Buying Existing vs. Building Your Own Business

By Jon Porter

I have been asked a lot of times, is it better to buy a grooming shop or build your own?  This is the question that many groomers are faced with.  The answer is more complicated than you think.  As an owner of a very busy salon, we had our share of groomers come and go and each of them say the same thing as they are headed out the door, “I can do better.”  Well, I say go for it, but heed the warnings before you do.

When faced with this difficult decision, the question you have to ask yourself is “how long can I go without a paycheck?” I’m not saying you will not be able to pay yourself, you will, just not right away.  There are so many things to consider when picking the right shop, such as: location and size.

You must also take into consideration general geographical location.  An example is, a small town vs. large city or Northern States vs. Southern States.  Why is this important? Well, in South Florida, we are a seasonal area so our busy time is November through March.  On the other hand, in areas like Boston or Chicago, the summer months are busier than the winter.

Let’s get right to the point; do I buy or do I build?  There are advantages and disadvantages to both.

Buying

The obvious advantage is you are buying a turnkey operation (hopefully).  Turnkey means you just unlock the door and you are open for business.  You don’t need to buy supplies or equipment, you are in business.  The biggest disadvantage is that you are buying the bad habits/reputation.  If you find a place that has a great reputation, you are going to pay for it.  To understand how to value an existing business, you must get down to the numbers.  This is not easy to figure out.

There are two numbers to determine the value of a business; gross sales and average dollar sale.  Let’s use the number $100,000 as an example for this purpose.  So if a shop’s gross is $100,000 per year with an average dollar sale of $40.00, then you can conclude approximately there were 2500 grooming jobs done that year.  A grooming shop’s profit percentage on average is 60%.  Using these terms, the net profit would be approximately $60,000.  I would then take an inventory of all the goods/equipment the shop has and figure the cost of replacing everything new and divide by 25% to figure the value of the equipment.  So to replace everything would cost $20,000 new, and the value of the goods is only $5,000.  I call the total of the two the “Positive”, totaling $65,000.

In a large market (city), the sale price should be approximately two times the positive.  Most business owners, when buying a shop, have their own ideas and values and once they purchase a shop, they tend to try to make it their own.  Be careful of this trap; the shop’s success is built on someone else’s ideas and not your own.  Don’t change anything until the clients ease through the transition to your ownership.  If you do, change can hurt your business, especially if you do many changes right away.

The disadvantage of buying a preexisting shop is you are buying someone else’s dream.  The layout might not be what or how you want, the prices might not be what you want – but most of all – you are buying that business’s liability.

Building

This is very difficult to explain because each individual shop is different per location, services offered, etc.  For the purpose of this article, I am only going to touch on key features when opening your own shop and the prices involved.  Having a proper business model will save you time and money.  During the assembly of the business model, factors such as: services offered, max capacity, number of employees, cost of goods, sale prices, marketing (including social networking), and emergency funds are to be considered and figured out.

Research is the key to opening a shop and being successful.  Picking a place that has lots of foot traffic or drive by traffic is the way to go, but it is also expensive.  I highly recommend taking a higher foot/drive by location if your budget allows.  Before looking at locations, it is important during the business model to decide what services you will offer.  For this purpose, I am only dealing with grooming for the model.  Once the business plan is in place, you can start looking for locations.

The location should only be the size you need, not what you want to build the business to.  You can grow, but it is very hard to downsize if you make a mistake.  Most owners starting off make the same mistake and take on more than they can handle.  Ask yourself, “how many shops in my area have opened and closed and why?”  The simple answer is always the same: they tried to grow too fast or they just were not prepared.

If you want to build, there are a lot of costs associated with building.  Again, for this example, I am going to use round numbers of 1,000 square feet of retail space.  This is actually large for just grooming, but it will make it easy for the numbers involved with opening.  I am using an approximate number as prices per square foot vary from place to place.

If you find the perfect location with 1,000 square feet of space, lease should range from $800 on the low end to as high as $2,500 per month (keep in mind that these are not actual figures and vary depending on location).  Most leases require first, last and security just to sign and get the keys. Let’s say the monthly cost is $1,000 a month.  That would mean $3,000 just to sign and get the keys.  Now let’s add some other costs involved: phone/internet, electric, water, gas, insurance, alarm, equipment, products (shampoo, ear cleaner, etc.) permits for signs/banners, business licenses and more.  These costs add up quickly.  Just conservative figures, total outlay will run approximately $25,000-$35,000.

Keep in mind these costs are just to open the doors; we haven’t touched on getting clients through the door yet.  It takes an average of 8 months to a year to lay a foundation to build on.  If you think you are going to open the doors and clients are going to come running, I hope you have enough money saved up to not draw a paycheck for a while – it doesn’t work that quickly.

Let’s take a step back for a second.  When buying, there were a few things I left out.  What I didn’t touch on is how you buy the business!  What are you buying and why?  There are two different ways to buy an existing business; you can buy it outright “as is” or you can buy just the goods and services. When you buy pre-existing, you buy everything good and bad.  When you buy the goods and services, you are buying everything, but not the name or liability.  I strongly urge you to look at the goods and services only.  The reason is you don’t have the liability and reputation coming with it.

When my wife and I purchased our store, we bought the goods and services only and we closed for two days to repaint and redo the inside, but nothing major.  We changed the name and gave it an updated look and we managed to keep the over 1,500 active clients that the previous business had.  I’m not saying this is typical, but I will say that we lost quite a few clients in the beginning as most people don’t like change.  If this happens to you, don’t feel bad and swallow your ego – it happens to everyone in the beginning and if you plan for it, it will be easier to understand and take.

  • Now that I covered the basics, the following is a quick rundown of the business plan and what to include:
  • Name of the business (think of marketing/website and/or social marketing when picking a name)
  • Services offered (including cost of services and types of services offered)
  • Costs of products (shampoos, ear cleaner, ear powder, etc.)
  • Cost of overhead (rent, electric, gas, water, alarm, internet, register, etc.)
  • Advertising budget (monthly allowance)
  • Employee costs (not necessarily in the beginning, but plan for it, including yourself)
  • Miscellaneous expenses (figure this on the high side of $300-500 to be safe)
  • Capacity of the location (total max number of dogs in the shop on any given day)

There is a lot more to a business plan, but this should help give you a start.  Once you have these numbers, you can figure out how much business you need to cover costs involved and make a profit.  Using the figures I put in this article, you would have to do about 2 grooms a day just to cover costs to stay open.  This does not allow for a paycheck yet. I know two per day is not a lot but it is when you first open a new startup.

So now ask yourself, do I buy or build?

Comments

  1. Kristin says:

    Would love to see your research to backup your quote of “A grooming shop’s profit percentage on average is 60%.” How is this possible when the MAJORITY of owners are still paying 50% commission and payroll taxes on top of that?

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