TriSporter,
I’m in the process of opening up a run/walk/swim/tri shop in Brooklyn. (As soon as I have an opening date, I’ll announce it here.) Since you’ve already started your video store and tanning salon, you already know that the sheer number of details that you have to deal with is immense. You’ve probably figured out that a cycling shop is a lot more capital intensive than a tanning salon or video store – my shop is going to require several hundred thousand dollars in startup and operating capital, and my inventory cost is probably lower than yours.
The best way to get a handle on all those details – especially how much capital you’ll need – is to write a long, well thought out business plan. That will help you decide if you can do it, and if it’s really worth it. It’ll also give you immense credibility with vendors who get calls all the time from people who want to sell bikes – it will show that you’ve really thought out the details and are confident that you can make it work.
Start with documenting exactly who is your target market. Geographically, who can you attract and where is the best location for you to attract them? Demographically, what ages, cultures, sexes, and income levels are you trying to appeal to? You should be able to list the expected customer breakdown demographically, and tie a number to each demographic based on how many in that demo you can attract and how much you think they’ll spend. Are those numbers going to be accurate? No. But it’ll force you to think through exactly who you’re appealing to and exactly how much revenue you can realistically expect. Realistically, how many triathletes are there in your area who will buy $4000 tri bikes? Or Cat 4+ racers who will spend $1000 or more on a road bike? How many teenagers are there who will buy a $300-$600 sport-utility bike? Where do they all shop now and why would they buy from you?
Once you know all that, you should be able to figure out what your ideal product mix is. Are you going to end up selling a lot of $500 bikes or even $200 bikes, or should you focus on the $2000 and above market? Probably a mix of both, right? Your demographic list will tell you what that mix is. That will lead you to a list of suppliers you need to work with, and some guesses about the quantity of product you’d sell each week/month/year from each.
Besides bikes, what else are you going to have in the store? Services? Gear? Any Tri stuff? Any kids stuff? Mtn bikes? You need an office, a back room, space for inventory, shipping/receiving, etc. I used a copy of Visio to lay out exactly where everything would be and exactly how much space I’d need to achieve my model. You can do the same to get an estimate of how much sq footage you need, and your construction costs. A real estate agent will help you guesstimate your rent and closing fees.
OK, so now you have some idea where, some idea how much space, some idea of your demographic, and some idea of your product mix. Start to put together a startup budget: what do you need to spend to get open? Realtor fees, rent security, legal, insurance, construction, permits, computers & software, phone system, etc, etc, etc. Lay it all out and come up with a number. Then put together an operating budget. Call the vendors and find out what you should expect for gross margins on the bikes once you’re up and running. See if the vendors can help you estimate volume of sales. (They won’t volunteer any numbers, but bounce some ideas off them and see if they think you’re nuts.) Multiply volume by GM to get operating profit. Subtract payroll, rent, insurance, utilities, advertising, etc etc etc and see if the number at the bottom is greater than zero.
If you do realistic monthly projections for 2 years, including the variations in business between winter & summer, you’ll be able to decide: does this make any money? Does this make back the money I invest in starting it? How much capital cushion do I need to make sure I stay in business? If you want to get really detailed, do balance sheet projections and cashflow projections. I think you’ll see that for a reasonable sized shop you’re going to need upwards of $250k, and you won’t make it back for at least 2 years.
Once you’ve done all that work, and you’re still convinced that you want to make a go of it, make sure you put it into a well organized document that shows your vendors, bank, investors, whomever, that you’ve really thought this out. I’ve been able to get approval from all the vendors I’m trying to sign up just on the strength of the business plan – because I’ve convinced them that I’ve got a handle on the details, so I’m more likely to succeed than some schmoe who wants to sell shoes.
In terms of financing, I both agree and disagree with Tom. I’m borrowing using a home equity loan. At 4.25% before taxes and 3.something% after taxes, it makes a lot more sense to borrow than it does to spend my own money. However, I’m keeping a fairly substantial chunk of my own cash around in case interest rates skyrocket and the interest cost starts affecting me dramatically. I think that ideally the asset:debt ratio should be at least 2:1. But to Tom’s point, you’re paying someone to use their money. If you have your own money, you should have a very good reason why you’d want to pay for someone else’s. Same thing goes for rent, by the way – you’re paying the landlord for the use of their capital in the form of a building/space. Better if you can own, especially with today’s interest rates, but you have to come up with the down payment which can be a considerable chunk of your operating capital.
Good luck!