If you are considering adding a second store to your business, make no mistake, going from a single store to two stores is a big leap. Going from two to three to four is a comparative breeze.
If you are looking to add another store to your stable, you will be either looking at buying an existing business or opening a new store.
This article will present the pros and cons of both options, and also a list of considerations when making the decision.
No one buys an existing jeweler's shop unless they know they can build it up. This is an exciting time, you have benchmarks (previous years sales, profits, quantity sold, average sales and markup, etc). To increase sales is easy… on paper! But think about it, if the previous owner has had years knowing the customer base, the demographics, what the market wants, why has the business not already reached its potential? What makes you think you can build this business? Sure you have heard the odd story about the previous owner giving bad service, but an odd story on its own does not make an opportunity.
If you don't get it right when you buy it you will have an uphill struggle, even maybe becoming a statistical number of those who don't make it. Apply the following rules in looking at a new business and you will greatly enhance your chances of a successful purchase.
Rule Number 1
Don't let your emotional enthusiasm for going into this business rule your decision-making in buying this business. You will absolutely need enthusiasm if you are going to succeed but enthusiasm alone will not get you there.
Rule Number 2
Have a numbers man such as your accountant balance your enthusiasm. I have lost count of how many businesses I have looked at for existing clients who want to expand their stable and have advised them to flag it away. The number one reason has been a lack of understanding of the time required to spend with the new baby, resulting in less time available to spend with the existing store. I have one rule I get clients to apply - if the new store is going to take up even half your time, as of tomorrow start working only 20 hours a week. I f your existing store suffers because you are working only 20 hours a week then that's how it's going to suffer when you spend 20 hours a week in the new store. Of course, you can spend your current 45 hours a week plus another 20 hours on the new store, but I recommend discussing this with your family. It's not a lot of fun owning two stores, working 65 hours a week, and losing a spouse.
The second reason I recommend clients flag a business away is it just does not stack up financially. You do not buy potential. You only buy existing performance. That right, you do not buy potential! Don't make this mistake. Potential is like capital gain on a property. You don't buy a property paying extra for the potential capital gain.
In doing the numbers these are the considerations you should factor in:
1 - Return on investment and,
2 - Income for time worked.
Gone are the days where you add the stock up at cost, agree on a value of plant and furniture then maybe add something for goodwill.
It's a very simple equation, forget it's a jewelers shop. Think of it as an investment. If you were investing money in the bank, your investment is safe but only gives you a few percent returns (let's say 2%) and you get a minus capital gain.
Invest in the stock market with a higher risk but in return, you hope to pick stocks that get an annual dividend (for comparative purposes say 6%) plus some capital gain. The risk is higher but so is the potential return on your investment.
The property market will give you between 5% and 10% return, with minimal risk and higher capital gain.
Now, look at the jeweler's shop you are eyeing up. The risk of your investment is infinitely greater than the bank, so it follows the return should also be greater. The rule I apply is that the percentage return should be no less than 25%, so if you are looking at a business that is showing average last 3 years net profit of $100,000 then it is not worth any more than $400,000 regardless of the value of the stock and plant. If the stock and plant are valued at say $600,000 then the business is underperforming at $100,000 net profit. Do you want to pay $600,000 for a business that going to take six years to pay you back, or a business that is going to take four years to pay you back, bearing in mind that most shop leases are under 5 years?
Where does this 25% come from you may well ask, and it's a fair question.
It's based on risk, the risk that a downturn in the local economy won't impact you, the risk that you are not wiped out by flood or fire, risk of theft (customers or staff), risk of not actually doing as well as the previous owner, risk your lease won't be renewed, risk key staff don't leave you, risk interest rates on money borrowed won't rise, risk your or other key person health holds up, risk another jeweler does not open near you, and so it goes on.
Also, remember in addition to this $100,000 a year profit you need, you also need to earn a wage (I assume you don't work for nothing... if you do I will be able to find plenty of jobs for you). So, what are you worth per hour? What hourly rate would you have to pay someone to do your job? Let's say you are worth $120,000 per year, then the business has to provide you with $60,000 for your half time in addition to the return on investment of $100,000. Also, remember the $160,000 is before tax, so take off say 30% for the taxman and you end up with around $112,000.
While an existing business gives you a known quantity, it also brings issues like old stock, carved in stone image (good or bad), and staff (good and bad). It will be hard to change the store image (if you want to). Long-serving staff may resist your proposed changes, after all, they know the business better than you… right?
Having presented a reality check, which for some readers, may appear depressing, let me say - it's a great feeling to grow your business. I have 30 years of experience helping clients grow their stable, but only with stores that are worthwhile investing in. There are businesses that have a genuine reason to be sold and businesses that just don't cut it, and never will.
The other option is to open a new store. I tend to favor this option, as you can create your image from day one. All new shop fit, all new stock, all new staff that can be trained to do it your way. The downside is there no sales history to build on.
Rule Number 3
Image - do you have a planned image for the new store? This is critical. Are you going to replicate your existing store or create a brand new image to appeal to the younger generation or what are your image goals?
Rule Number 4
Location - as they say, location, location, location are the first three considerations. If the store you are looking at, whether it be an existing store or opening a new one, is in a location not as good as it was a one time (town has moved, mall has extended away from the store) you will be pushing water uphill trying to grow the business. Do NOT, I repeat, do NOT settle for a second-rate location, be it an existing business or a new store.
Rule Number 5
Name - unless the second store is in a town away from your existing store, or you intend to adopt your current image (same brands, etc.), do not name your store the same as the current store. If you go into a McDonalds and don't like their burgers you won't ever go back to any McDonalds.
This is a very important point so don't underestimate this advice.
I wish you the best of luck with this major decision. It can bring great rewards if properly planned.