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Buying a jewelry store


#1

Hello everyone,

I have an opportunity to buy a jewelry store, and I am in need of
advice. What do I need to be looking at, Re: the store’s financials,
lease, etc? I am welcoming of any and all input, as I’m not wanting
to get in over my head. (It’s a VERY nice jewelry store - the kind
of place that makes me feel fat and like I have dirt on my nose -
how do I get over this feeling, btw?)

I’m not wanting to limit myself income and opportunity wise, but I
don’t want to do something stupid, either. I am eager and willing to
learn, and ambitious enough to want to claw my way to the top.

What do I do next?

I’ve thought of following a “big box” (a personal shopper) for a few
days or weeks to see how they interact with wealthy customers. But
is there really that big a difference between talking to the middle
class folks I’m used to and the very wealthy?

Do any orchidians own high-end jewelry stores? Did they even worry
about how to interact with wealthy customers? Please, I’m all ears -
especially when it comes to business advice.

Thank you,
Susannah Page-Garcia


#2

Hi Susannah

I can give some advice, have helped others.

If the store has inventory: Everything in the store gets discounted
or depreciated. Showcases are old, as is computers, desks, safes,
etc. EVEN INVENTORY is old and discounted.

TYPICAL Jewelry store will get, after all discounted stuff COST OF
INVENTORY when they sell.

Read that line again.

Unless the store is a CASH COW, the owner will get cost of inventory
as the selling price.

You would want to see financials, but even better (financials are
easily fixed) if they have a point of sale program that will show
better numbers.

If not…

I’d want to see the tax return for the business and the owner (sole
proprietorships are one and the same)

Also the P&L and balance sheet and accounts payable listing.

Let me know if I can help further.

Your biggest challenges are:

  1. Don’t over pay and get hyped into it.
  2. Is the place nice now? Will you have to borrow more money?
  3. Why are they selling?
  4. How’s the location?
  5. Do they keep a customer list? Is it yours once sold and they don’t
    try to sell to the list?
  6. Financing?

David Geller

David Geller
JewelerProfit
510 Sutters Point
Sandy Springs, GA. 30328
(404) 255-9565
www.JewelerProfit.com


#3

Hi Susannah

Congratulations! Please, though, even those educated in accounting
and finance would enlist the services of a good CPA and a good
attorney. You will need to have the proper business organization
paperwork filed and the lease analyzed by an attorney knowledgeable
in these areas and a CPA will be able to analyze financial statements
effectively. The investment will be well worth it.

Best of Luck
Kim


#4

Susannah,

If you aren’t even sure what you should be looking at the store’s
financials, However I will tell you this much: Whatever they are
asking is too much. Consistently, across the board, small business
owners overvalue their own businesses. What usually happens is
something like this: The owner says to him/herself, well I’m making
$100k per year doing this and we manage to grow a little bit each
year so I should probably get 5 times (or whatever number they
choose) my income. So then they ask you for $5-600,000. The only
problem with this thinking is that when you, as the buyer, goes in
and pays that much money suddenly you have a huge debt to repay
(even if you don’t have to borrow the money you still have to be able
to get the initial investment back out in a reasonable period of
time, plus you are losing whatever you might have been able to make
on the money if it were just invested in stocks and bonds). So you
are now attempting to pay back $100,000/year in debt plus interest.
The interest also decreases the profitability of the business. So
where do you get any income from?? You are suddenly spending the
$100k/year the former owner made just servicing the debt.

Given how you started your posting, I wouldn’t worry about dealing
with the customers just yet. I would worry about whether the store
is profitable enough given the price they are asking and whether you
know enough, or can get enough help with, just running the store
from a financial perspective.

Daniel R. Spirer, G.G.
Daniel R. Spirer Jewelers, LLC
1780 Massachusetts Ave.
Cambridge, MA 02140
www.spirerjewelers.com


#5

Susannah,

Selling to wealthy people is easier than the middleground…all you
have to do is make them happy and they give you lots of money. Making
them happy is the trick. An entire subject unto itself. Sell them on
quality with a reference to value.

Regarding what to look at when buying a store…that’s an entire
subject also. First step is to get an accountant familiar with retail
stores. He can analyze the P&L statements. Do not rely on just their
tax returns, they are mostly fluff in some cases. You need to look at
the store’s trend over the last few years. Going up, down, stagnant?
Why are they selling? What’s the future look like? How is the local
market doing? Employment levels good? Home values?

The most important aspect is the lease. You don’t want to buy a
store with a short lease. I learned the hard way. Your lease
determines a great deal of what you can/cannot do with the store.
Your accountant can figure the relative value of the lease in terms
of what other spaces might be available. and how a short lease would
impact the price you SHOULD offer… You need to know you have a home
for a certain period of time and its going to cost $X. Look at the
cost of your lease both monthly and for the term of the lease. A $5K
a month cost doesn’t sound nearly as daunting as $300k for a 5 year
lease. But that’s a lot of jewelry you have to sell just to BE THERE.
If one uses the rule of thumb that rent should be in the vicinity of
7% of sales…Taps furiously on calculator…that’s four and half
million bucks you have to produce in five years to cover that
postulated rent

. Nearly all important business factors work from the lease. Most of
your other overhead is related in some fashion to your lease/space.
Big space? you need to fill it with jewelry. Big inventory? you need
to insure it. and you need staff and marketing to sell it. and on and
on it goes. Big overhead can cause you more trouble than being
overextended with suppliers. Suppliers will almost always work with
you, Landlords seldom do. Does the store come with inventory? It will
have to be discounted from cost. If its fresh and moving, a lower
discount will apply than if its old and stale. You might be tempted
to liquidate it and buy new but you would be losing money right off
the bat. You would be paying $100 for every 20 or 30 you got back. If
you have enough contacts to get all new inventory without breaking
your back, do so. Fresh, fashionable jewelry sells much faster than
old dogs, regardless of the discount. Look very carefully at how your
deal is structured. Is it lump sum payment or will the owner take
paper? If you can get him to take paper(hold the financing note) you
don’t need a banker. bankers have no entrepreneurial vision. and they
like foreclose when things get tight. In this business COUNT on
things getting tight sooner or later. I bought my first jewelry
store a week before Black Monday 1987. It was an inside purchase with
owner financing. Had the bank held my note I would have been in big
trouble.

And get a lawyer versed in business acquisition. You have to cover
yourself for all eventualities. You know, Murphy’s Law.

Sorry, I didn’t start out here to write a book. That’s for my
retirement.

Best of luck, feel free to write me.


#6

Susannah, The financials are everything. You need to see what you
are buying and the only place that is available is in
the financials. The goodwill the business has built up may or may
not be worth anything but you may be paying for that above and
beyond the actual assets of the business. The lease situation the
business has will also be indicated in the financials in the form of
lease payments or equity if the business owns the building.
Marketing on your part will be the life blood of the business but
deciding whether or not you can afford the marketing will be largely
determined by the financial health of the business. Restarting a
business against previous owner’s momentum will be part of the
marketing. Their business practices will be a big influence on the
immediate future of that business and that will also be recorded in
the financials.

Sam Patania, Tucson


#7

There is much good advise in reply to this thread about how to go
about it. I will address your other thoughts, though, about relating
to customers. Your business is going to be like your family - it is
an expression of yourself. Someone described it as “The Ultimate Ego
Trip”. In the long run, you are going to have a clientele that you
are comfortable with, and who are comfortable with you. It’s not that
you can’t learn the “high-end” jewelry business, and deal with more
well-healed customers, it’s that you will establish a comfort zone,
because you’re human. I would applaud your enterprising plan -
automatically, I would say “Do It!”, if the terms are good. But. Do
you feel comfortable in the store, yourself? Or do you feel you could
grow into it, and make it grow into you, without a complete
re-design? My meaning being, if you’re a coke and potato chips
person, can you thrive in a champagne world? And do you want to? Do
the shoes you are trying on fit like a glove, or do they pinch your
toes and make you walk like a duck?

http://www.donivanandmaggiora.com


#8

I agree. Trying to repay a huge financial loan can be huge burden on
your new business. You should be looking at cash flow, however not
profit. You will need the cash flow to repay or at the very least
keep the creditors/landlord at bay 'till you get on your feet. What I
would do is look at the monthly overhead (rent, payroll, utilities,
insurance, etc) and add about 30% then double that number. That will
be your minimum cash flow. Lets say your overhead is $10,000 per
month based on my really rough formula, you’d have to sell at least
$26,000 per month. Not a huge number, just make sure you can do it.
Also-- if this store is/was a partnership look at what the other
partner is doing. I bought my business from a partner who split from
his other partner. The seller retired. The other partner opened up 5
or 6 miles away, had a copy (I feel stolen) of the mailing list,
marketed the heck out of these people-- leading them to believe my
store is closed, threatened a lot of suppliers against selling me
(most listened and obeyed), took over advertising positions that my
store had held for many, many years, (again making customers think my
store is closed)etc. Oh, I forgot, one more thing-- he put a bill
board up right by my store announcing where he was. After that, he
went to church on Sunday and all was forgiven.

I would suggest working at the store and making friends with the
employees. You will gain a lot of insight into the hows and whys
before you make the big jump.

Oh one more thing- just because the seller is holding a note does
not mean that he won’t do or prevent from happening any of these
things that I mentioned. Regardless of what happens you still have to
pay that note. You probably won’t have the time and energy in the
first few years of your business to fight uphill battles-- esp. since
the note is a contract.

Having said all of this-- back in '98 when I bought my store I went
in poretty much debt free (personally) except for a $1000 mortgage
payment. I even sold my '93 Corvette so I wouldn’t have a payment.
The first day we opened, we had a box of jewelry on “inspection” from
Shah Diamonds in New York (20 pieces maybe?). We sold $1000 that day.
I knew at that point that I shouldn’t have sold my Vette because we
hit the ground running. I now have two Vettes. It will be the most
rewarding thing you ever do (except children of course). Good luck.
Let me know if you need any help.

Stanley Bright
A&M Jewelers
Baltimore, MD

Quick Note to Mr Geller- nobody is going to give away a healthy
jewelry store for the cost of the inventory. They are usually valued
as a percentage of gross sales plus inventory.


#9

Talk to your accountant. This is a minefield. There are books
available on buying a business and what to look for but it can be
remarkably tricky. Sellers often want to conceal important details
for no better reason that that it brings them more of your money.

Is the store run by a team of employees or is it being run by the
previous owner, soon to be you?

Neil


#10

This is an interesting topic to me, as on several occassions I’ve
considered selling my profitable jewelry business. Unfortunately for
me, however, though I have a great location in a great mall, my short
lease (3 years, the longest lease mall management will give to a
kiosk) makes selling the business for a worthwhile amount difficult.

As a very general rule, I thought that most small businesses sold
for 1.5 to 3 times NET profits (while also taking into account lease
terms, present trends & future sales projections, existing inventory,
accounts payable, likely demographic changes, location, etc.).

Taking a look at the business’s P & L statements, accounting & POS
software is good advice, but just remember that ALL of these can be
artificially manipulated to reflect whatever figures the seller wants
them to reflect. In most instances the tax return will be the most
accurate picture of the business.

Someone mentioned tax returns and how they are mostly fluff; what is
meant by this? Are you suggesting that people often over-inflate
their profits on their tax returns?! What I think a buyer might hear
is a that seller tells them “Look, between you and me, I know that I
only listed gross sales as $400,000 on last year’s tax return, but we
do a lot of cash sales, and last year’s actual sales were actually a
lot closer to $500,000”. IMHO that’s too damn bad for the seller. You
as the buyer should value the business based upon what the tax return
states, not what the seller says. But in terms of the tax return
being mostly fluff, I doubt that many people are going to inflate
their sales & profitability figures (and thus their tax liability) in
one year in the hope of being able to sell their business for more
the next year. But maybe I’m wrong.

Several people wrote (and I’ve often heard elsewhere so I imagine it
is true) that most jewelry businesses will sell for an amount based
upon the discounted value of their existing inventory. So what
happens in the following example?

Say you’re comparing two stores, both stores had gross sales of
$600,000 and after tax net profits of $150,000 (for the sake of
comparison let’s assume everything else about the two stores is
equal) except the following: Store A’s end of year inventory cost is
valued at $300,000 Store B’s end of year inventory cost is valued at
$100,000.

Regardless of what the realistic selling prices of either store is
determined to be, is store A is worth three times what store B is
worth?

How does one take into consideration and balance net profits versus
existing inventory? Which is more important and how does one affect
the other?

Doug


#11
How does one take into consideration and balance net profits
versus existing inventory? Which is more important and how does one
affect the other? 

I’m sure you’re going to hear from David Geller on this one, but the
store that ended the year with only $100,000 in inventory is going to
be a far more profitable operation (in fact the net figures you
quoted probably wouldn’t be equal), because basically it means they
have a much higher turn on their inventory. This generally means they
will be more profitable (unless of course they are making virtually
no mark up on everything they sell). The problem with your question
as I see it is that all of the things you mentioned are
interconnected. You can’t really separate out inventory turn from
profitability. But here’s the other thing. If it’s possible to do the
same sales with one third the inventory then that store is a more
profitable investment if you are buying it because even if you pay
for the inventory plus some good will/profit price you’ll still pay
less for it than the other store. But I really think David should
jump in here because he knows this stuff far better than I do.

Daniel R. Spirer, G.G.
Daniel R. Spirer Jewelers, LLC
1780 Massachusetts Ave.
Cambridge, MA 02140
617-234-4392
www.spirerjewelers.com


#12
Taking a look at the business's P & L statements, accounting & POS
software is good advice, but just remember that ALL of these can
be artificially manipulated to reflect whatever figures the seller
wants them to reflect. In most instances the tax return will be the
most accurate picture of the business. 

I just wanted to stress the need for a CPA. I highly recommend them
for the analysis of statements.

Someone mentioned tax returns and how they are mostly fluff; what
is meant by this? Are you suggesting that people often over-inflate
their profits on their tax returns?! 

I wasn’t the original person to say tax returns are mostly fluff,
but I have one opinion to express about the inventory number on any
statement or tax return. I would want to know how often physical
counts are taken and when the last one was. I would probably try to
press for a physical count as part of the valuation of the business
for selling purposes. The reason: Over time, using any inventory
valuation method can cause the inventory number to be
over/understated. Statements and tax returns usually reflect
historical cost of inventory…not current replacement cost.Also, to
know the potential profit from sale of items in the inventory
account, you would have to know the current value of such items, not
just what’s on the statements and returns.

Kim


#13

Doug,

Someone mentioned tax returns and how they are mostly fluff; what
is meant by this? 

The wording I used was to not rely on JUST the tax returns and that
they can be fluff, sometimes. The entire picture has to be
considered and cross checked.

If the store is changing hands by way of a stock buyout…keeping
the original corporation, the new owner becomes liable for all
previous debts and liabilities. One must know for sure that there are
no surprises, like ‘erroneous’ tax filings, which may become the
personal liability of the new owner. Scary? You bet!

Someone contemplating a sale might conduct his business in such a
way as to show maximum paper profit. This might include things like
not paying suppliers and ‘inadvertently’ leaving those debts off the
P&L. While the buyer would have legal recourse, the courts move very
slowly and the buyer would have to cover the debt in the meantime.

Of course, honest mistakes can happen. When I purchased my first
store in a stock buyout deal, my former boss was such a bad
bookkeeper that there was over $20,000 in cash and easily liquidated
assets that he was apparently unaware of. That windfall did not show
on the disclosed paperwork anywhere. Lucky me, that one particular
time. That 20K could easily have been a liability instead.

The point I was trying to make was not to take the sellers
declarations as fact. Prove or disprove them to your satisfaction
before you sign on the deal.

A safer way to purchase is to buy the assets without buying the
corp. You can ‘pay’ a sum for the use of the trade name of the biz if
that’s beneficial and incorporate a new legal entity.

If one is absolutely certain of the integrity of a stock buyout deal
it is a very much simplified and less costly transaction. But beware
the pitfalls. Upside is that it can truly be a turnkey deal.


#14

I love this one,

F. Scott Fitzgerald was very impressed with money or the people who
had it. According to Hemmingway he made the statement: “The rich are
not like you and me.” to which Papa responded: “Yes, they have a lot
more f*** money.” Another good friend of mine who sells high end
houses has a favorite saying: “Money doesn’t care who owns it.”

Another saying of the rich and shameless: “It takes three
generations to take the rough edges off of money.” I like this one
the best it means that those who make it tend to be a bit rough
around the edges perhaps because you have to be a real SOB to get
rich and their decedents learn the art of being rich. Point is there
are all kinds of rich people.

If their word is good and they pay on time I am more than willing to
do business with them.

Richard


www.rwwise.com