Open a Small Retail Business

If you are an aspiring or established entrepreneur looking to open a small retail business, there are many things to consider before opening your doors. Options abound with regard to location, types of merchandise you will sell, and other factors that will ultimately affect the success of your store. It is important that you or someone you will partner with has extensive experience working in various roles within a small or large retail business to navigate through the process of opening a retail business.

Steps

Deciding What to Sell

1. Choose a product in which you have interest and knowledge. You don’t have to be an expert, but you should have a working knowledge of and a genuine interest in the product you will be selling. Understanding your product will help you to make good business decisions in the future. Also, you may already have contacts with suppliers and other professionals in the business who can help you get yours up and running. To decide what to sell, you can:
   • Evaluate your hobbies. If you have a hobby about which you are passionate, investigate whether it could turn into a retail opportunity. If you already spend a lot of time on something, chances are you know a lot about it. Your excitement for and knowledge about the product could help you to educate customers, which translates into more sales.
     • If you are an avid gardener, consider selling gardening supplies.
     • If you like to refurbish items purchased from flea markets, consider running an art and antiques store.
   • Use your line of work and education to inspire you. Your education and work experience have likely imparted useful knowledge that you can use to run a retail business. Think about the skills and practical knowledge you have acquired while building your career. Ask yourself if could see yourself selling related products.
     • For example, a hair dresser might consider running a beauty supply store.
2. Gauge the demand for a product. No matter how much you love something, it will not sell if there is not a real need or desire for it. Do some market research. This will allow you to determine whether or not people will purchase your product.
   • Investigate whether people are purchasing a product. Visit online marketplaces like Amazon or eBay. Amazon has a Best Sellers Page that lists products that sell well. On eBay, you can do a search for completed sales within a category. Study how well products did in auctions. If it sold quickly or there was a bidding war for the item, it might be a product worth selling.
   • Visit Google Adwords Keyword Planner. Type in keywords related to the products you want to sell, and see how many searches have been done on these terms. This can help you to assess demand for a product.
   • Visit retail stores that already sell the product you’re thinking of selling. Evaluate performance by noticing how long the products have been on the shelf and if they sell for full price or only when they’re marked down. Ask proprietors what their bestsellers are.
3. Read trade magazines and academic journals related to your industry or target market. These will give you a well-rounded understanding of the market. Learn about trends in the market. Find feedback about the product you want to sell. Evaluate the ads that are displayed in the publications. If someone was willing to purchase ad space for a product, chances are it’s a good seller.
4. Search for actual facts and figures. This information will not only help you to gauge the market, but it will also be useful for creating the financial projections you need in order to obtain financing. Read retail trade reports published by the U.S. Census Bureau. These are updated every five years and present information about sales trends in different industries. Also, join a trade organization such as the National Retail Federation. Their Retail Insight Center lists industry and consumer data gathered from government agencies and consumer surveys.
5. Estimate your potential profit margin. Figure out how much it will cost you to produce or procure the product you want to sell. Compare this with the amount for which you can sell it. Determine if the profit margin is enough to make the business worthwhile.
   • Get to know suppliers through trade organizations, by attending trade shows or by visiting online platforms like Thomasnet.com. Compare wholesale information, trade prices and minimum order requirements.
   • Determine the retail price by researching what other stores are asking for the product. Visit an online marketplace or a brick and mortar store to do this research.
   • Compute an estimated direct costs margin. The formula is Direct Costs Margin = Sales Price-Total Direct Costs.
   • If it costs you $5 to produce an item and you sell it for $20, your direct costs margin is $15.
   • Calculate the direct costs margin percentage. The formula is Direct Costs Margin Percentage=Direct Costs Margin/Sales Price*100.
   • Using the above example, you would calculate <math>15/25*100=75%</math>.

Writing a Business Plan

1. Write a Company Description and Market Analysis. Provide a high-level review of the type of store you want to open. Describe the kinds of items you intend to sell. Identify your target customers their distinguishing characteristics, and how you are going to meet your customers’ needs. Identify your competition and explain how you have a competitive advantage.
   • For example, suppose you want to open a small pastry shop. The items you will sell are gourmet coffee and pastries.
   • Your target customers might be commuters on their way to work, or diners from nearby restaurants looking for a place to enjoy dessert.
   • You may plan to meet your customers’ needs by offering quick service, special seating or even a drive-through window.
   • Advantages over your competition might include your location, a well-known pastry chef or a special recipe you use.
2. Describe your organizational structure. Provide details about ownership of the store and information about your management team, including their qualifications and how these qualifications complement your skills. Write an organizational chart with narratives about who is doing what and who is in charge of every function. Ownership information should include the names of owners and the percentages of the business they own. Include the legal structure of your business.
3. Describe your marketing strategy. Explain how you are going to promote your store on a limited budget and fill it with paying customers. These strategies may include ads in the paper or direct mail and flyers. In addition, you could offer coupons or discounts for bringing in new customers. Finally, networking is a powerful marketing strategy. Introduce yourself in person to local businesses, join the local chamber of commerce, small business associations or local charities.
4. Explain your plan to fund start-up expenses. If you are going to be requesting funding, provide specifics about the amount you are requesting and how it will be used. Specify the amount requested. Explain in detail how the funds will be used, such as for capital purchases, marketing or start-up inventory. Define the type of funding requested, such as a debt you intend to repay or an offer of equity in the company.
5. Provide financial projections. Write about how you expect your cafe to perform over the next five years. Draw up forecasted income statements, balance sheets and cash flow statements. Write a budget for capital expenditures, including food service and counter area equipment, storage, and office equipment. Explain your pricing structure, including the cost to produce menu items and the prices you will charge to make a profit. Describe discount pricing strategies.
   • Discount pricing strategies include price bundling (offering a discounted price for multiple items purchased together), complementary pricing (charging low prices on one common item, such as coffee, and higher prices for others) and customer loyalty discounts.

Finding a Location

1. Work with a commercial real estate agent. An agent experienced in retail businesses will be able to show you properties that might meet your needs and are available for lease within your budget. You could also contact the commercial real estate development company that owns a specific property that interests you.
   • A good alternative would be to take over an existing retail store that has a loyal client base. A commercial real estate broker will know about these opportunities as well.
2. Conduct research on your potential business location. Search public records of how the location was used previously and statistical data such as the average income in the area. Find out if there are competitors and similar ventures nearby.
   • When you find a potential location, observe the area for a few hours and analyze the foot traffic in the neighborhood. Is it near public transportation or highways? Is there enough parking? Being near the competition can help attract the right customers if you believe your products will be superior.
   • You will want to also analyze the demographics of the area. Does the income level match the type of clientele you hope to attract? Your local librarian or commercial real estate broker can help provide this information.
   • Once you find a location purchase insurance policies for general liability and fire insurance.
3. Determine your needs. Find a location that exposes you to your customers and is consistent with your image. Make a floor plan and look for a location with suitable space and layout. Consider proximity to suppliers. Evaluate the local labor market to determine if the area has potential employees. Research the local zoning regulations. Research the local crime rate to ensure the safety of your customers and employees.
4. Develop a budget. Determine what you can afford to spend on rent each month. Be aware of hidden costs, such as repairs. Start-up costs may include renovations and decorating your space. Budget for local property taxes.
5. Plan for future growth. If you plan on expanding your store within the next few years, find a building with extra space. Communicate with the landlord about the availability of extra space in the future. Extra space may include a second floor or outdoor space.

Figuring Out Your Finances

1. Determine your expenses. Lists all of the expenses your business will incur when starting out. You may have to lay out a lot of money at first before you start making any money. Planning how to spend money will help you spend it wisely and start earning money sooner.
   • Rent and operation expenses include your rent and, in the beginning, any security deposit you need to put down. Other expenses in this category include utilities and staffing.
   • Property improvements and customizations include construction costs, furniture and fixtures, equipment and office supplies.
   • Technology and communications expenses include computers, phones, internet, point of sale (POS) terminals, card readers, scanners and printers.
   • Calculate how much you need to spend in inventory to start your business.
   • Marketing and advertising expenses include print, online, television and radio advertising, grand opening expenses, print marketing materials like posters, flyers and coupons, and design work for your logo and signage.
   • Other required fees include licenses, permits, taxes, registration, legal fees and accounting fees.
2. Identify funding sources. Know where to look for financing to help kickstart your retail business. If borrowing money from friends or family members, preserve your relationship with a written agreement that specifies the terms of the loan. Banks offer traditional commercial loans, and the Small Business Administration (SBA) partners with the government to offer several loan programs for entrepreneurs. State, county and municipal economic development offices support small businesses that boost the local economy by offering financial resources, loans and grants.
3. Contact the SBA for information on obtaining an SBA guaranteed small business loan. You would then apply for the SBA loan at a local bank or credit union. This type of loan guarantees repayment by the SBA if you default.
4. Consider a home equity loan. Find a bank that will give you a home equity loan or home equity line of credit. You would be using your own home as collateral. Make sure you can pay back this loan or you risk losing your home. You will also have to have a credit score in the high 600s to take out this type of loan.
5. Consider micro lending. Internet micro lending services (also called peer to peer lending) help borrowers find lenders for relatively small loans, usually under $35,000. Research these sites and familiarize yourself with all of the rules and regulations in order to avoid misunderstandings later.
   • Popular micro lending sites include Kiva, Prosper and Lending Club.

Complying with Laws, Rules and Regulations

1. Choose your business structure. The structure you choose has tax implications. Learn about the different types of business structures. Choose the one that works best for your business.
   • A sole proprietorship means you alone are responsible for the business. You claim all gains and losses on your personal income taxes.
   • A corporation is a legal entity owned by shareholders. Shareholders are not help personally liable for losses of the business. Taxes are paid by the business on profits, and then the shareholders pay taxes on dividends that they receive from the business. Corporations must be registered with the state in which they do business. You will have to file articles of incorporation with the Secretary of State in that state.
   • A partnership is an arrangement between two or more parties to run a business. Each partner contributes to the business and shares losses and profits.
   • A limited liability company (LLC) offers the liability protection of a corporation with the tax flexibility of a partnership.
2. Register your business name with your state government, if necessary. You can do business under your own name, or choose another name for your store. Check with the U.S. Trade and Patent Office for trademarks, and choose a name that is available as a URL address so your website address can be your store’s name. A DBA (Doing Business As) is needed whenever you are doing business under a name other than your own. Registering a DBA name is typically done through your state government or county clerk's office.
   • Choose a name that not only looks good on a logo or a sign, but that also reflects your store’s philosophy and culture.
   • For example, if you are opening a chic boutique, you want to use words and phrases in the name that connote style and will appeal to your target audience. You might choose to use your own name, or integrate your location with a name like “Charlotte’s Uptown Closet.”
   • If your store sells cute things and you are targeting a young audience, use a cute name, such as the Dress Up Shop or the Rose Petal Boutique.
   • If you are selling more sophisticated styles and are targeting a high-end clientele, you would choose a name that reflects that image, such as La Couture.
3. Apply for a state licenses and permits. Every state requires businesses to register with them in one form or another. Licensing and permit requirements vary from state to state. Visit the website of the state in which you want to do business. Learn about the procedures for applying for applicable permits and licenses.
4. Apply for federal licenses and permits. Only specific categories of businesses need federal licenses and permits. If you are selling something that is regulated by a federal agency, then you need a federal license or permit.
   • To sell alcohol or firearms, you must comply with federal licensing regulations.
   • If your store is involved in selling products related to aviation, commercial fishing, mining and drilling, maritime transportation, agriculture, nuclear energy, radio and television broadcasting or transportation, then you must contact the relevant government agency to learn about licensing requirements.
5. Obtain a federal tax ID number. You will need to file a separate tax return for your business and therefore will need to have an employee identification number (EIN), also known as a federal tax ID number. You can find the form online at www.irs.gov.
   • The most efficient method is to apply online. You will get your EIN immediately.
6. File required state tax returns. Almost every state requires businesses to file income taxes. Also, most states require businesses to pay employment taxes. Some states also require businesses to pay for temporary disability insurance. Depending on your state, you may also be required to pay unemployment insurance tax or workers’ compensation insurance.

Hiring Staff

1. Determine how many employees you need to run your store. Write job descriptions that define each person’s role, responsibilities and work hours. If possible, plan to avoid hiring too many part-time employees. Instead, design a schedule that gives employees more shifts or longer hours.
   • Part-time employees are disengaged from your store’s success. Full-time employees are more likely to be committed to the success of your store.
2. Find and vet job applicants. Once you have written your job descriptions and determined your optimum staffing levels, it’s time to find prospects. Search for job applicants by networking and by posting on job boards. Specify the work experience and educational background you want applicants to have.
   • Ask for referrals from friends, family and professional colleagues. Employees who have been referred to a business by a mutual friend or colleague tend to stay longer and work harder.
   • Use the recruitment tools on LinkedIn. Do a search for a relevant job title. You will see a list of members who match your search terms. Review their background, skills and references. Contact any whom you would like to interview.
   • Advertise on job boards like such as the NRF Job Board, Craigslist, CareerBuilder, Monster and Seek/TradeMe. Thousands of job seekers will see your post.
3. Interview applicants. Sort through all of the applications you receive and generate a list of applicants to interview. Stay organized by making a list of questions to ask and taking notes during interviews. After the interview process, use your notes to assess each applicant. It’s important to meet all applicants in person before offering a job. Sometimes an applicant looks good “on paper,” but turns out not to be a good fit for your business.
   • Be honest about the job during the interview so applicants understand exactly what will be expected of them.
   • If possible, invite others to the interview to get additional feedback.

Related Articles

• Open a Boutique
• Open a Beauty Supply Store
• Get a Job in Retail
• Start a Small Business
• Create a Logo for Your Small Business or Website
• Create a Brand Positioning for a Small Business
• Write a Business Plan

Sources and Citations

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