Many consignment store owners recommend buying an existing store rather than starting your own from scratch.
There are pros and cons to doing this versus starting up from nothing.
The Pros of Buying an Existing Store
- The location is already decided, and you have a good idea how well it works for the store
- The clientele are established, both consignors and buyers
- There are existing financial records, so you know much, much more about how the store is performing than when you do a startup.
- If you do an “asset purchase” you will be getting all the store’s inventory, the building lease (or the building, if they own it) and all the equipment uses to run the store. Getting all the inventory and all the marketing materials and all the equipment in one fell swoop is a gigantic time-saver, and you will probably spend much less to buy them this way than you would if you bought the equipment a la carte at retail prices.
- If you do a “stock purchase” you will be buying everything in the store and all the financial obligations and monies owed.
The Cons of Buying an Established Store
- You must do a thorough investigation of all parts of the current store, especially their legal and financial health and obligations, or you could be walking into a nightmare. You will need to hire a lawyer to review the terms of the sale, and a CPA to review the books of the store.
- If the store has a bad reputation, even with some customers, you are buying that bad reputation. Putting up an “Under New Ownership” sign may help a little, but once people have a judgment about a store it is hard to change it.
- The store may not be profitable, and you may end up spending a lot of money with a lawyer and a CPA and doing negotiations with an unrealistic owner before you have to let go and move on
- The store may have hidden legal or financial problems that (for whatever reason) do not turn up during your due diligence research
After you’ve weighed all those issues, it may still be a very good choice to buy a store. So how much should you expect to pay for a consignment store? It varies widely — typically business valuation can be 3 years profits or 3 years sales. If the building is owned instead of leased, that will also affect the price. Historically a consignment store can go for anywhere between $20,000 to $250,000, depending on how large it is, where it is, and how much business it is doing.
If you can, try to get a clause put into your purchase agreement that lets you work in the store for two weeks, then gives you the option to re-negotiate the contract after that period. Or, just ask the owner if they will let you help out for two weeks to really get a handle on how the store is operating. Those two weeks will be time well spent.
Another critical thing to know is why the current store owner wants to get out. Maybe they want to retire, or maybe their health requires them to work less. They may also have burnout, and while almost every business owner alive has had a case of burnout at one time or another, if there’s is severe, and they say they just want to get out of the business as fast as possible, you need to ask more questions about how they got so desperate.
Finally, if a current owner ever gives you any resistance about getting financial information, or any other information about the store, put up your problem radar immediately. If they flat out refuse to supply you with something, that is a serious red flag that could be the proverbial “deal-killer”.
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