We Sold Our Children’s B...

We sold our children’s brick-and-mortar retail business… But it was ultimately a failure... Ending with our manager yelling at us in front of the new buyers about how we’re the ‘worst bosses she’s ever had’ Bought it after seeing a tweet on here about biz for sale on Loopnet. Closed on store in 40 days. Started off well, big plans… but, eventually we failed & dumped it. Read about employee theft, bad luck, almost sued, city screwing you over and you have to take it… and more. Lessons & what it’s like to own a retail business (& owning a biz w/ your spouse to boot) (Long post ahead, get coffee and bookmark). Store was a girl’s children’s clothing & gift spot in our Downtown. We could walk to it. We live in one of the fastest growing counties in the state, we were already customers of the store, items in store were unique… Old owner was burnt out from retail, had stopped investing in store. Our thought: We put up ecommerce (had none) Invest in marketing Invest in more inventory Build the brand Expand to more stores… become a national brand, land on Oprah… ok, I’m stretching. Everything seemed to line up. We self-funded the store w/ an outside investor who had invested in one of our real estate projects. We were buying the store for 0.8x its EBITDA of 2018. We were confident we could get it back to 2018 numbers (we bought in 2021). At the time the store did about $500k in sales which is pretty good for a small retail outfit with no online presence. Foot traffic was gravy in this part of town. The store had 6 employees led by a 20-something manager who’d been there for 4 years & knew the store inside and out. “Great, we can lean on her expertise as we learn the ropes.” And we did. We gave her a 20% raise Day 1 & near autonomy on running the store while we learn. Our skills coming in: Me: I’m a marketer full-time. Accounting background so I know num...

...bers. Wife: Great at fashion, merchandising, and in-person selling (she’s awesome) I was so cocky & arrogant, before we even closed on buying the store, I was looking at a 2nd location in a satellite city that was also growing. Fortunately, the original seller talked me down & told me, “Figure out 1 store first, because two is harder than one.” (She owned multiple women’s stores as well.). Here’s the business model for a retail store like this one: Buy a bunch of inventory from wholesalers Mark it up a minimum 57% Sell Children’s clothes (as we find out) have lower margins than women’s clothes. Women’s clothes, they can jack up the prices by 80%+. Women will pay that. Children’s clothes… moms are less willing to open their wallets that high. -A woman will buy three $150 dresses for herself in a weekend. -That same woman may only buy one $150 dress for her kid in their lifetime. The goal is they buy an outfit, then you can upsell them on jewelry, gifts which have those 80%+ margins. In this children’s stores best years, they would hit that 57%+ gross margin. During Covid and later, the gross margins were sinking… 53%... 50%. Red flag we should’ve seen.🚩 The biggest expenses in a retail store: Inventory Employees Rent Other than that, it’s pretty standard set costs --- electric, internet, point-of-sale, credit card fees, etc. So obviously, if you can get one store to go from $500k to $1M without spending much more on employees… your rent is the same, so is electric, internet, etc. That’s where you can make money. Even if gross margins shrink, your volume can make up for it as many costs can stay fixed. …or at least that’s what we thought. 🚩We did all DD ourselves, which meant I didn’t know what pitfalls to look for. The original seller had a holdco that rolled up all her retail stores into one biz. She was breaking this children’s store out of her holdco. “I can’t give you my tax returns as ...

...that has everything.” So she gave me QB printouts of the store’s financials for DD. “That’s fine”, I said. “I was an accountant.” Famous last words. Every year, the seller showed a profit. For a retail store like this: Gross margins should be 60% Rent should be 9% or less of revenue Payroll should not go over 14% Meaning, if after all these costs even, plus normal credit card fees, office supplies, etc… we could net 15-18% pretty steadily. All the numbers seem to justify this and we moved forward. A mistake we made was we ‘fell in love’ with this deal. So no matter what small bumps or flags we saw, we waved them off. 🚩A few days before close, the seller told us, “Oh yeah, the HVAC is old and will probably need to be replaced.” That’s a $10k hit. Waved off. 🚩Day before close, seller runs a big sale if people spend $100, customers get a free $50 gift card. On Day 1, we were now on the hook for thousands of dollars of gift cards. And the seller’s response was, “You said I could run any sale I wanted to get inventory down.” Waved it off. 🚩“We’ll run this store better than her anyway.” (stop thinking you know better than grizzled vets) Again, right away, we hand the keys over to the manager and let her run the shop. She handles employee issues, she inputs all inventory, she helps us buy new inventory, she buys office supplies as needed, makes the schedules etc. Meanwhile, we work on “high level” stuff like finding new vendors, marketing efforts, planning store events, my wife does merchandising and is in the shop 1-2x per week learning the ropes. Immediately, -We bring in double the inventory the old seller had. - We launch marketing efforts costing thousands… run online ads… start sending weekly emails.. Posting daily on social… We’re seeing sales go up. Soon, we’re hitting record months. (the store was 5 years old at this point). Last 6 months of 2021 were great… we were profitable… staff w...

...as happy. We got drunk on this beginner’s luck (free guvmint $) and let the manager expand hours for the other employees, she herself got lots of unchecked overtime “We’re investing in growing this store and need a great team” Mind you, most of the employees were high school kids just making some side money. Their motivation is sometimes there, sometimes not. By 2022, we’re rolling. The first half of 2022, the store did the most revenue it ever did in that timeframe. Our events were full. Everything going great, right? I did the books for first half of the year… 😡We were showing a big loss. “WTF”... our revenue is great! What happened? My thesis was wrong. 🤢Even though sales were going up, payroll was not 12-14% of sales… it was 22%+ because of all the unchecked overtime… girls hanging around past their shift. Meanwhile, gross margins weren’t 57%... 🤒They were 48%! We’re perplexed. Mind you, inflation in 2022 was picking up fast. Dresses we used to buy for $15 were now $25. Shipping was $5 before, now $15. Those add up as they cut into your margins. That wasn’t the only thing. 🚩🤡When the original seller showed her books, she showed office supplies and shop repairs as extremely low. Maybe $700 for the year. We were doing $700+ per month! From needing the windows cleaned, bugs sprayed, HVAC fixed, snacks for the workers, toilet paper, paper towels, new hangers, birthday gifts for employees… What we realized later was the seller likely hid those expenses at the holdco level… Or hid them on the books of the other retail stores. So she’d buy a huge bulk of toilet paper for her best store, then bring some of the TP over to the children’s store. No paper trail. … Meanwhile, the manager decides to fire our 2nd best employee b/c she didn’t like her. This 2nd employee was 50+ year old but an amazing saleswoman. She’s working with a bunch of young girls, tho. It didn’t mix well. To keep the man...

...ager happy, we let her do it. We also notice the manager’s been getting lax with her schedule. The store doesn’t open until 10a. She originally would come in at 9a. 🤡Slowly… that became 830… then 8… some days she’d clock in at 7:15a! In July 2022, we have an emergency meeting: -Cut payroll way down -Manager can’t come in more than 1 hour before her shift & no overtime -Inventory margins need to be higher or find ne (View Tweet)

Note: retail

SOME LESSONS/FAILURES THAT DIDNT FLOW IN THE STORY: 1. If there aren’t competitors in your area, that doesn’t mean you found a goldmine. It means it’s a bad idea. There were no competitors in our area within 10 miles that wasn’t a big box store. It means there wasn’t enough demand. 2. One of our longtime customers came in 2022, asked about how our store worked, etc. She owned a women’s boutique so we thought she was just talking shop. She then opened up a competing store 2 blocks away. 3. Don’t think family and friends will suddenly want to buy everything from you. Many of my family never shopped once with us. You can’t force people to spend money. Don’t bank on it. 4. Be stingy about giving out the family/friends discount. Once you open that Pandora’s box, you can’t close it. You’ll have Janice Smith who you met once come in claiming she knows you and wants 15% off. 5. If the business model is too easy, it’s going to be a rough road. For retail, there are markets across the country you can show up, with a Sales&Use ID and buy items wholesale to re-sell. It’s very easy. If it’s “very easy” , it’s a bad business. 6. Retail is NOT something you can passively do. That was one of our biggest mistakes. You need to LOVE retail. Part of it is passion, the other to make money. D2C isn’t retail as you’re making your own product. Small business retail doesn’t operate like WalMart. Walmart, if they don’t sell your wholesale products, they can ship ‘em back to you and get a refund. Good luck doing that as a small business. 7. After we sold, a vendor called up and said we owed her $3k and was going to sue if we didn’t pay. Apparently, we ‘ordered’ product 4 months prior and she was about to ship. I told her we sold and didn’t need it. She said we’d hear from her lawyer. I said, “do it.” She came back and offered a deal. I told her “My lawyer said we don’t owe you anything, but we did order them, so I’ll give you $2...

...10 to never contact us again.” And she took it. 8. I told the new owners, “You’re likely buying this store at the bottom. Once the economy comes back, this store will do well again.” And I mean that. Here’s the lesson --- every business has shit you have to go through. You have to know what shit you’re willing to put up with and what you don’t. For me, I realized retail shit is NOT the shit I want to deal with. 9. The idea of owning multiple businesses sounds sexy on here… it’s not. Focus hard on the businesses you enjoy and are good at that you have an edge in. There’s NO such thing as passive income or a passive biz… unless maybe you’ve been doing it for decades. 10. Dealing with low wage employees is taxing work. It’s not fun and you’ll have high turnover. If you NEED to have low wages, you better be getting them overseas else you’ll have daily headaches juggling minimum wage employees. 11. If you’re going to own a business with your spouse, make sure you both are on the same page, do NOT spend all the time talking about the business, and if someone believes strongly in something, make way for them to go through with it. (View Tweet)

MORE THOUGHTS: 1. The DT screwed us as they started doing construction right outside our door. They took half the parking. Our Saturday traffic dropped by half almost overnight starting in May 2023... and it's not set to improve for 2 years. Again, what shit are you willing to eat to get through the tough times. Pick the business you're willing to eat that shit. Fighting the gov't is not one we wanted to be in 2. People are asking "What could you do differently?" - We talked about getting into manufacturing clothes (another big pain) to get margins up - I was negotiating acquiring a similar sized biz to try and combine manpower and inventory (luckily, i did listen to my wife about NO) - I told the new buyers, the store needs more creative regularly. More pics of models, more offers you can get out there. Clothing takes A LOT of creative which is manpower - We tried different events at our schools, we tried marketing w/ schools, local theater etc. NONE drove foot traffic. - Careful 'sponsoring' schools and businesses. Do it bc you love the school, not bc it'll drive foot traffic bc many won't deliver on their promises of promoting you. Think of it as a donation not a strategy - As many pointed out, retail is ALL-IN or ALL-OUT. There's no part time in physical retail. You need to be there implementing SOPs and such or employees will take advantage. Big mistake we didn't realize which is easy to see now. (View Tweet)