Need UR help - What do we do?

My husband and I have come across an opportunity for a B&M business purchase here in the town where we live. The business is the local gun shop. Although we each have extensive knowledge and the confidence to run the business, neither of us has purchased an existing business before.

We DO know that we need to see the financials and are relatively confident in being able to read the financial statements. We actually have an appointment scheduled for Saturday evening.

We are looking for input from those who have had this type of experience (purchasing an existing business).

What areas in particular would you focus on to ensure due diligence is done. Other than making the numbers work, what pitfalls should we watch out for? Any and all input requested - Thanks in advance! We have entered new territory and feel pretty lost.

Be sure to scrutinize the financials carefully. You will probably need to recharacterize them to some extent. You should get tax returns as well as their internal statements. Recognize that some of the expenses are for tax purposes, some (depreciation) are not real dollars.

You want to look at this as you would buying any investment. You want a good return.
Is the owner's salary included as an expense item, and is it a fair salary for managing the business? If the owner's salary is limited to the net income, you may be simply buying yourself a job. You want the net income, after paying everything and everybody, to be worth the investment and worth the risk. In other words, if you were to buy the business and hire someone else to manage it, so that it's a (relatively) passive investment, what is the return? You'll probably want NOI somewhere between 20% and 35% of the purchase price.

Most small businesses are purchased based on a multiple of the net income (this relates inversely to the above returns) between 3 and 5. 3xNOI is for higher risk, less established businesses. 5xNOI is for lower risk, proven businesses with perhaps more potential.

You'll want to look at how inventory is being valued for the sale also. Is some of it outdated and harder to sell at retail prices?

The other big thing you'll want to look at is the real estate. Is the shop owned or leased. If owned, and you're buying it, is the value fair? If it's leased, get a copy and read it carefully. Is the lease at a market rate? How many years remaining? If the lease is well below market and expires next year, you may be in for a big hit to your bottom line when the landlord raises the rates. Is it a gross, modified gross or triple-net lease? It may be best, in some cases, to enter into a new lease. However, if you can take over a below market lease with 5 years remaining, don't change anything.

If you get serious about the purchase, hire an attorney for the agreements.

I'm sure others on here will have different ways of looking at it, but this is a fairly traditional approach.

note: I have brokered a business, and sold a 1/2 interest in one to a partner.

Before you make anything final, have a professional come in to make an appraisal of the inventory. I don't know if you'll have any collectibles, but the industry you're considering (if it's the same one we discussed on another occasion) is in a huge state of flux right now. Then, on the day they are to hand you the keys, it is worth paying a professional to walk thru again and compare the list to the reality.

My folks bought a retail store years ago. After the inventory was valuated, a LOT of it was removed and taken to the seller's other stores, and replaced with junk that they'd not been able to sell from those stores. The difference was in the 10s of thousands. It was just too hard to prove, after the fact.

Just to reiterate the above, tax returns!!

Also, make sure your purchase agreement outlines all inventory in the purchase ... ITEMIZED.

Gun shops are an interesting business to be in right now. First thing you need to do is take the last six months of sales records and completely disregard them. Over the last six months most gun stores have seen a 30-50% boost in business plus even higher grosses due to shortage of supplies. The only reason I am so familar with the business is my friend opened a store 1 year ago just outside of Houston and I've been helping him with implementing some structure. If I can help you with any specific questions feel free to ask. Also you need to ask yourself why the owner is looking to sell now? Could it be he feels that the business has peaked and now is the prime time to sell?

-Mike

Be sure to use an asset purchase rather than a stock purchase as the asset purchase essentially dissolves the business and establishes a new business in your name at closing. Any liability incurred under the previous owner is his, not yours and this type of business has potential for a lot of liability.

That being said, as others have mentioned, scrutinize the inventory and watch for trends and anomalies in the financials. For example, maybe someone bought 50 AKs in March which will make March sales look good but it's a one time sale.

Thank you all for your awesome replies. I will be updating this soon.

We met and got some initial numbers to start evaluating. (A P&L Statement and last two years of taxes. 2 years is as long as he has had the business). Selling due to illness in his family - 3 fold; his brother, his wife and himself.

I will be posting some additional details soon. Not enough time right now to give out all that I want to. We also need to get some questions regarding his numbers answered. More soon; I promise.

Kerry

UPDATE: The owner is recovering from surgery so we are hold and have not been able to get our questions to him for reply. Plan to get to it mid-next week sometime.

We will be going up to the gun shop tonight. The owner should be there and we should be able to get some of our questions answered.

Michael and I have known all along that this business, should we move forward with it, is very much an "S" business. And our reasoning for getting into it would not really be for the income; we are relatively certain at this point that the business breaks even and neither of us doubt our ability to beat that.

So our next questions are mostly to ourselves in the aspect of what benefits will this business offer us and are we willing to sacrifice whatever is needed to make this a reality.

The top personal benefits (outside of the typical business owner tax breaks, etc.) is that it is a business that we can both enjoy and have a common interest in, and the cost reduction of product for ourselves.

Since starting the research for this project, we have had some very creative suggestions come up and have not ruled any options out. We have found out that there is another couple who is also looking at the prospect of purchasing the business. Ironically, we are not at all concerned with that. We expect to press on with our own research and take whatever time we need to determine if this move (buying the business) is the right one for us, where we are now and with where we want to go.

We will keep you posted.

This statement is kind of a red flag to me. Reminds me of us a few years ago.

Buying a Brick and Mortar business is absolutely 100% a life altering decision. There are so many responsibilities that go along with this type of business. Responsibilities that will be on your shoulders day and night. Meeting payroll, knowing your employees are depending upon you to put food on their table, meeting the mortgage on the building, maintenance of the building it goes on and on. The overhead involved in a biz such as this (vs. an online biz for example) is a lot higher. That makes a difference in how it plays out in real life.

It is easy to brush over this and go straight to the bottom line. If it is making money, what is the big difference if it has a lot more overhead? Well, it is a difference in stress level, ability to adapt, ability to get liquid if you need to, etc.

Are you prepared to cover payroll out of your own pocket if need be?
Are you prepared to drop everything and go spend 16 hours a day there, 7 days a week for stretches of time because of a crisis, or an employee quit on you, or sales has dropped and you can no longer afford an employee?


I know I am rambling... I guess what I am trying to say is that it is really easy to let your excitement carry you toward a purchase without taking a good, realistic, honest look at the responsibilities that will come with a brick and mortar biz and the lifestyle impact it will have on you and your family.

This is not something to take on so that you can be working on something together or get some free product for yourself. It is something to take on if it is a lifestyle choice, if you see some huge upside potential, or if you see some way to scale it for the upside potential.

ATW- Yes those are all the things that have brought us to take the time we need and not be concerned if it does or does not work out. In our case, there are no employees... we are it. The hours are completely up to us and the current owner even shuts down when he plans to be away. It is truly a "mom and pop" kind of place right now. There are other personal benefits that WOULD help an online business that we have started too. So it would not "just" be the brick and mortar business. We would likely link it to the online side of this.

I don't think you were rambling... it is this exact thing that has us contemplating it at all (at to be honest, it has all along). And you are absolutely correct in that is becomes a lifestyle choice. We have been completely involved in a business venture (hockey rink management) which we did everything. And it was our life and very much enjoyed. I DO see this opportunity as being much the same. The downside to the hockey rink was the fact that we did it as volunteers, lol.

My earlier post was just an update... we have not come to any conclusions as to which way we will proceed with this. We are ONLY in the research stage. And we greatly appreciate all the input. The "red flag" for me is knowing it is an "S" and NOT a "B" which is what we both really want. However, this opportunity might could (that is for you Dana, lol) be the vehicle that could help us obtain the knowledge base and education we need to move this product in a "B" business down the road.

Another concern, the current admin seems to have his regulatory sights on guns and regulation is one of the three evil TIONS ... Taxation, Regulation, and Litigation.

It would suck the buy the business and have some new gun restricting legislation come by and totally redefine your business operations.

This reminds me of that old joke... it is like buying an airline so you can get free pretzels

I find this thread very interesting as it documents the realities of the process. Rep++ and thanks for sharing.

MJ is absolutely right. Legislation in this area is a crap shoot right now. Also, don't forget some of the other possible overhangs that mess with your future. Pending lawsuits? Did the shop have a rep (good or bad) with the local law enforcement? Did they pawn/loan on guns and is that accounting spot on? Have gun purchases FROM customers/trade ins been well documented? Is Big Box Armament negotiating a 100,000 sq. ft. building just down the street? Are employees transferred or do you get to eval. and hire as you please? Does the local gun community have an overriding opinion (good or bad)about this shop for any reason?

Some dumb thoughts in there, but it is incredible what kind of headaches can show up in a business after the business is sold.

I'm assuming that you are referring to the gun-related website that you set up, but were unable to capitalize on since it required official licensing to trade? With all the caveats mentioned here, I think this is the one thing that might tip the decision scale the other direction. If indeed it would give you the legal ability to "trade" online, then it could greatly change the picture. I would obviously provide a much larger "storefront" than your B&M would have in your little town.

That being said, the prospect of federal regulation that MJ mentioned is the on issue that is of major concern for me here.

I know the fear of anti-gun democrats was driving a spike in gun sales early this year, and may still be. Personally, I think most of those fears are unfounded. However, if the current administration does start trying to push that kind of legislation, you would likely enjoy a HUGE INCREASE in sales! Fear and greed drive a lot of buying decisions. If you can get your store in front of a lot of buyers, and can meet demand, a gun business could become very fastlane!

But that same kind of rush, as seen immediately after the election, would be pretty short-lived, wouldn't it? I think they will probably put more regulation on the ammunition than on the guns themselves, because there are too many already out there in circulation to be able to control them.

Short lived can be okay - provided 1) you sell enough during the rush and 2) you don't end up with too much inventory that you can't sell. It would be smart to have an exit strategy in mind for this situation though. Take the profits and start thinking of the next venture.

I see this scenario as a long shot anyway. Gun laws will probably not change dramatically, and sales will have minor swings up and down over time. But it's interesting to ponder the possibilities.

I have a friend you really ought to talk to. He's liquidated a good deal of his personal collection (6 figures) recently and he works gun shows and helps out in a gun shop as a hobby.

I think the insights in this post are fabulous - some really good info folks.

My suggestion falls in line with some of it - seeing what the key inventory (bread and butter) items are and making sure that those can be ordered right now. My friend could answer those sort of questions and might be a really good person to value the store's inventory for you. Jill knows who I am talking about if you guys are chatting today. Anyway, he is also the world's foremost skeptic and I use him to shoot holes (pun intended) in some of my ideas.

We did not get our questions answered last night. The owner was not there. His wife has taken a turn for the worse and has now only been given a few weeks to live. We had submitted the questions in an email and I do not want to press for the information right now. I think he needs to deal with his wife and other issues. As I said, we are not in a hurry to get this and don't mind waiting. So, I will take this opportunity to answer a few of the concerns and comments that have been posted.

I agree there has been some GREAT info in here. I cannot thank you all enough. My husband is actively involved with the NRA and very much aware of the legislation and other political issues surrounding this topic as well. I am also aware of them but not nearly as active with it. We both receive and read information daily. We would not even be considering this without the proper amount of due diligence. And although I agree that there may be changes forthcoming because of current administration, I also have to have faith that America will thrive and continue to provide our fundamental rights according to the constitution and allow for the firearm industry to do business freely in the United States. Granted we may have to do it it differently, soon.

As far as some of the other concerns...
Taxation, Regulation, and Litigation: Do you think this will stop people from buying? They still buy cigarettes and alcohol, right? (Playing devil's advocate here). Certainly a concern to consider. Weigh the risks, I guess.

Pending lawsuits? Did the shop have a rep (good or bad) with the local law enforcement? Yes, the owner has kept good (and legal) records appropriately. The shop has a great reputation.

Did they pawn/loan on guns and is that accounting spot on? No pawn. Yes to consignment and yes excellent records of that as well.

Have gun purchases FROM customers/trade ins been well documented? Absolutely... there is not much room for NOT doing this. And there is government regulated systems in place for it.

Is Big Box Armament negotiating a 100,000 sq. ft. building just down the street? LOL, no... small town, only one other gun shop in town. Great resource but more locals prefer this shop due to ownership honesty and integrity. A winery is next door and they are expanding for tourism... I believe the plans would include us share a parking lot in the future expansion plan.

Are employees transferred or do you get to eval. and hire as you please? No employess would not be transferred. We would actually be the employees (at least at first). We would be able to hire and have 100% control.

Does the local gun community have an overriding opinion (good or bad)about this shop for any reason? Yes, good. Referrals coming from surrounding communities as well. We would expect a decrease at first until everyone realized we were an asset to the local business as much as the current owner was.

I'm assuming that you are referring to the gun-related website that you set up, but were unable to capitalize on since it required official licensing to trade? Yes the gun-related website and we don't HAVE to have the B&M shop to get the needed FFL (Federal Firearms License) but it would come with the purchase. We would still have to take the classes and get the certification. The biggie here is we would be dealing in the specifics of the industry on a daily basis and the education and knowledge gained from it would be more expeditious and potentially catapult the info on the website.