Acquisitions Anonymous - #1 for business buying, selling and operating - How This Children's Consignment Store Achieves 40% Margins

Episode Date: January 16, 2025

In this episode, we dive into the unique world of consignment stores and explore the dynamics of a profitable children's consignment business in Charlotte, North Carolina.Business Listing - https://www.sunbeltnetwork.com/charlotte-nc/buy-a-business/listings/listing-details/charlotte-consignment-store-sale-56092/This episode is sponsored by:Acquisition Lab: The premier resource for acquisition entrepreneurs. Get the support and resources you need to buy your dream business. Learn more at https://www.acquisitionlab.com.Learn about managing multiple businesses and more at Hold Co Conference 2025. Save 10% on your ticket with code AApod at HoldCoConference.com.Join the hosts as they break down the ins and outs of a children's consignment store for sale in Charlotte, NC. With $425,000 in gross revenue and $190,000 in cash flow, this business offers strong margins and a unique model with no owned inventory. From exploring the store's operational challenges to assessing the potential for expansion, they discuss everything a potential buyer should consider, including systems, accounting, and the value of 8,000 consignors. The episode also touches on broader insights into the consignment industry and how businesses like this can thrive.Key HighlightsUnique Business Model: Retail without inventory risks; consignors provide items for sale.Strong Financials: $425,000 gross revenue, $190,000 net income, 40% margins.Key Challenges: Accounting complexities, reliance on systems for store credits, and potential liabilities.Growth Potential: Leveraging marketing, expanding categories, and maintaining a robust local presence.Considerations for Buyers: Importance of clean accounting, solid systems, and assessing lease stability.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

You really have to know what to take, you know, and what to say no to. There's something with this business that many other businesses don't have, which this has a substantial liability, like an inventory liability. There is a good business here. It's just a really a matter of, I think the systems and the accounting is like your number one issue. That's the one thing that's sort of hard for me about this business is I'm not sure how to grow it. Hello, everyone, and welcome back to Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses.

My name is Bill Dallisandro. I'm one of your hosts. And today I am with Heather Anderson. And we have a new type of business we've never done in the pod before. It is a consignment store. So peeling back the economics of consignment, it's actually pretty wild, north of 40% net margins and zero inventory, which is pretty neat. They have some schemes where they kind of keep working capital in the system. and try to prevent you from walking out with a check and instead get you to buy other stuff.

So really unique business, I think maybe hard to replicate, maybe more of a buy rather than build. So first time we've ever done this model, I hope you guys enjoyed this episode of Acquisitions Anonymous. Are you ready to take a leap into business ownership but you don't know where to start? Well, look no further than Acquisition Lab, the premier resource for entrepreneurs seeking to buy their dream business. Founded by Harvard MBA and acquisition expert Walker Dybul, the lab is your fast travel. success in the search diligence and acquisition process. With hands-on support, world-class resources and a community of like-minded entrepreneurs, Acquisition Lab gives you the tools and confidence to navigate every step of the journey. And we're proud to call Walker and Chelsea, the lab's director,

longtime friends of the podcast. They're passionate about helping entrepreneurs like you take the next big step. So don't wait to make your business ownership dream of reality. Visit Acquisitionlab.com today to learn more and schedule your free consultation. And when you do, be sure to tell them the Acquisitions Anonymous podcast sent you. Hey, Heather. Exciting for another episode of Acquisitions Anonymous. I am excited to see what we're going to talk about today. You never know what it might be.

You never know what it might be. But before we get started, we were without sharing anything personal. I was just congratulating Heather. Heather's business, Vizzo Capital, had crushed in Q4. She just kind of put the numbers together and told me that she had a great quarter. And so I was telling her she was doing a great job. Yeah, it was exciting. And we cannot wait to see what kind of growth we're going to see in 2025.

I mean, the market activity is booming. And people are getting more and more smart about how to go about it. And it's just exciting to see. Can't wait. I mean, you close dozens and dozens of loans, right? Thank you for. Yes. We are rounding in the next week or so.

We will hit $200 million in funding since inception. and that from our first deal to the 200 million market will take us about 16 months, which is pretty incredible. Wow. That's pretty exciting. Amazing. Yeah. Amazing.

So if you're out there looking for an SBA loan, Heather knows how to do SBA loans. You should get in touch with her advisor, and she's getting some really great below market deals for people. Oh, yeah. Some people are getting some fantastic rates. So that's part of what we do is find you the best bank and the lowest rate that we can find. So you mentioned, Heather, that it's booming out there. You know, this is being recorded in mid-January. I would say this is a market flip from probably six to 12 months ago. People were getting nervous for a little while there and kind of slowing, putting on the brakes, not sure where to go. Now you see it accelerating. I think, you know, there's a new president coming in. You know, people are a little more optimistic about the taxes, the tax situation where that might go, especially for small businesses. And, um, you know, technology is bringing about all kinds of change. And I think that that probably lends

to or drives more corporate refugees, you know, corporate folks who want to get out of that kind of system and, you know, take the chance at becoming entrepreneurs through buying something. So the demand has increased. So demand, so more sellers, more buyers, it seems like they're able to find market clearing prices, which was a problem for a while. Right. I think that, right, exactly. that was a problem. There was a big gap in valuation for a while for buyers and sellers, but now I think everyone's on the same page pretty close, how to structure it in a way that they can get the debt and the equity. And then also, you know, what is the valuation that, you know, is fair for both sides. I think you see a lot more of that kind of being on the same page right now.

Are the banks a little bit looser with credit than they were a year or two ago? I don't want to say looser lenders never want to say that, but are they, you know, more understanding a little bit more aggressive than they were? Yeah, they're aggressive. I mean, what helps lenders along is being competitive with each other. You know, they've all kind of launched their 25 initiatives and they're all telling us they want to grow by X amount. So if they want to grow, they're going to have to get a little more flexible. They're going to have to get a little more aggressive, you know, but internally, they never, they never say they're getting easier on credit. But if they're trying to get more competitive, they tend to have to, or at least, you know, bring down their rates a bit. So I think you

you're seeing a little bit of both. That's all good if you are a seller or a buyer. It's all good. Love to see it. Okay. Well, speaking of selling things and buying things, we have a deal that helps you do that. So this was sent to me by my friend Ted Williams of the Tiny Money newsletter. And he actually asked me for a comment. I don't know. I said a comment. I'm going to give you 30 minutes. So this is a profitable Charlotte consignment store for sale. So I don't exactly know which one this one is, but it is in my hometown. It is a consignment store located outside of Charlotte, North Carolina, and sells primarily children's clothes, shoes, baby equipment, including high chairs, et cetera. It does $425,000 of gross revenue and $190,000 of cash flow.

So really strong margin there, pushing 40% or so net margin. And the asking price is $550,000, so almost exactly 3x. It says it is centrally located in a downtown area with ample parking and easy access. The store currently has more than 8,000 consigners with at least 2,000 of those as repeat customers. A large percentage of those consigners are also shoppers, which makes the mechanic. of shopping easier for both the store and the customers. The intake process for consigners is quite easy. No callbacks, no givebacks.

The owner knows what will sell in the store, so there is very little unsaleable inventory, and what does not sell after a short period on the shelves is donated. There is no inventory at all owned by the company, so there is no risk of obsolescence. When a sale is made, the consigners account is credited with a percentage of the sale, and the store takes the rest. Many consigners then use their account credits to buy other items from the store. So it's sort of a closed loop system, which is amazing. The store is fully equipped with new signage, HVAC, RAC, custom-built checkout and intake area, and a computer system.

There are two connected buildings with two bathrooms, two breakrooms, dressing rooms, and a large storage area. The company has a very active Facebook page with 2,000 and growing organic followers. It is in Charlotte, North Carolina, and they're selling because they're purchasing a new business. It was established in 1994, so it's very seasoned, has two full-time employees. The rent is $750 a month. And it says the owner will stay on for some transition period and has identified specific ways a new owner could grow the business with very little effort. The store is only open four days a week, is closed on weekends, and you could also grow

with a website and additional marketing. This is by Sundelt Business Brokers and Al Waugh, I think is how you say that, who looks like a very nice guy. Heather, what do you know about this or what do you think about this listing? Well, the last time I was in a consignment store was, and the types that I would go to were for equestrian stuff. Saddles, riding clothes. I mean, that's a common way to buy equestrian stuff on a budget, you know, and to sell it. you know, frankly, I've sold stuff that way too where, you know, I needed to get rid of some stuff that's still usable and I could get a little bit of money for it.

This sounds like it's mostly clothing, you know, looks like high chairs, baby equipment, children's shoes, children's clothing, obviously stuff that they grow out of. They don't really wear out. I think it's a great little business. I do think, though, they sort of hint at it here, you really have to know what to take, you know, and what to say no to. So when people bring you their junk, which I'm sure they see a lot of that,

they have to know how to sort through the junk and know what they can really sell and what not to take on. And then also to clear the racks so that the store doesn't look cluttered. The consignment stores I was in were very cluttered. Yeah, they can take a very kind of pawn shop vibe, can't they? Yeah.

And you'd feel like, you know, it was kind of exhausting to look through what they had to see if there was anything good where, you know, I think that's what would be sort of the difference between a good consignment store and not so good one. But I love the idea of no inventory. I love that. Yeah. I mean, I totally, I retail store with no inventory. Like, that's a rare thing. So the economic model, so the way this works, right, is let's say you have some branded, you know, baby clothes or a high chair or a stroller or something. You know, let's say this stroller is worth 500 bucks new. You bring it in the

assignment store, they might say, we are going to sell this for, you know, $300, and we will give you a 50% revenue share. Right. So you leave your stroller with them. They put it on the shell. Make sure it's clean and merchandise well. And then if it sells for $300, the store pockets $150 of the $300 sale and pays you out $150. But the key is they don't actually pay you out. They just credit your store credit account with the $150 and you have to come back in to the consignment store and ask for a check. Right.

And they say, and then you get in there and they say, sure, we will give you a $150 check or your money is worth 20% more if you use it to buy something else in the store. Right? Which kind of keeps the funds in the system.

Yep. And a lot of these people are going to be moms, right? That brought in the stuff they needed to get rid of. And then they go, oh, yeah, well, you know what? This isn't coming out of my checking account. I can go buy something else. And that's, yeah, what you're going to tend to do is you're going to just go ahead and use the store credit rather than get the cash. And so, yeah, that's why you've got such great profit margins here. Really, the overhead, the people and the rent is primarily the cost of this business. Right. And so my wife is a mom. So we have a five-year-old,

three-year-old and one-year-old. So she goes to places like this all the time and takes the stuff that the kids have grown out of. And most of the time they go, oh, like we don't want your target jump or whatever, right? But if it's like a nice brand or it's a thing that you know, and they have a sense for it at the consignment store and they'll go, oh, yeah, this will take. And they kind of have to know where to price it and whether they want to put it on their shelf and then if it's sell if you get paid. And that's what she says all the time. She goes, oh, I had credit. So I bought something else. It's fun. I think it's great. You get rid of stuff you don't need and you have fun shopping and you get new stuff. Great. Love it. Yeah. And this niche baby though is kind of evergreen,

right? It's sort of perfect for consignment. Yeah. What I'm curious about is it is it the seller that's really driving the decisions on what goes on the shelves and what does not? So in other words, are you going to have to replace that skill if you're buying this business? Are you going to be the one that needs to make those decisions and how are you going to learn how to do that. So there's probably a little bit of transition risk if it's the seller that's making those decisions. And I would imagine it is. It probably is. This is sort of that feel you get after a lot of time in the business. Now, that being said, you're protected because you don't have to buy it up front. Like if you take something and it sits on the store on the shelf for a little while, it sounds like they already have

a policy where it just gets donated. Mm-hmm. Yep. In which case, I wonder if there's even a tax write-off. I wonder, I mean, there is a tax write-off, but who's it? For somebody, yeah. For somebody, right? So, like, I wonder how that gets distributed. That if you would, if you, the store could keep a portion of the tax right off, that would be really fascinating if you split the tax right off with the person somehow.

Speaking of taxes, yeah, maybe some accountant out there will tell us, I wonder if they have to report the revenue that they paid, like when you do get a check, when you do get a check, when you don't use the store credit. I wonder if this kind of business has to 1099 you, if it's above a certain amount. I'm sure they do. That might be a administrative burden, right? So I bet the administrative is a huge pain of the butt.

So that would, a huge pain in the butt. I mean, because you have to, what does it say? They have 8,000 consigners. Yeah. And 2,000 of those are repeat customers. And each of them is going to have like a store credit balance. Yep. Right?

And they're going to have an inventory balance. You've got to keep track of what you have, if you have any of their stuff, and what split you've agreed to, hopefully it's standard, and then their store credit balance. So there's absolutely an admin component. I wonder if there is software to run consign.

Exactly what I'm thinking. Is this on paper? Oh my gosh. Can you imagine? Scary, scary. Yeah. If it's on paper, I might run very fast away from this.

But if it's on a decent system of some kind, even if they sort of kind of semi-customized it out of some other platform, then it might be pretty interesting. But yeah, I think that's probably the biggest headache of all here is the systems and the tracking. Three years ago, Kelsey and I decided that we wanted to launch a conference. It was in a space that nobody else was talking about yet, Holdco's. I only attended three live events last year and only one big conference, and that was Holdco conference. We ran two amazing events in Cleveland, one in 22 and one in 23.

And after the event in 2023, we decided that we decided that we were. We really had to take it up to the next level. We took a little bit of a break. We started looking for how could we turn this conference into something that a decade from now, we can be proud that we launched it. Someone and some team needed to step up, and we're doing that.

I'm partnering with Kelsey and John to host Holdco Conference in 2025. We're so excited to partner with Gurley and his team for Holdco Conf 2025. If you're somebody who runs a Holdcoe wants to run a Holdco in the future, isn't our buddy named Matt Paulson who hates Holdco's because he has problems,

and you want to learn how to manage multiple business as it wants, want to learn how to incubate companies. That's my joy. I like, I love doing it. I'm excited to talk about it. And you want to connect with other people that are building portfolios of companies as a hold co practitioner, then this is for you. The big news is it gets to be a ski conference plus whole co-co-conf. So this conference is for folks that are building a holdco as their main strategy. So you're going to be incubating businesses. You're going to be buying businesses, and you're going to be growing through holdcos. You should come to Utah next spring. We're not doing this like other conferences because frankly, I hate those other

conferences. This is much more of a sense of camaraderie and very little of the let's get drunk and have a cocktail party and pretend it's progress type conferences that a lot of things are. So space is limited. Get your tickets now and we'd love to see you. It's going to be very small, very intimate, and filled with great people. Check out wholecoconference.com for more deeds. So not only that, so system and tracking, but then you also alluded to the accounting because there is a, this is something, there's something with this business that many other businesses don't. have, which this has a substantial liability, like an inventory liability, right? Because so, two things, there's the, there's the store credits that you owe, like all of those store credit

balances. I think that you've got to, that seller should have to pay you for those or like that you wouldn't have to pay the seller for that because you're going to come out of pocket. It's money that's owed. Yeah. Right. It's owed. Like that's a liability. It's like customer deposits. It's almost the same thing. It's like a gift card deposit. It's like a gift card you've sold but have not redeemed yet. Yes. And that I would be very, I would need to even think through how to handle that.

Well, and there's some legality around gift cards that may or may not apply to these store credits. So it differs state by state. But for example, I've run into this in med spa businesses that sell gift cards. In certain states, once the gift card is aged past a certain number of, months, you can keep it. You know, it's, you know, the law is, it's obvious this person's never coming back to spend their gift card and you can sweep that into revenue. I wonder if in North Carolina, which North Carolina, I doubt it. Just some of the other state laws I've seen in North Carolina, but it would be interesting to know the legality of whether those store credits ever sort of expire and you don't have to pay them.

Yep. And this is also an area where sometimes the accounting rules and the tax rules can differ. Right. Like you may have to sweep that into revenue, but for tax purposes, you may not have to recognize it as revenue. You know, sometimes they're all that's very, very different. So you would need, if I were to buy this business or any other consignment business, I would want to have an accountant. Like I will want a Q of, or some sort of, I mean, this is a small business for Q of, but I would want some sort of. I mean, this is a small business for Q of, but I would want some sort of. accountant to say how best to handle this, right? It's a little easier than gift cards because people aren't like running around with them in their wallets and show up and try to redeem it. Like you should have a computerized record of everybody's account balance in this case. So you should kind of know what your liability is. You should, but I've seen a lot of these. I being the spreadsheet numbers person, I have seen some, you know, horror stories.

So that would be, you know, this is one of the. of those deals where I think you need to kill it early by finding this stuff out. You know, like how messy is this accounting or this are these systems? If they're messy, this cash flow figure that they're reporting, it could be very far off from that, the real, the real tax or accounting figure could be way far off. So this would be one of those businesses where I'd sort of have a gut feeling that I've got to do some very quick financial diligence with a professional. And there's a, that's the problem with businesses like that.

You have to spend money to figure out if it's transactable. You have to spend your own money as a buyer on professionals and unwinding and, you know, asking a lot of questions only to find out that maybe there's a 50, 50 chance that this is not transactable, or at least not at the price that this, you know, seller might be expecting. That's something we see a lot, you know, any kind of business that is prone to messy accounting. And there's a lot of those. Yeah, this seems like it could be prone to messy accounting if it didn't have software. That being said, the messy accounting you don't have is inventory here because you don't own any of your inventory.

So you don't really care what it's valued at. You know, worst case, you had to donate the entire inventory of the store. You wouldn't lose any money. I mean, your customers, your designers might be pissed at you because that was their valuable designer baby stuff. But you don't have to diligence the inventory as thoroughly and you don't have obsolescence risk on the inventory. Right. Yeah. Agreed. Yeah. There is a good business here. It's just a really a matter of, I think, the systems and the accounting is like your number one issue. Yep. And this is a good niche for kids also. You mentioned equestrian and other kind of sports stuff. Our niches where you see consignment in. You also see it in fashion, although that's harder. So my wife also shops at consignment fashion.

Yeah. And they've got to be really savvy about what they take, right? Yep. Yeah. Purses you mentioned. Luxury purses, yeah. People trade those, even trade those online. Yeah. So there's definitely some categories that make a lot of sense here. And I guess if you got this business really humming in the baby product and kids clothing category, you could maybe expand to another one of those types of, you know, sports. Sports might be a natural expansion because the kids grow up and they go into, you know, soccer and football and whatever else. So that's the thing. That's the one thing that's sort of hard for me about this business is I'm not sure how to grow it. Because these are retail centric businesses. I mean, there's not, eBay is not the same thing. Like you can't really do this online.

Like people want to be able to bring the laundry basket of stuff and like unload it, right? And then make money when it sells. And there's a shopping experience, right? For people that want to buy secondhand stuff. Like you don't want to buy it on eBay, the shipping, like all that stuff. So this is a retail business. it's hard to expand in other categories in the same store because it you know your branding doesn't make sense like there's another one in charlotte that i don't think is this one called kid to kit

is a kid consignment store like you can't like put purses in there you can't put equestrian stuff in there yeah you know like maybe you can do some sports but like it's kind of hard to grow um on the flip side you know i'd want to understand like what consignment is doing as an industry but i think it would be hard to shrink also. Like if you have a good lease in a good location and the community kind of knows you're there, you got a whole bunch of 8,000 consigners, you know, I would think this just sort of runs and your main thing not to screw up is to not merchandise it the wrong way. Right.

Yeah. Yeah. So you're right. Maybe growth isn't really that easy. And then speaking of the location, like you said, it's really kind of critical or core to this business. You need to find out about the lease if you're going to buy this business. How much longer, this is absolutely location dependent.

So how much longer does this seller have on that lease? Can you get it extended? If so, what's the cost? I mean, you really have to secure that location for a good period of time to want to buy this business at, was it four times or three, no, three times. Three times, yeah. Yeah. Yeah, I agree.

Lease matters a lot here. Location matters a ton because you're like part of the local community. And people know that they're going to go to that retail store. and unload their stuff. But that, so like, I just think this is stable, right? Like, this is a community institution. It's probably not going to grow a lot. It's probably not going to shrink a lot unless I'm totally wrong.

And like, people are abandoning consignment in droves for eBay. But I don't think so because it has a different dynamic. So it's not, I don't know that I would pay 3X, but like there might be a transaction here. You know, if it's a good store and a good location. Like, could you get SBA debt for this? Then it's a little bit oddball, but you could. Remember, SBA loans are always underwritten to the tax returns. So, you know, depending on what the tax returns show,

if this also feels like there could be some cash business going on here. Like, maybe not. But I'm just, you know, this is the kind of business where I kind of tend to think that could be going on. If they're not reporting at all on the tax return, you know, then you won't be able to get financing. But, yeah, if the tax returns look good, you could get an SBA loan for this. Yeah. Yeah. I would imagine that this is an, an.

industry where the quality of accounting varies wildly. Like, if this is, if this business has good systems and like good accounting and everything is done the right way, it can be a really beautiful business, right? It can be almost entirely digital. People are like swapping, paying with store credit. Like you're not even having payment processing fees all the time. Yeah. You're just moving dollars around in a ledger as people buy things.

And everything can pretty easily be computerized. that version of this business is beautiful. The other version, which Heather, I think you're envisioning when you go, I don't know if you can get a loan, is when it's all on paper and it's not documented and it's like buy-sell trade, you know, very informal, which is obviously completely untransactable. Right, right.

So that, exactly. And I think I remember that in the back of my head from the equestrian place that I used to go to because they bring out these big books. And it was, it gave me anxiety just to look at it. Yes, for real. Just a mess. Yeah.

Yeah. But I don't know. It's also not quite big enough to get me super interested, you know, 200,000 of net income, like you're running a retail store. Yeah. But as far as retail stores go, you're doing 200,000 of net income on only 400,000 of sales. So that's like not a lot of people through the front door, right? So it's a relatively easy retail business to run, relatively low volume because the margins are awesome.

So as far as retail businesses go, I really don't hate it. Yeah. A local person. that, you know, that likes retail that's already maybe got some retail experience, understands the baby product and kids clothing niche. Yeah, great little business for somebody like that. Yeah, I like it. Now, the question to me is, do you buy it or can you start it? Do you think you can, for less than three times, for less than half a million bucks, can you start a kid's consignment store in this area? Well, or not?

it's a supply side question because i think you could probably go get the lease you you know retail's not that hard to find these days retail space uh but can you do you know can you get the word out to the right people the moms of the community that you know or whatever product it is you're going to sell that you know they need to bring their stuff to you uh and you're going to be able to sell it i think and i think it would i think there's a ramp up period that might be kind of long to get enough inventory to get some traction. And that would be the hard part. Yep.

It also seems like if you, like if this is the area you wanted to be in, you might, you might kill them and also not get enough traction to get off the ground. It might be, you know, you just divide the market and then both. Not enough room for two.

You know, and they both can't survive. Yeah. So what's interesting is like I would initially think, oh, you can just replicate this. This might be harder to replicate than I originally thought. Mm-hmm.

Yeah. because you got to source all the all the inventory and you got to do it over time. I'm sure they didn't start with. I'm sure they have a full store now, but they didn't start that way. So that would be tough. I think, yeah, I think that is a moat. This one has a little bit of a moat. If it's got a nice, you know, what did they say, 8,000 consigners.

That's the moat. That's what you're buying. Yeah. So I'm kind of surprised. I like this more like initially you're like baby clothing retail. No thank you. But there's a lot of things to like about this. I agree.

All right. So you thumbs up, Heather? I'm thumbs up if the financials are okay. If it has software and clean accounting, thumbs up. Otherwise, run screaming. Yes, that's me. Yep, yeah, cool.

Well, this was a first. I don't think we've ever done a consignment store. No, we haven't. So shout out to Ted. Thank you for sending me this deal. And you can find his newsletter. I think it's just tiny money.com. So thanks, Ted.

Thank you for listening to Acquisitions Anonymous. Join us next week.