Buying a LHS

[conford]

QUOTE: Originally posted by whitman500

I actually buy businesses for a living though they are generally larger than a local retail store. These are the things I would focus on:

1...

Anyway, that's all I can think of off the top of my head. Curious what others think of my list.

Here's what I think: this is a level headed and comprehensive overview. It was great fun to read and, from what I know, it's good advice. Thanks for posting it. And good luck to the LHS. I shop at mine as much as I can, because from everything I read here, I know I am lucky to live near the Whistle Stop, in Portland OR.

Thanks for your comments

Peter
conford

[Anonymous]

i am not going to reveal that information.

those distributors/ wholesalers will remain anyomous

[Anonymous]

QUOTE: some distributors/ wholesalers are banning ebay stores/ and some products online.

Would either gentleman who have said this name a specific mrr product whose distributor/wholesaler has banned it's sale via the internet by their client retailers? I have a very difficult time believing that.

Horizons has a policy of not selling to non-brick and mortar businesses, but even they have exceptions, according to another thread.

Mike Tennent

[jrbernier]

I was a part owner(group of 6) that owned 2 large LHS's in the 70's/80's. We made money, but really not enough to survive on(or at least equal what I was clearing in my 'day' job). We eventually sold off the stores and invested money in something with a much better return on our investment.
The above comments are very good. Location is still important, but mail order/Internet/train show dealers are eating into the market. I now buy most of my model railroad purchases from the above mentioned sources. Also, I found that I like model railroading, not running a LHS! I got very little model railroading done at that time .....

Jim

[Anonymous]

u need to see what lies aheard before going any futher

the gent made a point, some distributors/ wholesalers are banning ebay stores/ and some products online.

yes i know its stupid.

one key point never deal with a distributor/ wholesaler who makes you spend every month no matter if a product is produced.

and lastly no one has the right to tell you how much to sell an item for,

In canada that violates the Competion Act, which is a federal offence. I am not gonna name names, Canadians will know who I am talking about.

Later

[Anonymous]

Thanks everyone. You're all confirming what I was thinking: assess it as a business using the standard metrics and stats, regardless of what it sells. Obviously all the factors that culminate in "valuation" are the key and I wouldn't be pursuing it if I didn't believe there was some significant undervaluation going on!

Interesting off-the-beaten path perspective ctcbound, thanks for adding that viewpoint to the mix.

[ouengr]

QUOTE: Originally posted by ctcbound

Secondly the internet is almost dead. Most distributors/ wholesalers are now banning ebay store, and electronic items. Secondly, the only way a LHS can survive is to be a multiple hobby shop. Hate to say, but trains just don't cut it. Secondly Model Railroader book listing does nothing, i used and get got me nothing but negative cash flows.

Where do you get this information? I for one buy almost exclusively on-line anymore. My LHS are failing even though I have tried for years to support them. Any distributor who fails to see the value in competition, i.e. on line sales is a fool and one that will not survive in the long run. The economy is changing and we are seeing far more competition in the nitch markets that we ever had in the past.

If you are starting or buying a business today, the internet is the single greatest tool to expand your customer base. I am moving to a town of more than 1-million and it does not have a adequote hobby shop dispite hosting one of the largest train shows in the country each year.

I like being able to go to the LHS and check out the latest products. Unfortunately they are a vanishing breed. I cannot makeup for a lack of good business practices nor am I willing to pay anymore than I absolutely must for an item. To do so would be the same as paying full sticker or above for a car. Many modelers have this level of investment in their collections.

If you want o be successful, give me a reason to go to your store and buy from you. For me this means good service and competitive prices. If you want to own a hobbby shop then you will need to court and keep good customers.

[james saunders]

well in a business trader mag here in Aus a specialist train store was $166,000 + stock all up $300,000 he was making a good earn since he had no competition etc.... those things you have to consider, competition, location, customer base etc...

[Anonymous]

I own my own business.
Don't get a CPA it will cost you more in consult.

My suggestion find some accounting majors, that will be a 5th the cost.

Secondly the internet is almost dead. Most distributors/ wholesalers are now banning ebay store, and electronic items. Secondly, the only way a LHS can survive is to be a multiple hobby shop. Hate to say, but trains just don't cut it. Secondly Model Railroader book listing does nothing, i used and get got me nothing but negative cash flows.

Local hobby shows, are key. Meeting people, the best lure with this hobby is two things you need to constantly think outside the box, and second retailers not working with consumers.
The previous Sir, mentioned an execellent point. I had a gent coming in a couple of days ago looking for a wild, inexepensive part, well most people would nopt care about that. Personally I was able to find it and get it for him. Since then hes been back three times and spent over 800 CAD.

Websites need to be creative, ie meta tages, etc. Buy the best package for the dollar, basic sometimes is effective. My MBA Ecommerc prof disagrees, the cost factor is huge.

You need to maximize all distribtuors/ wholesalers
find a master list of man. and then their corresponding partners.

Lastly, I repeat never, charge a customer in advance. That customer will be offended. Unless its on rare items ie brass.

Maximixe your 30 days Net window.
Never heard of buying on margin.

Thats, my two cents.
My creativity has caused one retailer to close, sorry to say it. Adaption is key to survival.

Later

[Anonymous]

I look at the talent. The purpose of a LHS is to provide service and more importantly, advice to customers. Most anyone can simply cut a check and load up a building with a bunch of inventory and displays. But not everyone has the talent to run it properly and provide the service customers need.

I was in a hobby store yesterday that I drove 80 miles to get to. The store was clean and reasonably well organized. The store had very little character. They defined themselves as a well staffed and knowledgeable place to go for DCC and other high level modelrailroading. The first thing I did was meet the owner who was behind the counter. I tried to be a good first time customer. I had been eyeing one of the Tower 55 Sound diesels for the past few weeks and he had just got a few in. So I bought a unit. I figured, a great way to make friends. And I spent another few bucks on some other supplies. I even told him I drove 80 miles to visit the store.

To make a long story short, the owner was lifeless and seemed to care less about getting me as a new customer. They claim to be well versed in Digitrax and when I asked him about that he said his guy will be at the store soon he was out getting Tacos for lunch. "Okay, I'll wait." I waited 30 minutes and then the guy went to help another customer first. I waited another 20 minutes. Then I introduced myself and asked a Digtrax decoder question and the guy gave me a blank stare. "I don't know about those, I've never used them". That will be my last time in that store. The owner didn't even take my name for his mailing list.

My point to my story is that if you're going to open a Train store, be a good business person and make sure that whoever is helping the customer knows their stuff, is people friendly and conducts themselves in a professional manner. Most everyone buys off the net or mail order at a discount these days. But there is a faction that needs local help (like me!). If I can find it, and they make me feel welcome, they got a customer for life. Even the modelers who are experts will go to a quality train store to buy if they need something "now".

The one store in Los Angeles that does an incredible job if you get to know them a little bit is Allied Trains in Culver City. Bob and Nick (along with the rest of their fine staff) do a great job helping first timers in getting a layout off to a good start. And they complement their fine service with an inventory second to none.

Remember, all hobby businesses are quirky and the people working in them can be "characters" - so it does take some work on the customer's part to get to know the people at a good store. But that extra effort is worth it.

I know about hobby businesses, I stood behind a counter for over 20 years in the Los Angeles area (not model trains).

Good luck, but remember: knowledgeable and friendly people are the key resource for a successful train store and they will be the reason customers come back.

[davekelly]

whitman,

Yup yup yup. In addition to having an accountant pour over the books, I would suggest that any existing contracts with suppliers be reviewed to see what their terms are, the length of the contracts and whether or not the contract is assignable. You don't want to assume the business and then find out that all your suppliers are charging more than you expected.

[whitman500]

I actually buy businesses for a living though they are generally larger than a local retail store. These are the things I would focus on:

1. Sustainable Advantages: Does the store have any attributes that will give it some degree of competitive advantage? Examples would include superior location, economies of scale from being a large operation, a below-market lease, a recognized brand. Given the advent of the Internet, I think location is fading in importance as is brand so I would focus on size and the resulting cost advatnages.

2. Historical Financial Performance: The retail business is somewhat cyclical but when you take that out of the equation, what has been the trend in revenues and margins? A business with shrinking gross margins is in real trouble. How much of any revenue growth/margin expansion is from price increases versus volume/greater efficiency? The former is rarely sustainable at greater than 2-3% per year.

3. Business Model/Operating Leverage: What is the margin on an incremental dollar of revenue? The best businesses have strong operating leverage so that small increases in revenues translate into large increases in profits.

4. Market Demographics: What does the local market look like? Given the trend in model railroaders, the best area would probably be one that's seeing strong growth in middle-aged and retired persons. The US Census Bureau should have data on this.

5. Online Potential: This is where all the growth in this business is coming from so having a viable online operation is a must. Size will matter here since there are fixed costs associated with running a website and a small store will not be able to do so profitably. It will also help to be in a low tax/low-cost state so that you can compete with online retailers located in states with no state income tax, etc.

6. Customer Loyalty: The best local hobby shops have a core of loyal customers that keep coming back and buy big ticket items. Assuming the store keeps track of credit card purchases, you could see how much revenue is produced from the same card numbers (and hence customers).

7. Systems/Facilities: What the store looks like and how it is organized does impact sales volume though some of this can be improved after you buy the store. Having a decent inventory management system is also important so that you can see what is selling well and manage stock efficiently.

8. Personnel: Competent employees matter so make sure to interview all of the employees. Having to replace more than a couple will be a serious distraction.

9. Valuation: Based on items #1-#8, is the valuation appropriate?

Anyway, that's all I can think of off the top of my head. Curious what others think of my list.

[grayfox1119]

John gave you the best answer....have a CPA check the books as a 1st Step. You must remember though, this is not the whole story.

[Anonymous]

QUOTE: Originally posted by FundyNorthern

If you want to make a small fortune in a LHS, you have to start out with a large fortune!

Bob Boudreau

You are correct!
One of our more famous actresses once said she could make a millionaire out of any man, providing he had several million to start with.


This in mind, you would need several million dollars if you want to have a million in most LHS today. The local market just is not lucrative any longer. There are at least four shops in the USS that I know of that might be worth the purchase price if they were reasonable. Most are not!

[Anonymous]

If you want to make a small fortune in a LHS, you have to start out with a large fortune!

Bob Boudreau

[jxtrrx]

Is it cash flowing or is it losing money. If it's a loser, you're just buying his inventory and hoping you can create success where he couldn't.

[jsoderq]

Forget it is a hobby shop. Get a CPA to go over the books and tell you whether it is a viable business. Many are not.

[Anonymous]

Okay, since I know there are some current/past LHS owners out there...

If you were going to buy a LHS - an existing going concern, what would your main questions/criteria be? What would you look at first? How would you think to value it?

I certainly have my own opinions on this... But would love to get other thoughts.