Buying a Small Business in Russia:
Disclaimer: The following has been edited and modified from its original version for the ESW Patreon. This article does not constitute a comprehensive guide to buying fine dining establishments in Russia, but may be used as a starting point for Westerners considering the purchase of such a bar and grill in the RF.
Always do your own research and be prepared to consult a professional.
See also our funding a Westerner's retirement in Russia overview article.
-- James Smith
Editor-in-Chief and Publisher, ExitStrategy.World
October 19, 2024
For anyone who intends to do business in Russia, whether you are a foreign business owner relocating, looking to start a business or just want to acquire some real income-generating assets, the subject of buying a business inevitably comes up. A good functioning business can be an investment, a source of semi-passive income, or a great opportunity to learn how the business environment in Russia works, by going through all the processes and challenges with an already established and experienced team at your side.
In this article we will be looking at the process of evaluating a small business for sale to the point of making a decision to enter a pre-sale agreement. Due diligence will involve looking at the advertised claims, getting in contact with the seller, exploring the business, getting as much information we can without committing any money down, and ultimately reaching a conclusion that would have lead us to enter an agreement or to drop the case if we were actually looking to buy.
Photo credit above: Interior of cozy restaurant in the modern style
Uploaded to iStock by TatianaNurieva Jan 2024 iStock photo ID: 1915070481
There are several different ways and approaches to searching for a business for sale in Russia. You could of course look for a franchise using platforms like Platforma-fr.ru, which is not the focus of this particular case study. We would mention here however, that the Vkusno & Tochka "tasty and that's it!" franchise that replaced McDonalds restaurants in Russia after the SMO has drawn a lot of media coverage since 2022, including from commentator Tucker Carlson enjoying one of their burgers when he came to Moscow. We may go more in depth on the subject of franchises in Russia in another article.
Another way to find a suitable business for your budget and needs is to hire an agency like AlteraInvest.ru or a private consultant like yours truly https://alexmashkin.site. Our approach allows for a more personalized and structured process of searching and making decisions. Working through an experienced agent can make the whole endeavor smooth and seamless for the buyer, especially a foreigner.
To look for an actual business for sale directly one typically goes to one of the following platforms. Big professional business for sale platform BusinessesForSale.ru have various businesses presented in a structured manner. The portal for entrepreneurs of all kinds is BeBoss.ru, which contains different sections, including business for sale. And of course the biggest Russian noticeboard type portal Avito.ru, where pretty much everything there is to buy or sell in Russia, all the items, properties or services, nearly everything is represented there. That is the one we will be using for our present case study.
We’re looking for a business in Novosibirsk just because it’s easier for me to check out locally. But since Novosibirsk is the third largest city in the country, it will be well representative of a good portion of millionniki cities in Russia. Moscow and Saint-Petersburg are more of their own thing, but most of the points we will be discussing in this article would apply to those cities and their middle-class to more affluent suburbs as well.
Seeking a business for sale
We are going into Ready Business category on Avito and choose one at random, one that looks like it might be a legitimate offer, not some kind of scam or a shady franchise. The small steakhouse on offer has caught my eye for some reason.
The description says the following. “Sale, operating business. We have been working for 4 years, the rent is low ₽70,000 for 160 m² the daily revenue is from ₽40,000 to ₽80,000, the markup is 120-150%, the net profit is around ₽500,000 to ₽600,000 a month, everything is documented. The staff is 8 people, everyone wants to stay, there is a person who is engaged and runs this business - the manager. Corporate events, weddings and birthday parties are held. We are present in all delivery services applications. The company's official turnover per year is ₽30,000,000.” Asking price is ₽5,850,000 which roughly translates into $61,500.
The description is definitely not written by an agent, it appears probably written by the owner themselves, maybe the manager. When I’m looking for a business to buy, I prefer dealing directly with the owner, it is more work to find out all the details, get all the information we will need for evaluation, but it also makes the process smoother and more genuine.
Other than that, there's not a lot to go by in the description, no additional info or attachments and the location isn’t marked on the map either. Not a great start, seems like it’s pointless to try and find the location on our own to check it out. So most info will be on the call. Checking the seller’s profile, looks like they're selling one more business. Still no location provided, probably can find it on my own but will have to use my local knowledge. Not going there, continuing with our first pick. Seller has only registered on the site last month. So far nothing stands out, but it looks clean enough.
The asking price is about 10-11 months of claimed net profits, a bit low for a small business in that fine dining category, but maybe they need to make a quick sale. Both offers placed only very recently, which is a good sign. If a business remains for sale too long there’s a good chance something is wrong with it.
Made a call, got no answer, left a message through the website. Received an answer 4 hours later, exchanged contacts, received a call 1.5 hours after that. Got some information. What interests me the most at this point: is this a genuine seller, what exactly they’re selling, how their financial claims check out, what the risks might be.
Assessing the information from initial contacts
First of all we’ve got a location of an actual place, that enables us to explore it via 2gis.ru/ - a very helpful Russian application that has maps and all businesses on them with a lot of information and options, much more useful than Google or even Yandex maps. The establishment in question looks legitimate and, frankly, good. There are 219 reviews, average rating is 4.4 out of 5, which is good for a little place like that, there are signs of some efforts to boost their rating, but nothing too egregious. The biggest takeaway here is that many of the latest reviews are negative. This will have to be a business consideration for the buyer.
We also got some ledgers from the billing system. They show 1000-1100 checks per month, average check is about ₽980, monthly revenue is consistent throughout the ledgers (5 latest months are provided) at about ₽1,000,000. Cash constitutes about 25% of revenue according to the ledgers. Data looks consistent, no discernible metadata in the files, they’re definitely generated by an automated system, also bear no obvious signs of tampering. So we accept them as legitimate for now.
The third thing we were provided is the bank account movement report for the latest month, the picture is edited by me to hide sensitive data. From there we get two main things: now we know the official business entity (could have asked of course) and we can see some costs. Also we can do a cross reference with the ledgers.
Bank account movement
The business entity is an Individual Entrepreneur (IE) - the type of person specific entity that can be registered for the purposes of doing business in Russia, very typical for a large array of small businesses. We’re checking the entity via the system, that contains all the legal information, tax office statements, court cases and other important documents tied to the entity, example of such system is https://zachestnyibiznes.ru/. There’s nothing suspicious or unusual, no court cases, all taxes are paid as due, the person with the entity attached is not involved in any other activity.
Checking the report. What we can see are withdrawals of money and inflation of turnout via extensive use of overdraft. But the seller didn’t claim that turnout, so it’s all good, we’re not overtly concerned for their actions here, because we don’t buy the entity since it’s IE, we will only be buying their assets.
Money withdrawals: ₽170,000 cash, ₽360,000 to the private account and ₽401,000 a very peculiar payment to some random company. Everything else looks legitimate: payments from clients, acquisitions, some bills etc. No sign of wages, which means the personnel get their money in some other way. Which is not a deal breaker, we don’t really care, but it will affect our financial planning, we will have to include taxes and social security to the costs alongside wages.
With that, we’re planning a meeting. Sometimes it can be resolved by phone, sometimes the sellers can insist on an in-person meeting, which is fine, it’s not far from where I am in this particular case.
Main objectives for the meeting:
- Ascertain which assets exactly are they selling;
- Acquire more information about the costs to perform at least primitive financial calculations. Return on Investment (ROI) is what we’re looking to evaluate.
Intermediate conclusion. The business is viable, the sale and the seller are legitimate. Claimed financial efficiency is questionable, it does not seem like a plug-in-and-play business, it will require work from new owner or a good manager and may also require additional investment.
Checking out the place
On the phone the owner has clarified the situation a bit. The business we’re talking about has a longtime manager who runs it and it doesn’t really require a lot from the owner, although she does check in on a weekly basis. All financials go online, the system is expensive but allows the owner to see everything that’s going on. The solution used is iiko.ru/.
The owner makes an impression of a competent person, who cares for that business and her staff. She lives in another country for a few years now, needs money for another project closer to the new home, so wants to sell fast. Usual story, we pretend to believe it. Whether it’s true or not has no real bearing on our evaluation process, as long as the basics of the business are solid and we can see how we will be making money, it’s all good.
The owner has a condition: the business has to run as is with the same team for at least half a year with the new owner. After that of course any changes can be made. In this particular case this condition is impossible to legally enshrine in the contract, not even talking about realistically enforcing. But in practice these handshake deal things are often honored. It is a reasonable mode of conduct upon acquiring a working business with the current staff and management anyway.
All in all, good impression, but still looking for solid data for ROI.
Trying to set up the meeting after all, now the manager is not in a hurry to respond. That is actually unusual behavior, sellers are rather responsive most of the time. These guys seem kinda strange, they either have a lot of offers or are reluctant to go on with the sale for some reason. It’s a small consideration for us though, just a little something to note, we’re still getting on with it.
In reality, I most likely would have dropped this one already, unless my client really liked this particular restaurant business. At this point I’d have definitely already given a brief summary and all the links to the client to check out.
After a meeting with the manager at the place so far it has been about 30 hours after me initiating the contact, about 1.5 hours of actual work, including 30 minutes meeting.
I showed up earlier, checked out the premises, ordered a coffee and specialty dish, watched the manager show up and interact with personnel for a bit. The establishment is situated in a stand-alone small building, slightly out of the way, but at the big junction with two big malls on it. About 20,000 people live in this area, which is the middle to upper middle income part of the city. There are no dining establishments of similar class and quality anywhere in a 1 to 1.5 kilometer radius. The place is clean, cozy, thoughtfully decorated, there are things to improve, but there always are. The waiters work very well, the coffee is alright, and the food is good. Service was fast, efficient and attentive, leaving a very good impression.
The manager is not entirely a manager--he’s a somewhat of a steward, carrying out orders, entrusted with cash, checking that everyone shows up, making sure the service is up to standard, but not doing much else. He also organizes events. But he isn’t involved much on the financial side, doesn’t know how the menu is composed, how prices are set, or how the kitchen is run. He’s buying all the groceries and cooking supplies, otherwise isn’t involved in business planning.
The place is about 150 m2 module building, main area about 100 m² , 36 seats, 10 tables. Three taps for beer, a limited cocktail menu and a gas grill. The menu is very diverse: plov (a Central Asian rice dish very popular in Russia), steak, tom yum - all sorts of cuisines. But the name is steakhouse and the specialty is grilled meats. Nice concept - ₽299 for any item on the menu. Business lunch from ₽249 to ₽349, on the lower side of average for the area considering meal quality.
The restaurant menu
Typically there are 2 waiters, 2 cooks and 1 aide/busboy (a dishwasher, janitor) woring simultaneously - 13 hour shifts. The main area is quite clean, but behind the counter not so much. Bottles are dusty, the kitchen is dirty and poorly run, there's no separation of the processes and no order or storage discipline. Cooks are doing their best, keeping their hands and the food clean, apparently they’re also good at what they’re doing, as the food was very good. But they’re not so well trained in running an efficient kitchen.
The place is done up nicely, well decorated, with good quality furniture. All vents, heating, fire alarm and electrical are made to spec. The kitchen is adequately equipped. All the equipment, furniture and decorations cost probably around ₽15-20 million (my eyeball estimate), could still be sold for probably half that. The place has been in operation for about 3.5 years.
The rent is ₽70,000, extremely low for the area, should be at least 1.5 times that or even more. Wages are around ₽400,000 a month (in hands) without manager’s pay, utilities add about ₽30,000 a month.
The story of this place starts with the owner’s friend, a chef who worked in the UAE that moved to Novosibirsk a few years ago. He owns and runs another restaurant with the same name elsewhere in the city. The menu and the technological cards are his doing. The landlord is also an owner’s friend and has built the place to the specifications. The owner also owns several shawarma joints in the city. From the manager we also learn that alcohol is sold without liquor license, but no inspection has bothered them so far.
Their price includes everything: equipment, furniture, decorations, all electronic systems, technological documentation and recipes, contracts with the suppliers. Also the landlord agrees to register a 5 year prolong-able contract with the new owner if they shoulder his taxes (which amounts to about ₽15,000 addition to the current rent).
Possible questions and concerns
As we’re waiting for the financial info from the manager we will address possible questions and concerns that could have arisen so far.
This business runs on owner’s connections.
Yes and no, all the basics are on sale, even if the whole team leaves, it can be re-branded and keep working. The biggest risk is a place, but the landlord agrees to register the contract for 5 years, assuming everything is in order, that’s acceptable.
The kitchen is a big problem, will take a lot of effort to get right.
Only if the new owner wants to get involved, but even then it’s not a deal-breaker, just an issue to work on.
Lack of alcohol license is a problem.
Not really, it’s not hard to obtain, and even if you don’t, upon the inspection (which might not ever come) just pay the municipal fine and then get the license.
The menu requires work.
Again, only if the new owner wants to get involved. The place does work for almost four years, people are coming here for that menu. There’s definitely work that can be done on that, but it’s not a huge issue.
If someone gets food poisoning it will be a huge problem.
Highly unlikely. Such cases typically can be resolved just by apologizing profusely and giving free stuff. In a worst case scenario, we’ll get inspected and fined and also pay damages. That won't be a lot of money and will not put us out of business. In any case, it is a standard risk of running such a place, even if everything is pristine, someone might still get sick.
A bit about communication. The manager didn’t send the info he promised when he promised it, in fact he ignored my inquiry sent to him via SMS completely. The next day he did send the info, not exactly what discussed but some of it at least. When I asked him about the previous day, he proceeded to whine about his problems and how the owner has burdened him with all potential buyers and how he has too many things to do. He completely avoided the topic of his own pay and was extremely evasive on the topic of cash. The owner was much more forthcoming and honest, although too had a tendency to ignore my messages for a day or so, and also she didn’t send all the info promised on time.
Financial estimates and calculating return on investment (ROI)
Financial info we received from the manager:
Costs of ingredients 25%
From the turnout ₽300,000 approximately ₽750,000 (I don’t understand this line)
For beer markup 150% to 200%, sold separately for cash
Wages by the shift:
cooks 2 people for ₽2,000 each
Waiters 2 people for ₽1,820 each
Dishwasher/janitor 1 person for ₽1,500
Monthly rent ₽70,000
Electricity ₽25,000
Water ₽500
Net profit 800k-1.2 mln (meaning 800,000 to ₽1,200,000, I guess).
Not exactly a structured report, which fact has a meaning in of itself. Meanwhile we forward the same question about how they calculate the profit to the owner.
Financial info received from the owner:
2 cooks for ₽3000 = ₽180,000
Waiters ₽1,820 2 people = ₽109,200
Dishwasher ₽60,000
Sum = ₽349,200 for wages
Rent ₽70k and electricity ₽25,000 = ₽95,000
Fixed costs ₽444,000
Cashless payments for August ₽2,360,140
Minus 25% ingredients ₽590,035
Total costs ₽1,034,035
EBITDA ₽1,326,105
Cash is around ₽1,000,000 a month, variations of ₽300 to ₽400,000.
The biggest discrepancy between the billing system and a bank account data on revenue comes from the alcohol, they charge for it separately. So it only shows up in the bank account data via different terminal but doesn’t show up in the billing system. The cash mostly comes from beer and events, at this point we have no independent way of confirming that.
About the manager. He gets the additional money from the events he organizes, those are fully his. He also gets 15% from the profits. August is not a best month, the better dining season starts in September, when Russians are back from vacations. New Year is a special season, the manager gets 50% from all the corporate events, last year there was ₽3,500,000 in net profit.
And here we have it, that is enough information for getting an initial assessment. We can’t account for cash, so we’re not going to try. Also keeping in mind that even if they are exaggerating a bit about events, those are a lucrative thing and will definitely add to profits.
For the sake of this analysis however, we will disregard those too. We extrapolate a slow month of august to the whole year. We make ingredients 33% instead of 25%, that would be closer to the average of the industry. Put taxes on all the wages - multiplication factor 1.5 (strictly speaking it is more like 1.48, but we’re doing rough calculation here). Make rent ₽85,000, as per the mutual understanding with the landlord. Add the alcohol license - ₽65,000 a year. And shear off the revenue tax 6% (they actually pay by a patent system, about ₽80,000 a year, but there are some conditions for it, so we just disregard it for now).
ROI estimation for decision making
Estimated ROI is 135%, which is a very good indicator for any small business, especially in the catering sphere. For the worst case scenario, we slashed revenue in half, making it more or less match the data from the billing system, the lowest documented confirmed revenue figure of the two that we have. ROI becomes 9%, which is still positive and ahead of inflation.
A few considerations. There are inconsistencies in the data, especially between the bank account movement and the billing system. During due diligence process we would have definitely remedied that. As it stands, we couldn’t enter a pre-deal agreement for obvious reasons, so we just have to take all information at the face value. For the ROI calculation we did disregard a lot of sources of revenue and some ways to cut costs. This way we can feel pretty good about our conclusions even though we don’t have complete information.
Conclusions
The owner is a genuine seller, throughout our interactions I never got any sense of falseness from her. She was putting out facts as they were in her mind, without trying to evade or obfuscate. Of course, during due diligence I would have double checked all their claims on site. For the sake of this exercise we assume that everything checks out.
We actually accidentally ran into a good business for sale on offer. If there are no hidden deal-breakers that would have been discovered upon due diligence (for example, the land under the building might not be properly registered), I would recommend a buy to a good portion of my clients.
There are two ways we have here to safeguard this deal for the investor. First is the mere fact that if worst came to worse all the equipment and furniture can be sold for a sum of money close to our investment, possibly even with profit. The second way is to put down a money-back guarantee condition on profits, seeing as the owner puts down the condition of leaving the team as it is. So we can get her to warrant our profits for the period of time we don’t meddle with the operations, calculating that period to match our money back condition. The exact mechanism for that provision can be enacted in a few different ways according to Russian law, including employing a bank as an intermediary and a guarantor.
But even beyond that, this particular business can also be managed in a two different ways:
- leave the manager as he is, put down the condition for him to send a certain amount of money monthly and just do quarterly audits;
- dismiss the manager and get deeply involved personally or via a representative, which is preferable for many types of investors.
There are risks and benefits to both ways. The business is already somewhat established and has growth potential. So reinvestment is also possible and could be advisable. In any case we would have recommended developing at least a simple form of the strategic business plan upon buying.
If you enjoyed this case study, let me know in the comments or reach out at the email address below.
Aleksey (Alex) Mashkin
PhD, MBA, fmr. CEO of industrial and medical companies, investment and business development consultant. Located in the third biggest city in Russia, industrial and scientific center of Western Siberia — Novosibirsk
E-mail: alex021202@bk.ru
https://alexmashkin.site
Published October 19, 2024 [Updated with tables October 20, 2024]
Novosibirsk, Russia