Opening a gun store. Anybody have one??

[Gunman21]

Hi,

My friend and I are considering opening and co-owning a gun store in South Carolina. We want to sell Title II firearms and the Class 3 License is pricey at around $3000 for 3 years not to mention the other expenses that will pop up.

Does anyone have a store? We are deciding to make the store a corporation or LLC etc. I personally would like to avoid the double taxation of a corporation but I also would like for both of us to not have to buy the Class 3 license. What are the advantages of having the business be one or the other? Is there a "norm" that most gun stores go by?

If I had the corporation licensed to buy and sell firearms would I be able to buy them for my own personal collection? Or would I also have to buy another license for myself since a corporation is considered a separate entity by law?

Thank you my friends

 

[Sam1911]

I don't own a gun store, but I am heavily involved with a small business.

Do you have a very detailed business plan? If a $3,000 license fee seems pricey, I'm concerned that your budget may not expansive enough to cover the unbelievable expenses that are involved with starting and maintaining any kind of a business.

I really hope you succeed! I don't want to sound discouraging. But please enter into this with the understanding that being in the guns business is not about GUNS. It's about BUSINESS. If you really like guns, then save your money and buy guns.

If you really like BUSINESS (and have the education and talent for it), you may be fortunate enough to do well in the gun biz. Are you familiar with business loans, zoning laws, insurance, audits (both by the ATF and the IRS), personnel management (hiring, paying, and keeping good staff that can make sales and keep the customers happy), labor laws, etc., etc? That's life in small business. Every once in a while you get to do some of the stuff you enjoyed about it to begin with. But usually you just hire people to do that stuff so you can keep your nose in the books.

There are some professional dealers here on THR who will hopefully offer their thoughts to this thread -- and maybe answer your questions better than I can.

One fellow who runs a shop and who posted for a while here once said something along the lines of: "I really, really like guns. So I opened a gun shop. I haven't shot a gun in years now. Every Saturday I'm in the shop. Every opening day of every hunting season, I'm in the shop. I've been in the business for three years and hope that maybe next year I can start to draw a salary. I get to help out some really nice people and see some really nice guns. But the other 99% of my time is usually drudgery."

GO for it, if you can. But as tough as the business world is (especially right now) you've got to understand what life as a gun dealer is like and be willing to live that stuff.

Good luck to you!

-Sam

 

[2RCO]

I gotta say that if you are worried about a 3k license. The you should forget the class 3 world. Inventory is going to cost you exponentially more than that.

As a former banker I've seen many businesses fail and can tell you that the #1 cause is undercapitalization. To start a brick and mortar store you need cash and good amountsbof it for employees, insurance, physical structure, and inventory. Be prepared for the business to do poorly for a while as well.

I've been mulling over putting in a gun store myself but I want to make sure it is the right idea before risking a couple hundred grand to do right.

So I'll be following this thread intently.

 

[dakotasin]

form an s-corp to alleviate your double taxation fears.

find a quality cpa/bookkeeper.

work with your local bank's commercial/business banker. the large national banks (wells fargo, etc) won't be able to get you out of their office fast enough.

be familiar with local ordinances, and tax issues.

have enough cash on hand to cover 3-6 months operating expenses before you talk to your banker. develop a rapport with your banker, and have him/her help you as much as possible.

the bank will likely lend you a max of 75-85% of your building's purchase price, and 50-65% of the inventory cost. be prepared.

good luck!

 

[2RCO]

work with your local bank's commercial/business banker. the large national banks (wells fargo, etc) won't be able to get you out of their office fast enough.

Unless you have a good rapport with your local banker or generate a good amount of cashflow from another endeavor good luck with any bank on any startup in the current market. All banks are accountable to the OCC or FDIC and neither likes risk.

As far as 50-65% on inventory from a community bank GOOD LUCK WITH THAT! Also under current lending policies I wouldn't expect over 80% on the Building.

From a Bank's perspective they prefer to loan money on a purchase of an existing business that way they have tax returns to back it up. Pro Formas aren't worth the paper they are generated on.

If you can get a loan on a New Business it's not based on the business but rather your personal credit and Cashflow.

I've worked as a Commercial Lender for both Monster Banks and a small Community institution neither are keen on lending money for a startup.

Raleigh

 

[jarhead]

I agree with the forming an S-Corp to avoid the increased taxation issue – but for a gunshop, more specifically a Class 3 gunshop there are many things to consider…

• Pro – S-Corp you can minimize some of the taxation;
• Con – S-Corp if you ever close the Class 3 won’t be considered your “personal collection” because the FFL isn’t in your personal name, it is a corporations… so from what I recall, any Class 3 would have to be re-papered (and tax stamps paid individually) on each Class 3 you transfer;

I’d be hesitant in this day and age to have the FFL in my name individually due to liability concerns… if you do the FFL directly in your name, you don’t have the same protections (and those are not absolute) you may have with an LLC or S-Corp holding the license.

I have owned a store-front Class 3 gunshop before and enjoyed it very much… it is a very rewarding business if you enjoy the trade; however, be very aware that it is a cash intensive business that it can be very tough to make a good living (especially if you have partners… and partnerships rarely work out in the long run…. at least in my experience). It can also be very difficult to get bank loans or investors in this cash intensive business because it isn’t a normal business… you have to worry about politics and the possibility of being legislated out of business.

If some politician made a run at Class 3 firearms and somehow got pushed through that Class 3 could no longer be sold or transferred… or on the other extreme if the Class 3 laws were relaxed by some unexpected Supreme Court ruling that said that suddenly new Class 3’s could be sold to civilians on the open market (either of which would have a huge impact on the value of your Class 3 inventory). I don’t think that there is anything to worry about on either of those examples… but with bankers/investors their perception can become your reality in how much they will lend.

If you decide to open your own shop, I absolutely wish you the best of luck and 100% want nothing but the greatest success for you… but I think that starting a new gunshop from scratch (especially a Class 3) could be hazardous. Many shops have been in business for many years – but most of them gained their footing and experience in more “gentle” times politically and took their lumps during their business learning curve in a different economic environment. Just looking at the economy as a whole, I’m not sure what impact you might expect this to have on Class 3 items, which are necessarily high dollar items.

Please don’t take this as discouragement – just want to be sure that if you do it, understand that it may be a hard road ahead and do it with your eyes wide open.

Best of luck on your business venture – in spite of what I’ve written, I’m envious of your opportunity. I may be totally off base and I am sure that there will be others with much greater experience to offer.

 

[scotthsi]

Uh, good luck with that.

 

[Gunman21]

Thanks for the insight my friends. To make myself seem more qualified for your time, I'll give some background information about myself. I recently graduated from Clemson in business so I'm no stranger to the in's and out's of what this venture will require.

I am also lucky enough to have a brother who is a CPA.

With that said I believe the S-Corp is a good idea. I believe in the event of a close it would be worth paying $200 per gun to add to my collection to exempt me from a possible lawsuit to my own name.

Also remember that not all Title II weapons are machine guns costing $10,000 per gun. Even If I fronted the cash to stock those guns I would be lucky to find a local buyer. I expect most of the revenue from the Class III license to come from the sale of suppressors, SBS's, SBR's, and AOW's.

I do appreciate the time and insight into the subject by the knowledgeable members of this forum. I hope this thread will continue to be a place of learning as others have expressed an interest in the topic.

 

[Phatty]

Con – S-Corp if you ever close the Class 3 won’t be considered your “personal collection” because the FFL isn’t in your personal name, it is a corporations… so from what I recall, any Class 3 would have to be re-papered (and tax stamps paid individually) on each Class 3 you transfer;

If you go out of business, it won't matter if your FFL is in your own name or the corporation's name. You can't just keep a "personal collection" as a FFL holder; you have to be actively doing business.
Also, is there any reason why a person couldn't set up a corporation for the business and have the FFL separately set up under their own name?

 

[jarhead]

I think that the biggest reason not to have the FFL in your name solely and have the gunshop itself incorporated separately would be the direct personal liability… I would think it would make it much easier to pierce the corporate veil.

 

[gun&knifecountry]

Class 3 is $500 per year.

We are a storefront ffl dealer as well as a class 3 SOT dealer and thought I would chime in on a couple of things.

The SOT tax what everybody calls the class three liscene is $500 per federal calender year. That is July1-June 30. So if you started the business now the SOT would be good till June 30 2010 and would cost $500. If for instance you started in April it would still end on June 30 2010 and still cost $500 dollars.

As to keeping guns for your personal collection. If you are a sole proprietor you can log guns out yourself and keep them for your personal collection with no 4473 filled out. As to title 2/class 3 guns. If you are a sole proprietor you may keep class 3 items and log them out to yourself when going out of business without paying the $200 individual transfer tax. You may also keep so called Pre-May dealer samples those machine guns imported between 1968 and May 1986. This only works for sole propreitor not partnerships, llc or any corps.

As to partnerships they rarely work in the gun business.

You'll need twice as much money as you think you will. Rent don't buy the building starting out. Never borrow more than 50% of inventory.

If your serious and not within a hundred miles of Oak Grove Ky PM and I will be glad to talk to you about it. There are some serious economic issues in the gun business right now especially in the class 3 business.

 

[Phatty]

As to title 2/class 3 guns. If you are a sole proprietor you may keep class 3 items and log them out to yourself when going out of business without paying the $200 individual transfer tax.

So, theoretically if a person had a good chunk of change and wanted to put together a large collection of title 2 firearms, they could get a Class 3 license, buy all the guns without paying the tax, and then go out of business and transfer all the newly acquired guns to his personal collection?

 

[Gunman21]

Phatty I believe as a FFL dealer you must conduct a certain amount of "business." If the ATF found out you did that they would be hella pissed!

FFL's correct me if I'm wrong...

 

[Pweller]

I am not in the gun business, but I have owned my own business for 13 years.

Some good advice has been given already, but I can add a few things. Don't assume that you have real knowledge of how to run a business just because you have a degree. The degree doesn't mean so much in the real world, especially if you are trying to start a business from nothing. It's helpful in getting a job someplace else, but there's no school that can prepare you for what you are trying to do. (I have a BSME and took quite a few business courses as well - didn't mean much to my success. Even what I 'learned' in the corporate world had to be relearned/re-evaluated.)

I think if you knew that much about business, you'd seriously re-consider a gun shop in the first place, because it is my understanding that the profit margins on guns are pretty low. Really, you need to double your money on your inventory to have a viable business, and it is my understanding that doesn't happen very often in the gun business (I could be wrong). That 'high-volume/low margin' thing is a myth - that's why Wal-mart buys so many things directly from China, to keep the costs down and the margins way up. Furthermore, there are a lot of people going in and out of business in the gun world, and that isn't a good sign. Personally, with my real-world experience, I wouldn't even consider doing it.

But, far and away, the most important thing to do first is to go work for a successful gun retailer for a while. You'll learn the real ins and outs of the business, and, more importantly, you will get paid to learn these things. If you start you own business, you will be paying for this same knowledge through your mistakes (which is very expensive). This was something that I did not do myself, and would have been very difficult in my given situation, but I definitely would advise everyone to do this first. It's a perfect solution - you get paid and educated in your direct field.

 

[mgkdrgn]

Nope, you ain't wrong. On new guns you'll make 10 - 20%, tops. CC charges will be 3% (now down to 7 - 17%). Taxes will take 40% of what is left (now down to 4 - 10%). With what is left is what you get to pay for your building, insurance, license fees, utilities, phones, advertising, employees, etc, etc.

IF there is anything left after that ... you -might- just get to eat this week!

it is my understanding that the profit margins on guns are pretty low. Really, you need to double your money on your inventory to have a viable business, and it is my understanding that doesn't happen very often in the gun business (I could be wrong).

 

[Bruno2]

I worked for a class 3 dealer for a litle while when I was fresh out of HS . I know that the BATF will come in un-announced and do inspections of your inventory and paprework to make sure everything is in order and if its not you could be out of business . The impression I got was people could obtain these class 3 FFL's as a right that an American citizen has a privelege to , but , the BATF really doesnt want you in business . The guy I worked for had a mentor that built the chopped down mini gun that Hollywood leased for the Predator and Terminator movies (very smart mechanically inclined person who was IMHO a "GURU" ). The BATF came in for a suprise inspection at his place and supposedly was in posession of a bootleg AR-15 and he went to prison for 10 yrs . I dont know if he had it or not , but , he went to the clink for it . The guy had everything legally that anybody on this site would want (m-60's mag 48's , mg 42 , all of the Browning makes , RPD , RPK you name it he had it ) so why would he have a bootleg ?

 

[jarhead]

I found that a business degree teaches you a great deal about how to run a business after it is successful, it usually doesn’t teach you what is needed to start a business from scratch, how to capitalize, setting up licenses or taxes or what it is like to lay awake at 2am in a sweat about meeting a payroll.

Any business, especially a gun shop, has a very steep learning curve that is a very expensive education.

 

[wyocarp]

I would skip the "friend and I" thing as the first order of business.

 

[Gunman21]

A business degree is most certainly a starting point. I wanted to ensure the contributors of the forum that I am serious in the endeavor and their time to advise will not be wasted. But lets stay on topic. I want this thread to be "if you insist on doing it, this is how..." rather than "this is why you shouldn't do it."

Bruno... wow that's a horror story.

mgkdrgn... those are scary numbers. Can anyone give a good estimate on how much insurance is? I assume it will be more than insuring a clothing store of the same value.

Here is another question. On the FFL application it says name your place of business. So lets say I want to rent 123 Makeitup Street for my business. Do I have to rent the building for the 6 or so months while I wait for my application to come back? Would I be best to use my house as the initial place of business on the application and then immediately file for a change of location when I receive my FFL. I would then only have to wait for approximately a month to be authorized at 123 Makeitup Street.

I hope I am missing something. I do not want to rent a place for 6 months waiting on the FFL. Dealers who started out renting a building... what did you do?

 

[CapnMac]

And you forgot the "sweetheart" rent deal to the strip center includes a kickback of your profits, too. Your choice being much higher rent, or a less-good location.

Only thing worse than one partner is three.

 

[Gunman21]

Hahaha the go it alone has been duly noted.

 

[dakotasin]

gunman - you don't say where you are or where you want to be... buying an existing operation w/ an established location and client base may be better than starting from the ground up. but, if it is an operation that shows a net loss in each of the last 3 years, you can expect problems from your appraiser and banker, and expect the seller's feelings to get hurt when his business appraises for half of what he thinks it should (commercial appraisals are almost nothing like residential appraisals... the commercial appraisal is heavily based on what the business generates in revenues, and location, neighborhood, etc is a very tiny piece of the puzzle).

to address some other financing concerns... 50-65% of your inventory on a line of credit is pretty standard assuming the same bank does the real estate deal and has first lien position on the real estate and first blanket ucc filing. most banks will finance 75% of appraised value or actual purchase price, whichever is less. if you get a strong appraisal, some banks will do up to 90% of cost and up to 75% of appraisal. again, depends on the situation. point being, you need to be prepared to come to the table w/ 25% of the land and building cost, 50% of the inventory cost, 6-12 months of operating capital, and a solid plan. if you can get thru the money hurdles to start up, you're halfway there.

be very aware of your competitors, and be able to speak very fluently about them; a swot analysis is in order. visit your area's economic development offices and find out about any city/state backed loans/funds, or partial guarantees. your banker can direct you here.

and... don't just walk into the bank unannounced and expect to speak to a business banker and be taken seriously. find out who the business banker is (your cpa brother should have crossed swords... er, paths, w/ several business bankers and can probably point you to one or two who know their stuff), and set an appointment...

anyway... best of luck!

 

[2RCO]

Gunman--I make this challenge to you. Which ever one of us gets off the stick first and puts in a Gunshop creates a thread chronicling their adventure.

 

[dakotasin]

i hope one (both?) of you does exactly that. i think it would be very good information for everybody that would read it.

 

[2RCO]

Dakota-- I still can't get over your 65% financing on inventory for a gun store. Maybe I just worked for Banks that were Evil Bloodsuckers/ Was an Evil Bloodsucker myself but I'd never have thought about going that high. I probably would have cried tears of Blood had someone suggested that in loan committee. When I worked at the larger banks I think it might have given the Underwriters an aneurism.

Despite this you seem to know what the heck you are talking about so maybe other institutions would go that far. I'd always been accused of being too damn conservative by other Lenders so maybe this is why. Are you still in lending? I've been out for 2 years now and am actually starting to miss Banking in general.