Wondering how to open a tobacco shop?
The tobacco industry is one of the most highly regulated markets in the world. Failure to comply with new and evolving tobacco regulations can spell disaster for your new business. Additionally, from an operational standpoint, opening a new tobacco shop has its own unique challenges and roadblocks.
This blog outlines the seven mission-critical steps to open a tobacco shop. Use this resource as a starting point to develop your business plan, attract prospects, and reel in paying customers.
How to Open a New Tobacco Shop in 7 Easy Steps
As an industry-leading point of sale (POS) system provider, we know a thing or two about helping small business owners and managers reach their goals. In fact, specialized POS software is purpose-built to help retailers manage and grow their business.
We’ve helped more than 10,000 retailers nationwide find the perfect POS for their business.
Beyond investing in a best-in-class POS system from the outset, these seven steps will walk you through how to open a tobacco shop successfully.
1. Write Your Business Plan
“Failing to plan is planning to fail” — this well-known phrase is especially relevant when opening a new business. Developing a detailed business plan for your tobacco shop will map out its creation, growth, and future success.
This document should clearly state your business structure, such as a limited liability company (LLC) or sole proprietorship, and is necessary to attract investors and secure loans.
A typical business plan includes an executive summary, company description, products and services, market analysis, marketing strategy, financials, and budget.
Consider using the 5 Cs framework to guide your market analysis:
- Company: Branding, products, business goals, mission statement
- Competitors: Competition’s strengths and weaknesses, compatibility gaps
- Collaborators: Suppliers, distributors, investors, partnerships
- Customers: Customer motivations, behaviors, target audience
- Climate: Laws & regulations, economic trends, new technologies
This deeper understanding of the market will drive your product offerings, pricing strategies, and overall business approach, plus create a more compelling plan for any potential investors.
For a helpful step-by-step guide specifically designed for new business owners like yourself, refer to The Best Business Plan Checklist for New Owners.
2. Create a Budget & Financial Plan
Just like an overarching business plan, a financial plan is a practical budgetary guide for your new business.
A strong financial plan includes a breakeven analysis, profit and loss statements, cash flow projections, market viability, and industry ratios. A section addressing all possible financial risks your particular business may face is also a valuable addition.
Unforeseen costs can be detrimental to your tobacco shop’s profitability, so include an emergency fund within your financial planning to stay ahead of any surprise expenditures.
Proactive budgeting also includes any operational investments you know you’ll need to make when opening your tobacco shop, including a POS system. If you don’t choose an industry-leading tobacco POS system right from the start, you may end up with unexpected costs later down the road.
Remember that your financial plan isn’t static, so plan to regularly review and adjust it as your tobacco business grows.
3. Apply for Necessary Licensing & Permits
Applying and getting approved for licensing and permits is one of the most important steps when opening your tobacco shop. Overlooking or mishandling this step can throw a major wrench in your plans, potentially halting your opening, impacting any construction or renovations, and delaying your entire timeline.
Related Read: How Much is a Tobacco License? [Costs & Criteria]
Your tobacco shop must comply with all relevant local and state permits, as well as the specific licensing requirements for your new business. This typically includes obtaining a retail tobacco license from your state government so you can start legally selling tobacco products.
Note that this license usually requires annual renewal and is generally not transferable to other locations. If you expand to multiple locations, remember that each shop will likely need its own tobacco license.
Depending on your business model, you might also need a tobacco wholesaler license if you plan to sell tobacco products in bulk to other businesses across state lines. If you intend to have a space where customers can enjoy their purchases, like a cigar lounge, you may require additional permits for on-premise smoking and serving food or beverages.
A good resource to reference is the CDC’s State Licensure Fact Sheet. From there, you can contact your state and city offices to determine the specific requirements and fees.
4. Educate Yourself on Tobacco Product Taxes
The U.S. places tobacco excise taxes on items sold by both the producer and the wholesaler, ultimately driving up the retail cost of goods for customers.
Tobacco businesses have a particular excise tax called “the sin tax” to consider, in addition to state sales taxes. Yearly sin taxes for tobacco products in the U.S. easily exceed $13 billion in a given year, adding at least $1 per pack of cigarette products.
The specific excise tax rates vary by state and type of tobacco product. For example, e-cigarettes and vape products can be subject to substantial tax rates in some areas, and other products like chewing tobacco, tobacco liquids, and snuff also have specific tax implications.
Beyond the obligation to pay these taxes, many states require you to submit monthly tax returns, regardless of whether you had any taxable transactions during that period. A modern POS system helps you manage these varied tax rates, track sales, and ensure accurate reporting.
Related Read: The Benefits of a Tobacco Store Point of Sale System
Failure to properly collect and remit these taxes can result in significant penalties, including hefty fines and potential legal repercussions for your business. This means thoroughly researching the specific tax laws in your state and locality is a fundamental step in opening your tobacco shop.
5. Register Your Business
Choosing a unique business name that attracts customers can be a tricky task. Other than doing market research, try testing out some branding ideas with consumers in your target demographic.
Besides creating a unique and buzzworthy name, you should confirm that the business name is available on the platforms you need, such as your website domain and social handles.
Once you decide on a name, the next step is to register your business with state and federal agencies. There are several options for registering and setting up your tobacco shop business entity. You can register your shop under a “Doing Business As” (DBA) trade name versus a brand name with an LLC. An LLC can offer liability protection for your personal assets, while a sole proprietorship is simpler to set up but offers less protection.
The option best suited for your business depends on partnership status, state regulations, and local tax laws. If you plan to hire any employees, you also need an employer identification number (EIN) from the IRS.
6. Get Business Insurance
When researching how to open a tobacco shop, you don’t want to make the same mistake that many business owners make: forgoing insurance.
Due to the nature of the products sold and the potential for specific incidents, tobacco shops face unique risks that require careful consideration when choosing insurance policies.
The basic insurance policies to consider include:
- Commercial property insurance covers physical damage to your business property, including the building, inventory, and equipment.
- Product liability insurance protects your business if a product you sell causes harm to a customer. This is particularly relevant for tobacco and related products.
- A business owner’s policy (BOP) often bundles essential coverages like property, liability, and business interruption into one policy.
- Workers’ compensation insurance is required in most states if you hire employees; it covers medical expenses and lost wages for employees injured on the job.
- Crime insurance protects against financial losses due to theft, burglary, or employee dishonesty.
- Business interruption insurance helps cover lost income and operating expenses if your business has to temporarily close due to a covered event, like a fire.
- Employment practices liability insurance (EPLI) protects your business against claims of wrongful termination, discrimination, or harassment.
Tobacco shops have a significantly higher risk of fire-related incidents due to the presence and sale of flammable items such as butane-based lighter fluid and prefilled lighters. This increased risk makes robust commercial property insurance particularly important.
Additionally, if your tobacco shop includes a designated smoking area or operates as a smokers’ lounge, the potential for accidents involving customers on your premises, both indoors and outdoors, increases the risk of liability claims. It’s important to obtain strong general liability coverage in addition to product liability.
Consulting with an insurance professional who understands the specific needs of tobacco retailers is highly recommended to make sure you have the proper protection in place.
7. Find a Profitable Location
When searching for a property to open your tobacco shop, consider what your shoppers are looking for, which places would be most convenient for them, and where your business can draw in new clientele.
If you have a tobacco shop that doubles as a smokers’ cafe, you must have enough space to accommodate your customers comfortably. This includes seating areas, proper ventilation, and other local regulations regarding indoor smoking spaces.
Related Read: 6 Tobacco Store Promotions To Test for Your Business
Or, if you want to cater to busy customers seeking quick purchases, a high-traffic, easily walkable location, even with limited square footage, might be more suitable.
Start by analyzing your desired location’s walkability score, ease of access, rent price, square footage, local laws, and permit accessibility. Your initial market analysis of competition and customer demographics will help you evaluate which real estate options are best suited for your business.
How To Open a Tobacco Shop Successfully
Opening a tobacco shop requires careful attention to detail, from developing your business plan to securing licenses to finding the best location. Taking the correct measures to tackle these steps creates a solid foundation for a successful business within a heavily-regulated market.
To help manage the ins and outs of your daily operations, consider setting up a specialized POS system. Beyond processing transactions, your POS software can track purchase history, manage inventory more effectively, and provide valuable insights into sales trends.
See how a POS system built for tobacco shops can be the backbone of your new business by scheduling a free demo today.
