New to business, buying a business

Discussion in 'Growing and Managing a Business' started by PuffNStuffPipes, Jul 28, 2013.

  1. PuffNStuffPipes

    PuffNStuffPipes
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    Hello, I would appreciate some input on my situation. I recently came into what seems to be a very exciting business opportunity. I found a man who was selling his smoke shop (the kind with glass pipes etc) in the area, he has around $8-10k in wholesale value in inventory, plus displays etc, basics for running the shop. He wanted 6k for the business, I talked him down to 5k. You are probably suspicious, what is wrong with the business that he is letting it go like this? He opened it in April of this year (3 months ago) while running a club he owns, and then soon after decided to open up a second club a little further away. According to him, and he seems open and up-front, he just has never had time for the smoke shop or to even get it off the ground. From what I gather he had a girlfriend at the time who was very involved with the shop but they have since broken up and she is no longer in the picture. He didn't really want to start out with hourly employees due to expenses so it's been just he and his son working the shop and it sounds like they were rarely in there and definitely did not hold regular hours. He claims he just does not have time for it as a project and was just looking to get out of it, he was considering taking his inventory and trying to sell it individually but would rather not have to worry about it and would rather sell it at a loss.

    I have made a $1,000 deposit towards it and will be able to pay the rest next month, as I will be receiving a $15k inheritance then. I have myself, my boyfriend, and a couple of close friends who are going to be working the shop together, we will not start out with paid employees. We have ideas and an angle that will not cost too much to implement, and will hopefully give us an advantage over other shops in the area and the local folk seem excited about the shop and our ideas and we are excited to get started. I network with local artists and local glassblowers and also have found a very good, high-quality, good-value wholesale supplier. Rent is $900/month and the only utility expenses are electricity for $200/month and phone service for $40/month. The location is excellent, a corner unit in a small plaza off a major road with signage facing the road and shares a plaza with a tattoo shop and club, other "vice" industries that we hope will help draw business. We also plan on opening an online store which will cost us $15/month to keep up. While the shop does carry other items, I know that glass pipes of various types are typically marked up 200-250%, and that smoke shops can be a lucrative business. My goal is to be able to sustain myself and my boyfriend and the business expenses, as soon as possible. I have done some math and between the brick-and-mortar and the online shop we would need to make about $100/day profit in order to do this, about half that much to keep the business self-sustaining without covering my own rent etc. Aside from the small accessories, our main sales would come from items that range from about $15 up to around $400 or so. I plan on initially spending up to about $3,000 on new inventory, furniture etc, which means I will have at least $8k of my inheritance remaining to hopefully last until the business is able to support itself and my personal rent and living expenses. There are other options and we realize that we will probably both take part-time jobs, and if we both do this and worst-case scenario get part time jobs at minimum wage, we will only need to make about $50/day profit at the shop and online store in order to support ourselves and the shop.

    Basically, I am wondering if you guys, as experienced small business owners, think this is possible. It seems doable to me, especially if my boyfriend and I are both working part-time jobs as well. I am wondering how long it will take this business to be self-sustaining, and how long until it sustains itself and us. I have heard the standard rule of thumb for a business to become profitable is 5 years, but to me it doesn't seem like it would take nearly as long for us to meet our minimum daily sales. Also, does obtaining this business sound like a good opportunity, or is it a bad idea?

    Thank you in advance for your input.
     
  2. Gadsubone

    Gadsubone
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    The good news is that developing a business plan is not as hard as it seems. In order to develop a solid business plan, you need to have a thorough understanding of the business you're entering. Next, you need to determine how you'll use the plan and who your target audience is.
     
  3. bethw

    bethw
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    Buying an existing business means less risk than starting a new business from scratch.There are many favorable aspects to buying an existing business such as reduction in start-up costs. You may be able to jump start your cash flow immediately because of existing inventory and receivables.
     
  4. Fergal

    Fergal
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    Welcome to Business Advice Forum PuffNStuffPipes. It sounds like you have a very interesting business opportunity and I hope it goes very well for you.

    Do you and your boyfriend have any business experience at all? It's not necessary but it would be helpful.

    Is the business based in the US?

    Do you know if there are any legislation changes coming in the future, that could significantly affect your business? There was a legal crack down on related types of businesses here in Ireland (called "head shops" here) about three years ago. Most of those head shops closed after the legal change. Your business is probably of a different type, however you should check that there are no major legal changes coming in the pipeline that could potentially force you to close.
     
  5. alicemenezes

    alicemenezes
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    Make sure the new business is not in debts or legal backlogs.
     
  6. Business Attorney

    Business Attorney
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    PuffNStuffPipes: You have described your situation and then you asked if it is possible. Of course it's possible, but lots of things can go wrong in any business. The biggest questions for most businesses are: first, is there really a sufficient market for the product or services the business of selling and, second, can you reach that targeted market.

    You seem to believe that in your area there is a market for the products. None of us are in a position to second-guess you on that conclusion. If you are right, buying the business can be a good idea. If you are wrong, it is definitely a bad idea.

    Even if there is a market, you need a very solid plan to bring in customers. Although having a tattoo shop and club in the same plaza and a large sign on a busy corner may certainly help, you need to know how to reach your specific target market in a cost-effective way. Hoping that people will see your store and come in is not a very solid plan. Mass marketing, such as newspapers, radio and direct mail, will probably not be cost-effective. Blanketing a large audience to reach a very small subgroup of that audience rarely makes sense.

    You also say that you have heard that the standard rule of thumb for a business to become profitable is five years. I've never seen a small business that was able to sustain five straight years of losses before turning a profit. Some growth companies can justify several years of losses because when the company eventually reaches profitability it expects it will recoup those losses and much more because of its domination of its market. That is never true of a retail store. If someone sees that you are highly profitable, they can easily open a store and siphon off some of your customers. The barriers to entry are simply too low to justify absorbing years of losses.

    If you don't think that you can break even within the first six months and reach profitability at some point during the second six months, I suggest that you think about finding a different business.
     
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  7. jimmyP

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  8. PuffNStuffPipes

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    Yes we are in the US. We do not have experience in business however I have a lot of experience in sales and retail, and we have a lot of local connections in the culture/business. We are familiar with the laws. Those sort of laws are done by individual states usually. There was recently an attempt in this state (Florida) to pass a law illegalizing sales of everything but the more traditional tobacco pipes but it did not pass... well it was modified before it passed so it now basically just reiterates that you cannot sell anything for the purpose of drug use, which is why you specify that everything you sell is for tobacco use only. It could be a bad omen to get into this sort of business however there are also now people in this state pushing in the other direction of drug laws (legalization etc). So it's hard to call the future of the business, but for now we are safe. I am however having trouble with some wholesalers shipping to our state because they are not informed of the modification of the law.

    There is definitely a market for our business in this city... a very substantial market. However because of this, there is a bit of competition, but we have a sort of unique approach to how to handle this. The more reputable shops around carry glass from local glassblowers, however they usually carry the same artists and therefor a lot of similar stuff. We have sort of exclusive connections to some very skilled glassblowers who usually don't supply to many businesses locally, that are attracted to some features of our shop that I will mention in a moment. So in this way we will be able to carry pieces by local artists that are different from what is typically available in local shops. Also, all of the smoke shops around here are very in the door, out the door type businesses. We plan on publicizing through our customers by being a hang-out spot, we have a bit of extra space and would like to get some cozy furniture out with videogames, a gourmet coffee vending machine and snacks, and hookah available. We are hopeful this will encourage customers to bring friends etc, I have been told this sort of environment in a smoke shop is fairly common in the west coast, and our ideas with this seem popular with our local connections. We also have very strong ties to the local art community (which is a very big part of this city - I am actually a local artist and occasionally have my work in galleries around town) and local bars and we plan on utilizing these connections do draw business, with the local art community we plan on selling some of the artwork and holding art events, and with the local bars we are planning to arrange some cross-promotion. We also have connections to the local music scene that we may be able to arrange events with. We are definitely not going to plan on relying solely on walk-ins although the good location etc will always be a good thing.

    I mentioned the five year thing because it is what a couple of people who honestly are probably not very familiar with business have said to me and that sort of scared me. I don't see how an individual could sustain a business for such a long amount of time, but it did make me nervous. We have enough money to sustain ourselves and the business for a little while, but it will need to be profitable relatively soon. I believe the 6 month / 6 month plan you mentioned is doable and is what we were initially thinking.
     
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  9. scottbaird

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    Before buying any new business you should have the proper knowledge about the business. Setting up new business needs lot of research work like future, targe market, competitors and many other things.
     
  10. AnushaJain

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    Buying a business is a good idea because you need not to establish it.But you have to see the position of the business in the market that it is in profit or loss..Apart from that you need to know its previous deals and the professional background in the market..What is its name and fame in the market..
    And then you need to know the demands of the products which you will be going to sale..and you should have a good execution plan for further expansion of your business...
     

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