Current gun store owners - advice please

[2wheelwander]

Current or recent store owners, looking for some feedback.

Pursuing possible purchase of a LGS. Turn key. Not yet at the stage of hiring my own accountant to go over their books and numbers, so right now just going by what they've shared, it sounds good. They have good people working for them. I believe around 4 total employees with 2 there frequently, mayb full time. It seems having good help is already covered.

They've developed a good name, quality brand in the community. Store is always clean, not gimmicky, decent stock, never price gouged. It even seems to me they're a bit low on their consignment fees. But it does put diverse product on the wall.

At this point, I've no reason to distrust them or what they've shared so far regarding yearly gross income, and net profits. The deal is all inventory would be bought at wholesale, probable lease to buy on the building, though purchasing that outright is an option. Their quotes on building and the business itself purchase seem very fair. Again, all inventory at wholesale, so on my first sale I'd bring in money. They do have common calibers of ammo in stock. Excellent customer base, good foot traffic, good location.

They are retiring for health reasons and want their time to be their own now. I've dealt with them for some years as a customer now and would call them salt of the earth people.

But, I don't know what I don't know. We've discussed how I would have to operate under their FFL until mine came through. I can run a business and loved retail and sales when I did that, but running an FFL would be new ground for me.

Owner would stay on (paid) until my FFL came through, or perhaps 6 months, whichever came first teaching me the ropes and showing me how they've run the business. Frankly there is very, very little I'd change. They are pretty successful as is.

So, those who've been down this road, can you give me some insight, constructive criticism, words of warning, etc., in this possible purchase?

My wife is on board, has a good job. I am looking at a small business 7A loan. The shop is mess than 2 miles from my house. I've had 100 friends and family ask to come work for me (not gonna happen, don't hire family). I have a great job now, am 52 years old in fairly good health.

 

[Butzbach]

Deleted

 

[eflyguy]

I am not an owner, but my question is - do the staff already know and like you, and would want to stay on?

.. customers deal with staff, not owners, for the most part - unless this is a *really* small shop. Even the tiny place nearby I shoot at has 4 or 5 folks out behind the counters.

 

[Spats McGee]

....But, I don't know what I don't know.....

This right here puts you way ahead of a whole LOT of people. My dad used to say, "If I had to choose between being rich and being smart, I'd choose rich. I can hire smart." I have zero clue about how to run an LGS, but I do have some knowledge of businesses and business law. Just off the top of my head, I think you're going to need to figure out (or hire people to help you figure out):

• FFL stuff
• Business licenses
• Miscellaneous legalities (fire code, inspections, zoning, etc.)
• Insurance
• Accounting
• Incorporation

Whatever you decide, good luck!

 

[Aguila Blanca]

But, I don't know what I don't know. We've discussed how I would have to operate under their FFL until mine came through. I can run a business and loved retail and sales when I did that, but running an FFL would be new ground for me.

That statement sent shivers up my spine.

Consult an attorney NOW. I don't think that's legal.

 

[Wag]

Best advice you'll ever get is from a qualified CPA who knows the industry AND an attorney who knows the industry. Both need to understand the implications of doing business in your area.

Pay each of them $1,000 for a couple hours of their time and consider it one of the best educations you'll get. And the cheapest. You don't want to buy in and make a mistake that costs you many more thousands of dollars.

--Wag--

 

[2wheelwander]

Hired help/staff. Already in place. They have 2 younger people I see there often. Owner told me the young man I see frequently has a key to the store and is capable of opening and closing. Owner spoke highly of his help and not so much of those he let go within hours of hiring. What I witness in there as far as hired help is one of the reasons this is attractive to me. If I took over I'd give a token raise across the board and do my best to retain them.

Owner has agreed to stay on (paid) to show me how he runs the business from A-Z. Knowing I am coming in without an FFL he expressed his concern to make sure thigns are staying straight under his name. Help me continue relationships with his vendors, etc. Looking on the ATF site last night FFL liscening shows a 2 month turn around. I would own the business until my FFL was approved, he would be legally responsible until mine came in. I have an attorney friend who is on board and guiding me through this. He is who I will hire when I need official representation.

Also know who I will hire as my accountant 3rd party to go through his books. Don't know if I would retain his current accountant. Haven't met him.

Before an agreement purchase is ever made I'll be paying both for official advice.

Like you said Spats, I'm gonna have to pay people for things I don't know. Fortunately I know a few I trust completely who are more than capable and have genuine integrity.

 

[Skans]

In my opinion, buying a gun store is like buying any other business, but with the added responsibility of obtaining an FFL and complying with the BATFE's rules in this regard. You better know this forwards, backwards and sideways. But, there are many businesses which require special licenses, and an FFL is not that difficult compared to a medical practice, legal practice, even real estate brokerage. When it comes down to it, you are simply selling inventory at retail prices and range time, if there's a range.

Determining whether to buy the business for a given price is mostly about examining the financial statements, tax returns and possibly the general ledger for the past 5 years. Hopefully, the owner is proficient at using quickbooks or some other bookkeeping software and has kept excellent records. If the owner kept poor records or the books tell a dismal story, then I'd be looking at paying the liquidation value of the inventory and equipment, or more likely just walk away.

Your accountant should be able to tell you what multiple to apply if the books and records are in good shape, to determine whether the price is fair or not. Actually, if you are buying this business, you really should have some understanding and ability to do this on your own.

Is this going to be a stock sale or an asset sale? The transfer of inventory will need to be dealt with legally and financially in the contract.

You will want to verify that all sales tax and employment taxes have been paid up to date. Any problem with the owner not having paid these taxes is a no-go situation.

You'll need the lawyer to really examine the lease situation, assuming the seller isn't selling you the land and building too. The lease can bite you in the ass hard.

The rule of thumb is not to change anything in the 1st 6 months of acquiring a business. Most employees want to be assured it will be business as usual and that they will get their paychecks when they are supposed to. If the business is failing and needs a "turn-around" guy, that's a different story altogether and requires a different level of expertise.

 

[zukiphile]

Running an ongoing licensed business will involve a management agreement during the transition. The warnings above about using an attorney who has handled this kind of transaction before are true. You'll save yourself the potential of a hard education.

In my opinion, buying a gun store is like buying any other business,...

It may be quite a bit worse. It can be more like running a bar or restaurant. The counter staff who you see as employees can become your defacto partners as they divert lucrative deals to themselves or give incentives to their friends. Weirdly, they can be your smartest most motivated people.

Selling firearms in a storefront in a normal supply environment can involve very small margins on the firearm sales themselves. (The rest of the world has the internet too and can get guns from the same places for the price of a transfer.) They'll make money on range time and accessories.

 

[Skans]

It may be quite a bit worse. It can be more like running a bar or restaurant. The counter staff who you see as employees can become your defacto partners as they divert lucrative deals to themselves or give incentives to their friends. Weirdly, they can be your smartest most motivated people.

All businesses with employees will have some degree of employee problems if they are not managed correctly - that's par for the course. No attorney is going to help you with any of that.

An attorney can structure the deal and reduce it to a contract where different events need to take place leading up to closing. He can even prepare the documents for closing. If you can negotiate it, an attorney can even require up-front that some of the money to purchase the business be held in escrow to back up the warranties and reps made by the seller in the Agreement. An attorney who is knowledgeable about the BATFE, their rules and the firearms acts can help you understand the basics of what you need to know going into this business.

BUT, an attorney is not going to help you run the business. He is not going to help you evaluate the value of the business. He is not going to show you how to ship, receive and store firearms and bulk ammo. He's not going to take you by the hand and show you how to fill out 4472's, how to do background checks, how to make entries into your bound book or figure out if you should be using software to do this.

The first thing any prospective purchaser of a gun store better be able to do is work with a CPA to digest several years of numbers and then be able to get a feel for the financial health of the business. If you can't do this, then take your money you would spend on that store to Vegas and bet it all on Red.

 

[zukiphile]

All businesses with employees will have some degree of employee problems if they are not managed correctly - that's par for the course. No attorney is going to help you with any of that.

Not all businesses will rely on employees to transact business with customers through the business itself.

An attorney can structure the deal and reduce it to a contract where different events need to take place leading up to closing. He can even prepare the documents for closing.

***

BUT, an attorney is not going to help you run the business. He is not going to help you evaluate the value of the business.

In fact, an attorney can help with all those things. There's also an important middle ground left unmentioned. An attorney can help iron out problems in the business after it is purchased and protect against some management problems that may arise with staff. For some of my larger clients, having me in the room to provide guidance and comment is part of their management process.

The problem of a small business with a thin margin is that it can't support a lot of that sort of thing. So, when a small business purchaser is shopping for representation in the purchase itself, it may be smart to ask about whether the practice is purely transactional, or whether the purchaser can pick up the telephone and get guidance more generally. As a client, it's nice to have a relationship with someone in place when a problem arises.

As counsel, I'm happy to to take a half hour to lend some guidance that keeps someone out of trouble if it keeps me from having to dig one of my people out of trouble.

None of the above is to denigrate CPAs. There's a lot of overlap and they aren't just numbers people.

 

[hub1home]

I say go for it! You seem to have your ducks in a row.

 

[2wheelwander]

I appreciate all the posts. Everyone has been constructive.

To answer the building issue. I believe they own it outright. It was bought a few years ago and they completely renovated it top to bottom. The seller would prefer to a lease to own instead of my buying outright. I'm assuming primarily for tax purposes on his end.

If anyone has insight regarding the government 7A small business loans I'd love to hear it. Will have my attorney go over it before any signatures are done. I will have an answer on approval next week.

Told my wife I will walk through doors so long as God opens them. If He shuts one, I'll not loose a wink of sleep. I feel this has a pretty good shot at moving forward. I have the down payment and the ability to create a cash reserve for the first year until my own profits take over.

Less than 2 miles away ~160 acres has been purchased with the intent of putting in a giant sports complex. I believe 8 baseball/softball diamonds, several indoor basketball courts, a track, etc. Meant to host traveling leagues and semi pro athletes. Nothing else like it for a few hundred miles. Across the road hotels and retail outlets are planned. Ground appears to have been broken. Again, all <2 miles from the store.

As for changing things, I would not institute anything major for some time. The owner seems to have things dialed in. No plans to even change the name. The only down side is facebook has completely banned him business from posting or advertising. I don't know if I could sneak under the radar under my name or not.

 

[jmr40]

I don't own a gun store. But several of the local guys who do I consider close friends. Went to high school with a guy who ran one for a while before he got out of the business.

The stores that are successful have owners with deep pockets. You need to be able to order $50,000-$100,000 worth of guns to get them at prices where you can be profitable.

If you go through a distributor, they give serious discounts when buying in bulk and will often have deals such as 1 free budget rifle for each higher end rifle you buy. Some manufacturers don't go through a distributor and only sell directly to stores. But you may have to buy 50 of them at a time.

If you're buying a handful of guns at a time you'll find the guys buying in bulk can sell, and make a profit, selling the same gun for less than you're paying for it.


The other option is to concentrate on used guns. There is more profit on those anyway. One of the more successful stores locally started out as a hole-in-the-wall shop who mostly sold used guns at 1st. He built up a reputation for selling at good prices and made profits by selling a lot of guns instead of big profit margins.

Everyone that works there is family that had full time jobs elsewhere. They came in on off days to run the store and share the profits. We're talking about the owner, his wife, his kids, and their spouses.

He is now in a position to make those bulk purchases and get good prices on new stock.

 

[THEWELSHM]

Good will has a price, I was purchased as an entity once by a Fortune 500 company, the bad part was no one told me. The ignorant people had no clue how to manage our business, I beat them in FL on a non compete clause, and hired all my former employees. Game over I took all my customers with me, $25 plus million annually. Make sure the folks at the store are good with it...And don’t reinvent the wheel. Keep the SOP exactly the same and don’t MICRO manage, if you have discipline have at it, if not you will FAIL..good luck mate..

Thewelshm

 

[dogtown tom]

Aguila Blanca
Quote:

Originally Posted by 2wheelwander
But, I don't know what I don't know. We've discussed how I would have to operate under their FFL until mine came through. I can run a business and loved retail and sales when I did that, but running an FFL would be new ground for me.

That statement sent shivers up my spine.

Consult an attorney NOW. I don't think that's legal.

Perfectly legal. Original owner and licensee adds 2wheelwander as another Responsible Person to his FFL. OP would submit prints and docs to ATF.

 

[deadcoyote]

My wife does business appraisal as a third party. Her basic trope I hear all the time is the valuation of a business is supposed to be inventory cost plus the average yearly profit over the last X number of years x 3.5. Often times sellers will want like 10-15 times the annual profit, but it’s not typically a good idea.

 

[dogtown tom]

deadcoyote My wife does business appraisal as a third party. Her basic trope I hear all the time is the valuation of a business is supposed to be inventory cost plus the average yearly profit over the last X number of years x 3.5. Often times sellers will want like 10-15 times the annual profit, but it’s not typically a good idea.

.
Small business owners often overvalue their business thinking that having been successful for X years means something.

Fact is, OP could lease his own premises a block away, spend his own $$$ on inventory and hire whoever he wants and the couple trying to sell to him may get stuck with a building and inventory thats difficult to sell.

I would be leery of buying an existing stores inventory......if its on the shelf or back room it aint selling.

While there may be value in customer loyalty....that's fleeting. Do they have a customer list? Do they rely only on walk up? Do they do internet sales? GunBroker? Gunsmithing? Do they have a range?

A gun range drives traffic to your store. If a new range with gun store opened up a mile away would it negatively impact your business plan?

 

[2wheelwander]

Update, it fell through. Bank had access to their last 4 years books. Owners told me (truthfully) what they cleared the past 2 years. Democrat in the White House. '18 and '19, Republican in the White House, they were not near as profitable. They were profitable, but not booming business. Loan program takes into account the past 4 years performance of the business, while created a much higher risk. '18 and '19 years would be razor thin margins with the loan I'd applied for ($1M), despite me having 10% ready to put down.

Add to the fact my wife, who would continue to work makes not where near enough money to cover that kind of loan payment. Hell, WE don't make that kind of money. It would have been a sink or swim going in, which we knew.

I prayed about this constantly and asked not that I'd get the loan and shop, but that the right thing would be done. May not have been the answer I wanted, but I believe it was the answer I needed. The bank knew more than me and I would not have known until I paid an accountant to go over their books and started putting cash out. I'm good with that. Haven't lost a wink of sleep over it.

I appreciate all the responses and advice. I've learned a lot along the way!

 

[Cirdan]

Good lesson, and great it didn't really cost you.

I don't know anything about gun stores, but one wag on another BBS said they're really holster stores. You don't make that much from the guns. Accessories are where the money is at. They generally don't require an FFL (hint).