B&M Buyout?

wilbr11

So, The shop owner and I were talking today because I have been thinking about opening a shop if I move to a larger area, and he told me he has been thinking of selling out so he can retire. He's been in business for 20+ years and has a very established clientele and has an average annual gross sales over $200,000+. Seriously thinking about this as I've been wanting to get into the business for a while. Just wanting to Get some feedback from everyone, especially any shop owners out there.

zoom6zoom

Just remember that gross sales don't mean bupkiss. No matter what type of business you are looking at acquiring, when you get serious you need to insist on a full review of the books by a CPA of YOUR choosing. You can have huge grosses with a net loss.

dutyje

Good points there, zoom. You've got a lot of high costs as a tobacconist. I would expect most to just struggle to break even. The first things you need to research are the markup over cost on the inventory, the cost of leasing and maintaining the current space (you may want to look at another location), the condition of the facilities, and the arrangements currently in place with suppliers (Davidoff, for example, has a minimum order of $25K).

I've seen even the large on-line merchants offer steep (60% or more) discounts on cigars, and I know there are usually some good deals at my local B&M's. Normal retail markup is 100% of cost (take your cost, double it, there's your MSRP). If that's the case with cigars, I see most B&M's being a money pit. Also, take stock of what it is you're really buying. You're buying an inventory of cigars, humidors, and equipent. What are the terms of the property lease? Can you back out or renegotiate? You can most likely get the lease a lot cheaper in the current real estate market. What's the state of the current inventory, and is it well-documented? If there is a well-established client base, can they back that up with the books to prove it? Lots and lots of stuff to think about in this. On one hand, starting your own from the ground up is easier because it's all in front of you. On the other hand, buying an established business can be a convenient way to get over those frightening initial hurdles.

Also, keep in mind that someone selling an established business is expecting to reap the rewards of their work in building it from the ground up. Your ROI is going to be built by your own sweat and your own persistence.

wilbr11

Alot of good Info and Input, I really appreciate it. I do know the current shop is in a decent location that I would keep if only for the fact of the space it provides and the DECENT location in town. Rent is insanely low. I'm not sure as far as the negotiation of the lease as it was just small talk today. Next time I go in I plan on getting a bit more detailed with him. He has "Accounts" with most of the major Suppliers, which he said I would of course take over. Alot of the specifics are still very very Gray due to the fact he and I only engaged in small talk about it today. The facilities are in decen condition and I know his daughter does a phenomenal Job of keeping documentation of inventory. I believe the 100% markup is the case. Just curious, and again I'm young in a business mindset, well I'm young period, but How do you see only a 100% markup as a money pit? This will be a slow process if I do it, probably taking 2-3 years but I am a forward thinker and Like to be able to think things thru with a lot of time to toss all the facts around. I know with everyone here's expertise i should get some good food for thought.

dutyje

I guess the 100% markup is a red flag for me in this business because I see such a slow turnover of the inventory, and a huge need to move inventory that has been taking up shelf space. When I see large merchants regularly offering more than 50% off a cigar, it seems to me that they're probably selling this stick at cost or below. Gurkhas strike me as something that probably has a variable price per retailer depending on the volume of business they do. You can find Legend perfectos for $5 or less a piece if you look hard enough or are patient enough (I learned this lesson a little late, but next time I'm all over that). Another worry in this business is the taxes. On top of the regular taxes that come with owning an established B&M business, you've also got to worry about politics and the future of taxation on the tobacco industry. This is going to raise your costs at the same time your customers are suffering from a weak economy. This will squeeze your margins even further, and the players wielding the most strength in this combat are the major retailers (not you) and the manufacturers (again, not you). Are your local politics heavy on the tobacco taxation? Is this likely to rise in the coming years? What is the position of the local establishments and how do you forecast that to change? There are a lot of potential challenges to the smaller businesses in this industry in the near future.

OK.. enough on the negativity. Cigar-smoking seems to be a rather cyclical industry. The investment in the business at this point could prove to be very lucrative if cigars become ultra-trendy in the coming years.

madurofan

OK as someone who has repeatedly researched this idea, I'll give my opinions. First buying an existing tobacconist is the best way to do it. First many manufacturers, (Davidoff, Fuente, Gurkha, to name a few) have all kinds of restrictions on who can sell their products. Many of these include x number of years in business, x annual sales volume and some even physically inspect your facilities and humidors. Davidoff almost always requires you to provide a seperate humidor for their products that meets their expectations. Some shops avoid these requirements by buying off the secondary market, well in doing that they are paying more for the product and in turn are not competitive with their retail prices. Now that being said investing in the RIGHT B&M is key, as you know.
First, LOCATION, LOCATION, LOCATION!
Second, check out the competition this is too much of a niche market to try to go head to head with someone who is bigger and better.
Third, make sure they are already turning a good profit. Not only are you going to be assuming all the debt they already have but you're going to have a hefty loan payment for the amount you purchased the business for.


You will also need to seriously research your local tax laws. Many states require the tobacconist to pay an inventory tax some are annually, some quaterly or monthly. I've seen that these inventory taxes that can be as much as 40%. Finally as duty has touched on this is a scary time for tobacco industry. The majority of cigar smokers are casual smokers and if SCHIP passes and federal cigar taxes double even triple the cost of cigars how many are going to continue to smoke? I for one am hardly a casual smoker but I know if the cost of cigars triples I'll be smoking a whole lot less. Many tobacconists are finding they have to do more and more to keep their customers, the days of just selling cigars and having a couch are gone. Events, private clubs, poker nights, etc are now required to generate new business as well as keep your current customers. All of this costs money. The saying it takes money to make money rings especially true in this industry.

On a positive note(for the tobacconists) due to a recent supreme court ruling that essentially allows for a price floor by manufacturers the days of finding unbelievably lower prices online may be on its way out. Again if your state tax is high though... Good Luck