12% on just about all of the turnover if you exceed £64K. Turnover of the properties that I am interested average £80K at present (daft for reasons explained below).

So, assuming a '50% profit margin', that is no VAT on a turnover of £64K. Turn £64,001 and VAT is 12% of all £64,001 - almost £9K - mad isn't it? So, exceed the threshhold and you need to turn £84K to earn the same as with a £64K turnover. This increases the cost and business falls. There could be a vicious circle thing going here.

If the business did well I might be tempted to aim to increase turnover to £100K+ to make it worthwhile being VAT Registered. This could require two full time staff rather than one so the initial aim is to replace a salary of £25K and I think £64K would be enough depending on tax breaks

Might be time to talk to friends in the business but I think I'll wait until I have seen some accounts.

All advice welcome.

chippy chappy

Pennywise

You've hit the nail on the head with chip shops and vat. That is why some shops only open very few hours, i.e. just a couple of hours at lunch and tea time, for say 5 days per week, and have a tendency to close for holidays quite frequently. It is hard to stay under the threshold and your income and resultant profits will always be limited. Other shops open all evening, 7 days per week, because they are not constricted by the VAT threshold. Once you are well over the VAT threshold, your profits rise at a greater rate because your fixed costs have already been covered - opening for longer hours doesn't increase your rates, insurance, advertising, administration etc - the only extra costs are staffing, power and raw foods. If the shop is already over the limit, presumably you are proposing to work fewer hours. That will alienate a lot of regular customers who may get into the habit of going elsewhere. If there is the potential to increase turnover, then you should go for it as you'll make far more profit in the long run. Don't be blinkered by the VAT threshold - I've seen many potentially successful businesses stay undeveloped when the owners could (and should) have worked at it to get above the threshold and beyond.

blue_monkey_2

LOL, yes, was trying to think of how to put it but pennywise you hit the nail on the head.

Trying to stay under the threshold will be an absolute nightmare and the only other expenses you will incur by opening longer are the costs of your electricity, food and staff costs. You'll also be able to reclaim the VAT on other materials needed to run your business, business rates, etc... so it could work out in your favour in the long run anyhow so you should never disregard this. If the current customers find somewhere else to shop that is open then they will continue to use this shop - especially rural customers who have to travel to get to you. If it were me then I would rather go to one that I know is going to be open for the evening rather than get there and find that it be closed.

I would definately ask to see those accounts before considering. You would be surprised how easy it is to reach that limit, friday nights at our local chippy have queues out the door with people getting their friday night treat - I would say they easily take in 2k in that one night - maybe more - so straightaway they go over the limit on just one night and you can't just shut the doors because you've taken too much money. It's a hard call really. Is it because you don't want to do the work and can work part time with a few hours each night?

I am just trying to work this out really, you say you want to replace an income of 25k.

Working on turnover, lets say you bought in 60k to keep under the threshold for VAT. 40k of this would be raw materials (food), which you then sell with a mark up of 50% (20k profit), so this would bring in the 60k to keep you under the threshold. Once you have paid your suppliers their 40k for the materials it would leave you with 20k. That is it, that is all you say you want to turnover.

However, out of this 20k you will also need to pay business rates, electricity/gas costs, staff, mortgage, insurances (including public liability), an accountant, promotions (such as local newspapers), your own Tax & NI, Bank interest & charges, there might be more I can't think at this moment in time, so that is going to eat up the money you want to earn.

In all honesty, you are not going to get much change from 20k and that will leave you with no income at all. If you want to 'earn' 25k you are going to have to set your goal much higher than this and also have to be VAT registered. For this reason I really don't think that what you are suggesting is viable unless you give yourself a higher profit margin - but then you will run the risk of being too expensive and driving all your customers away.

To 'earn' 25k you are going to need to sell raw materials of 50k with a 50% mark up - 75k. You are also going to need around 15k for your annual running costs, then factor into this the cost of your motgage (but when you sell you may have to pay CGT on), staff costs 15k (2 part timers), then you'll have to be VAT registered 20k (maybe you can offset around 5 of this, so 15k VAT), and not considering the mortgage that means you'll need to turnover £120k plus to achieve an income of 25k pa.

I think you need to sit down and speak to a few people and find out just what sort of turnover you can expect as I think you would be very naive to expect to acheive a 25k wage on a turnover of 64k, I really cannot see this as viable in the slightest. Sorry to burst your bubble, I run my own business and am VAT registered, I have also worked in accounts so see what comes in and goes out to keep a business up and running and it is certainly very much more than 64k.

Chippy_chappy

I don't see the 50% that way. I was aiming at buying raw materials, wages etc., being 50% of turnover so that £64K = £32K profit. The accounts have arrived and I will review them over the weekend.

The VAT problem is that to make it worthwhile, you need to turn £90K or more to break even on the VAT. £64K =£32K profit whereas £70K = £8.4K VAT plus £3K additional raw materials = £23.6K profit VAT Sucks!

As I say, I shall review the accounts over the weekend before considering making an offer.

The £25K salary that 'needs' to be replaced is subject to tax etc., and entails 55 hours per week out of the house (for a 37 hour week).

chippy chappy

blue_monkey_2

Have a look at the books and see what they tell you.

I honestly don't think that you can run a business with making your expenses 32k. As a rule shops on the high street have outgoings of £1000 a week so they have to make this before they make an profit, while I would love to have a shop there is no way I would commit myself to that sort of money so I continue working from home.

As for the VAT, I guess it depends on what way you look at it. I have a set price so if I sell outside of the EEC (which accounts for around 30% of my sales) then I 'make' more profit. So it works for some, not for others. I have done around 8 returns now and only paid a small amount of VAT twice. So for me it works. Don;t forget, you can reclaim your VAT as well, I am sure sure if you would get charged this on raw materials so have a look at past invoices, if you can recoup your VAT then this is not so bad.

You also need to ask the current owners why they are selling!!

Savvy_Sue

Chippy_chappy wrote: »

The £25K salary that 'needs' to be replaced is subject to tax etc., and entails 55 hours per week out of the house (for a 37 hour week).

Remember that although there are different ways of drawing your salary (which are way outside my area of expertise!) you will still have to pay tax and NI. And although you may be able to reduce your travel time, if it's your business YOU will be 'on call' all the hours it's open and few beyond. If a staff member goes sick, you have to find someone else, and at short notice that may well be you. If the alarms go off after hours, that's you too.

I have a friend who used to run a cybercafe, which was all quite civilised until one of the family needed emergency hospital treatment miles away, more than once!

BTW, I haven't seen anyone mention littering and licensing problems: don't know much apart from what I read in the local paper, but I think you'll have to clear up around the shop, and if your customers are a mucky lot I think that can be a real problem, especially should you ever want to extend your opening hours.

And do check who the contract for waste disposal is with, how much longer it runs for, what it's costing, and google the company concerned. If you find a hit on this board, you have been warned!

motorguy

Chippy_chappy wrote: »

I don't see the 50% that way. I was aiming at buying raw materials, wages etc., being 50% of turnover so that £64K = £32K profit. The accounts have arrived and I will review them over the weekend.

chippy chappy

Where are you factoring in the costs of staff, overheads, etc? Or are you proposing doing everything yourself?

I think buying a business and aiming to restrict your potential turnover is a bad move.

Personally, i know of chip shops that dont register their earnings for say takings lifted during the day, but i couldnt possibly suggest that as its illegal.

clutterfrazzled

Chippy_chappy wrote: »

No experience but keen to learn.

:eek:

I don't wish to put a damper on your enthusiasm but if you've no experience do you know what you are letting yourself in for?

Grandparents have had chip shops all their working life. Their days pan out as follows:

6am One to shop to take deliveries, prepare spuds, fillet fish, turn the fryers on. Remain at shop then to bank with cash before brief visit home for shower and change and collect other.

11am Both to shop for 12 noon opening. One serving, sometimes with paid help, other continuously preparing spuds and fish etc. in back room.

2pm (or thereabouts depending on which day) Shop closes, cleaning up etc., preparations for evening opening.
Both home for lunch, brief nap, cashing up

4.00pm Back to shop opening to catch teatime trade, then 10 to 11pm closing depending on day. At least one hour clearing up etc before finish. If they are lucky home by midnight.

They learnt early on that being a cash business one of them always had to be there to handle the till - even when family were employed. When they went on holiday they had to close up completely.

Together 24 hours a day.

Smell of fish and & chips meant two sets of clothes a day.

Never saw their children in the evenings, with older siblings being left in charge and not being able to go out themselves leading to a great deal of resentment.

Suggestion: If your £friends in the business" actually run a shop shadow them continually for a month before commiting yourself financially.

Chippy_chappy

Thank you clutterfrazzled - a useful insight.

A small difference would be that the business would form part of the house. A large safe would leave banking for twice per week.

Rumbling and chipping. How long does this take? I estimate a couple of hours at night but would consider handing over to staff. Preparing the fish, maybe another hour or two once the routine is sorted. Cleaning, another 2 hours per day. Serving - opening hours about 25 hours per week over 5 days. That's about 55 hours so far - some with a part time staff member or two.

I guess I'll ask friends how long these things take.

I don't expect an easy life but, on the plus side, there is the satisfaction of working for oneself.

Thanks again

chippy chappy