Agreeing with what everybody else says, and also encouraging you to find out every detail of the ‘Trek Dealer’ details.
Odds are that they are going to mandate that a very large % of your purchasing and inventory is Trek/Bontrager only.
Don’t want to take the wind out of your sails or take you off your game, but you really should read this:
http://redkiteprayer.com/2015/08/where-have-all-the-bike-shops-gone/
It’s a sobering read, written by industry veteran, Rick Vosper.
Bike shop in this same location for around 50 years.
Does the current owner have a business operations manual? “I will train you,” isn’t good enough. Off the top of my head: there should be written procedures for loss prevention, employee evaluation, marketing, inventory control. If they have a good operations manual and they agree to train you for several months then that, plus 50 years is worth something. 2 x ? Maybe.
I’d run away as fast as possible
- if he isn’t willing to share every detail of the financials you can assume they are worse then he is saying, much worse. The business I bought last year thought they were doing much better then they were, they just didn’t know how to look at their own books.
- you are not guaranteed to get accounts with any of the vendors he is doing business with as you will have to reapply for an account. For all you know Trek is looking for a reason to close his shop so they can give an account to someone else in the area
- If he wants $600,000 all in, the shop should be doing about $1.4 million with net profit in the 12-15% range. Either that or he is overstocked and the inventory is inflating the asking price and you are going to be stuck with a crap load of inventory. And trust me stores that are overstocked are never over in the good stuff, it is always with crap. I recently bought the inventory of a defunct shop, they had the same number of shoes in stock as my main store did even though they did 20% of the annual business, some stuff was 6-7 years old
- very few bike shops have ever also been a good running store, just the way it is. Also a lot of the footwear brands are not opening new accounts right now so I wouldn’t bank on that
- have you written your own business plan and had an advisor look it over? Not a list of what you would do to make the place amazing, a real business plan of how you will pay the bills, grow the biz and put food on the table
Good luck
Lots of good advice on this thread (and the above bullet points). The purchase should come with all bills paid. Even so, you need to know how far behind he is with the vendors, and especially the relationship with Trek. If the blue sky that he is selling is wrapped around customers buying Trek, then you need to know that relationship is strong, otherwise that blue sky is no longer blue. 600k seems a bit steep, unless there is good build out and plenty of service equipment and parts. If there is another big brand dealer in the area, then you might not be able to just open from scratch. Big brands (Trek, Specialized, etc) protect their accounts. You might also want to track down the former employees to get the vibe of the company. If there’s bad blood locally, then you will have to carry that burden. If the customers love the place and are loyal, then that’s really hard to create from scratch. Good luck with your decision.
Look at his cash flow before and after taxes and expenses. Look at what margins he is making on his equipment. Look at what is selling the most.
Add in his inventory then cut that in half since it will take your time and effort to clean this up (get the store at a discount).
Look at his debt - because you really do not want to assume to much debt. Try to work something out that would take some or most of that out of the final selling price (again getting it at a discount).
now - run away. There is a reason I have not seen any local bike shop owners in Forbes.
What did you end up doing? Was 2.4 EBITA plus inventory reaslistic. That seems high, maybe 1.5?
Edit: Didn’t realize this thread was so old. Either way, hopefully my post below will be useful to someone.
2.4 times EBITDA plus inventory formulaWow. Never heard that before. If we’d gotten an offer of that type when we closed our shop we would have taken it and ran. We had a 6-figure EBITDA, excellent staff, name recognition, good brands, excellent location, high gross, and a promising eCommerce future, and didn’t get anywhere near that. In fact, we didn’t get an offer in excess of the liquidation value of our inventory. It was more lucrative for us to run a good going-out-of-business sale and sell our fixtures, so that’s what we did.
I (along with a business partner) learned a lot, made great friends, and created a marginally profitable (but not lucrative) business. I feel like we did lots of important things right and still couldn’t figure out how to transcend the bike shop economics that result in bike shop owners either living a Spartan (and overworked) lifestyle or having a second gig (or financially supportive spouse) to pay the bills. I think I know as much as anybody about bike shop economics, and frankly I don’t think it’s possible to make any real money owning a bike shop.
No doubt, I can make you an endless list of things we did wrong, should have done better, or that I might have done differently. But I don’t think any of that would have moved the needle that much.
Even the high-volume Internet dealers either failed or their success is much more modest than is thought. I remember lots of industry folks assuring me “TheClymb” was extremely successful. They ended up selling for 100k and the new owner assumed 18 million in deb.t I remember lots of industry folks telling me “TriSports” was stacking money high. They declared bankruptcy - the kind where auctioneers sell all your stuff. And the people at those companies were smart and capable, but the realities of bicycle retail don’t care.
If you are interested in purchasing a shop, you must be able to view and analyze the financials. You must consider the any lease terms and responsibilities. And you must be ready to give every hour of every day to that business. And if they don’t have good financials, then I’m guessing things are worse than they know. And they know they don’t have enough money to pay the bills.
Wow you dug up an old thread LOL
We bought the shop at a significant discount from what he was asking. SIgned a long term lease at a cut rate and paid to much for the inventory BUT the store had a significant amount of stuff not in the inventory to offset what we did pay for. The hardest part is going through and getting all of those things in inventory. That pretty much sums it up…
Actually last year was crazy and this year looks to be worse but I dont know many guys in our area complaining about the income right now. If you can get a shop at a good price and you can get merchandise this is going to be a great year (and probably next) to own a shop.
And you must be ready to give every hour of every day to that business.
This is the most important point. Obviously, owning an LBS or even an internet sales shop isn’t going to make you rich in your first year (and probably never will). If you’re really great, you’ll have reasonable income for your local area and meet some great people. Any independently owned business must start with someone willing to put in extremely long hours working on their passion. It doesn’t really matter what the business is. Even a McDonald’s franchise owner will work 80-100 hours a week in the first few years and they’ll be paying to go to “work”.
But if you don’t see it as “work”, then you “work” in your business focused on customers all day and “work” on your business focused on how to improve your processes to make it beyond five years all night. It can be personally very rewarding, but it’s not for the faint hearted. In the US, 95% of all indie businesses close within five years. Thankfully many people start new businesses all the time because of their passion.
But your training will suffer 
Actually last year was crazy and this year looks to be worse but I dont know many guys in our area complaining about the income right now. If you can get a shop at a good price and you can get merchandise this is going to be a great year (and probably next) to own a shop.Funny thing about the pandemic - it made having big inventory a huge advantage. Many shops - especially older ones - were drowning in excess inventory they couldn’t get rid of. The pandemic allowed them to turn a lot of that into cash.
Running lean and “just-in-time” was a huge advantage prior to COVID. But COVID turned things upside down.
for 600k the shop needs to cash flow 150K and you have a general manager run the place and you just collect your monthly cash flow… Don’t make the mistake of paying 600K to inherit a minimum wage job. Sometimes people think they are selling a business that makes 100K a year so you need to pay 5x that but the reality is the 100K is really their salary so the actual business makes NOTHING and in that case that is what it is worth.
offer to buy his inventory at cost and give him 50K extra. Thats my final offer.
Funny thing about the pandemic - it made having big inventory a huge advantage. Many shops - especially older ones - were drowning in excess inventory they couldn’t get rid of. The pandemic allowed them to turn a lot of that into cash.
Running lean and “just-in-time” was a huge advantage prior to COVID. But COVID turned things upside down.
Interesting to hear because every bike shop and fitness related store I called or visited couldn’t keep any bikes in inventory. They sold everything in sight.
Heck, even walmart had empty racks.
Yeah, everyone sold everything. So those shops that do big preseasons and had lots of prior year inventory sold through it. But those shops that ran lean didn’t have much to sell, because it was all gone - the distributes and brands were sold out and couldn’t get more.
You can’t sell product you don’t have.
Yeah, everyone sold everything. So those shops that do big preseasons and had lots of prior year inventory sold through it. But those shops that ran lean didn’t have much to sell, because it was all gone - the distributes and brands were sold out and couldn’t get more.
You can’t sell product you don’t have.
On the supply end here, we had bikes that had been sitting around for years that we couldn’t give away, and by late spring we had dealers begging us for anything we had, no matter how old. And even asking if we had returned warranties or bikes damaged in shipping we’d be willing to sell…