That’s what one potential shopkeeper wanted to know the other day. It’s a common misconception. Those looking at the business from the outside in, thin
k They get all their stock for free so what’s the big deal about starting a consignment shop?
Yes, it totally possible for a consignment shop to go bankrupt. Sometimes they seem to go belly-up overnight. Even donation-only not-for-profit thrift shops can fail. And the rate of failure for buy-outright (BOR) resale shops is astronomical.
So before you decide you want to start a consignment shop, open a resale shop, or even organize a thrift for your favorite charity, read this. Even if you are successful in this resale business, read this, because there is nothing that harms the reputation of the industry as a shop going out of business…especially those who do so without honoring their debts to their consignors!
The most common stumbling blocks I see in resalers going out of business:
* Not budgeting enough for opening expenses. Utility deposits, the high cost of signage, on and on… if a new shopkeeper uses up her financial cushion before she opens, there’s no cushion… which is the second most-common barrier to success:
* Not having, really HAVING ready to use, at least six months’ worth of business and personal expenses set aside. There is nothing so heart-breaking to me as the knowledge that JUST as Sally Shopkeeper is hitting her rhythm, say about month 4, that she starts panicking because income isn’t covering outgo just yet. She starts doing ill-advised things, and soon, the business she put her heart and soul into is kaput. Had she had that set-aside money, she wouldn’t have made bad choices. Which relates to third most common blunder:
* Using OPM as her own. Now, in business, using OPM (other people’s money) is considered a virtue: it means people are INVESTING in your success (and you get to use YOUR money for the above-mentioned cushion!). But alas and alack, spending consignors’ money that is owed them is a GIANT no-no. And it happens way too often. Take the advice in the manual and HEED it: a separate account for money owed consignors. Ditto, if you are buy-outright, for your open-to-buy dollars. Without the money to pay suppliers, you don’t get more supply, and you know where THAT leads!
* And finally, the last stumbling block to success in resale: Realizing that there’s a whole category of expenses involved in being self-employed that you plum didn’t think about. Lost of income from your last job. Child care. Loss of benefits such as health insurance. Added vehicle costs (hey, it costs money to go to OfficeMax every other day!) Daily food costs (coffee, lunch, and often dinner at the shop.) Added food costs for your family (“I’m too tired to cook; let’s go out.”) Then there are the “I deserve it because I work so hard” purchases to pamper/reward yourself. And finally, believe it or not, there is a stumbling block in all the GREAT things that come into your shop…that YOU buy. One shopkeeper told me she totaled her year’s purchases of things for herself, and it was over $1500. She was so bummed that I didn’t have the heart to mention that not only had she spent $1500, but she’d ALSO missed out on $1500 worth of profit, had she sold those things to customers. So it REALLY cost her $3000.
* Oh, one more stumbling block to success? Trying to make it alone. Reinventing the wheel. Doing things the way the past owner did (even though you BOUGHT her business because you could see areas that needed improvement) or the way you “dreamt up.” Don’t try to make it alone. Don’t try to figure out through trial and error things which are readily available at our Products for the Professional Resaler. No one has enough money, time, and effort to make mistakes in today’s financial situation. To risk a $10,000 to $200,000 investment in starting a business for lack of a few hundred dollars’ worth of how-to info is, well, kinda silly, huh?
Auntie Kate The Resale Expert 
Hey Kate, I have been thinking of starting either a thrift or consignment shop for some time now. I plan on buying your manual Too Good to be Threw in the near future. My questions involve some issues that I find confusing in resale. How does the tax structure work with consignment? In other words if I sell an item for $100 and the consignor gets 60% and I get 40% does my store pay tax on the entire $100 or just the 40% that the store actually receives? Also, is there sales tax charged on second hand merchandise? If the original buyer paid taxes on the item already then the concept of a second buyer paying sales tax on the same item doesn’t make sense to me. I’m not sure if these taxes vary by state. I am in Pennsylvania. Thank you.
Hi Janet, I am sure that my TGtbT manual will help you focus in on whether this is an industry you would enjoy and thrive in!
Taxes: It’s a SALES tax, so you have to collect it on SALES from your customer and send it into your state entity. What the store “actually receives” falls under income tax, and your state and federal governments will want their taxes on that. And of COURSE every state charges sales tax on any transaction, regardless of whether they’ve already collected it before. Finally, yes, sale taxes vary by state, and in your state, I believe some specific goods are exempt from sales tax. On my Links Page at TGtbT.com there’s a link to a site where you can find your specific state’s web sites for the nitty-gritty.
First of all, 6 months living expenses is not enough. You need a minimum of 12 months IMHO. Also, before you open a store be sure that you realize that you have to include your own salary as an expense before calculating your profit. In other words, if you make $50,000 after all expenses and you’re not paying yourself a salary then you’re really not making any profit! A profit is a return on YOUR invested funds. In other words, if your invest $50,000 to open the store and after paying yourself a fair salary you have $25,000 left over after all expenses for the year, then you’ve made a 50% return (profit) on your initial investment. So many owners think that if they pay themselves $XX,XXX/yr. that is the stores “profit”. But in reality they’re not making any profit at all (assuming that their pay equals a fair salary for a store owner). Believe me, when the time comes to sell your store any savvy buyer will only consider a “profit” after the owners salary has been considered as an expense! The new buyer does not want to “buy” a job they want to make a return on their investment, right? Good luck!
Thank you for your viewpoint, Sylvia.
I know this is about a brick and mortar shop but I’ve had a hard time getting the word out about my website that allows moms to buy and sell kids clothes. I offer this for free, but moms have to sign in so I can keep up with who’s on my forum (no spammers allowed) What would be the best way to get the word out? Any suggestions are appreciated.
Hello, TheMometc… I would recommend you browse the Internet for suggestions on getting your on-line-only buy/sell group more widely known. All the ideas about getting a B&M known apply, such as fliers, use of social media, even paid advertising and of course, most of all word-of-mouth events/promotions that will get people talking/ sharing/tweeting etc! How would meet-ups work for you? Let us know how it goes!
I have been working at a great consignment shop for a year now. The owner just closed her second location that had been failing for some time and has recently offered to sell me the business location that still remains, as she has another business interest. This is my dream to own and operate this store properly, unlike her. She has been mismanaging the monies for a long time and is now in debt to consignors. This store is in the best location in the area and is a potential gold mine if run properly.
Now that she has closed down the 2nd location, those consignors are demanding pay, but there is no money to give them.. (she often sold these consignors items at the better location).
Anyway, I want to take over this store and operate under a new name. I would like to resolve some of her consignor debt so that I can regain their trust and establish a good reputation. I fear that her debts from the failed store, as well as other debts such as advertising, for example, will be passed onto me if I legally buy the business and obtain a business license in my name with the name of this business.
Is it possible that I can register under a new business name, change the name of the store, new signs, new everything, but only agree to pay up to a certain amount of debt?
I know it sounds sticky, but I know that if I can get past this rough
patch, I will be successful and create a thriving business.
In a nutshell: can I buy her business, open under a new name and agree yo pay up to a certain amount of debt?
Also, what potential hidden debts might I inherit?
In a nutshell, Sarah, you need to structure the purchase of this business (if you decide to go ahead) with a well-versed business lawyer. DO NOT proceed otherwise. It may be best to steer completely away from this business and start your own, unrelated shop. Let us know what you decide!
Hi again! I stumbled onto this site tonight while doing a little research for my business. As I was reading some user questions, one of the stories sounded a lot like my situation last year and then I realized that it was ME who wrote to you over a year ago! I must have forgotten that I wrote to you! So that being said, here’s an update!
I ended up moving forward with the deal, but it was not a easy! My good friend is a business attorney and did not agree with all of the terms, but I took the risk anyway.
I was so worried that I would get stuck with the owner’s unpaid various debts by having the same store name, but lucky for me, when it came time to sign the papers, it was discovered that because she owed so much in back taxes, the name could not be transferred. This worked to my advantage and it was a perfect opportunity to change the store name completely.
The transition was challenging in the beginning- explaining the change to the consignors was exhausting- especially to those whose inventory was missing etc… I spent the first several months kissing babies and making things right. 99% of the consignors responded well and were supportive and relieved.
I cleaned the store up and decluttered. Little by little over time, I was able to paint, upgrade the racks and get new computers. I also changed the overall inventory selection, which brought me a new clientele. I have kept most of the old clientele too.. Having to explain over and over was draining, but eventually word spread and the old name and its reputation phased out. Every now and then, someone might mention the old store, but it’s rare now. I have spent countless 15 hour work days in the store and kissed my social life goodbye.
I opened the business with very little startup money, which I know goes against what you say to do. I have to agree that it is extremely risky and not the best idea in most situations.
So was it worth it? Yes, absolutely. There are some things that I would do differently, but if given the opportunity, I would do it all over again.
Sarah, how nice to hear the “rest of the story”… and I am so glad that it’s worked out for you. Here’s to a bright future. And, I hope, not “stumbling” upon the Too Good to be Threw family of sites 🙂 which are listed for quick reference here: https://auntiekate.wordpress.com/thebesto/ but rather becoming a regular at all our social media, blogs, and sites!
I am thinking about starting up a consignment shop in my area (as there isnt one decent kids one near by) I am definetly reading all I can about the business and researching locations and def looking at budget and all …but I just thought I might get any advice possible to people who already own a a shop … what makes it profitable … what ideas are great …which ones not so much… etc. I would greatly appreciate it.
Christina
Welcome Christina, to Auntie Kate the Blog. When you get some (lots of!!!) time, please explore not only all my entries and my buddies’ comments here on this site (hint: start with the tabs on the top of this screen, then progress to choosing general categories in the “What are we talkin’ about?” box in the right-hand column. You can also take a look at narrower topics, again using the right column under “Read more about:”)
Then, of course, my flagship site, http://TGtbT.com, has dozens and dozens of pages, articles, and ideas as well as almost 40 Products for the Professional Resaler. And our consumer-oriented site, http://HowToConsign.com, will give you valuable insight into what the public wants from a consignment, resale, or thrift shop (and it’ll tell you the difference too!)
Finally (if your brain hasn’t exploded by now) check out Facebook and Twitter too. You’ll be MILES ahead of most potential shop owners with the free info and our Products… all of which help YOU realize your shopkeeper dreams!
[…] you can go bankrupt. See the warning signs. Are you smarter than the other consignment shops? (See more posts about resale […]
[…] Including every penny you owe to consignors… that one piece of advice sums up a healthy, vibrant, growing shop. The money owed consignors (or your BOR budget, if you’re a buy-outright) is never ever spent on anything. Read more on How can a consignment shop go bankrupt? […]
[…] How can a consignment shop go bankrupt? […]
My shop took almost three years before I made a profit. What I discovered, unfortunately, is that I really bought a “job” instead of an investment. When I calculate what I make per hour it’s hardly more than I would make at a J-O-B!
Great5 tips! What I’m trying to figure out is how much revenue is reasonable to expect. I am developing a business plan for a non-profit shop to benefit a charity. I can generally estimate the expensed, but I have no idea how to guess at the income potential. Does anybody have any suggestions?
[…] We’ve already talked about how easy it is to go bankrupt. […]
I guess my main problem is when shops mix money. For the life of me I cannot understand this. The money you owe consignors is NOT the shops money. I would just die if I used the consignor money and then had to beg borrow and steal to make it up cringing each time the soor opened. I believe that too many places get to big too fast and in over their heads trying to keep up. Start slow and bulid again and again.
We are in this biz a little over a year and honestly we learn something new each day that changes the way we do business.
It is business but it is the BEST business ever!
Kate,
Thanks. I will admit that I am the sharer who voiced that opinion. But you are right. There are A LOT of reasons why a shop could go bankrupt and I’m glad you pointed some of them out. I just hope that with word of mouth, GREAT support, a CUSHION, a GREAT attitude and a LOVE for the business will help mine to grow and keep growing until we burst at the seams! I really appreciate all the help and advice I get from your site and I in no way was trying to offend anyone with my comment.
Thanks,
Nancy
Silly Sprouts CC Shoppe
Kate,
Its excellent!
and very very good reminder to lots…
There ARE lots of expenses to owning/operating a retail outlet…and sometimes those expenses are simply not considered as ‘real’ …………..just stock for some reason….