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Planning to sell? Hot tips for business owners

Preparing a business for sale is a daunting yet necessary task for most store owners at some point. DAVID BROWN discusses how to maximise the value for the best return.

It is important for store owners in good times and in bad to consider how they can make business better – whether it be maximising margins, closing ratios, average retail value, store management, marketing, operating expenses and stock levels to name a few.

Such improvements also make the business more saleable and valuable in the event of retirement or in the unfortunate case where an owner is forced to sell. Ironically, it can make the business more attractive for retailers to keep and become an absentee owner too.

The big concern that now exists is the increased number of Baby Boomer business owners who are approaching, or are past, retirement age and the lack of people looking to buy jewellery stores in the current market. That said, after some natural attrition such as the closure of unprofitable and therefore unsaleable stores, there is and always will be a place for bricks-and-mortar retailers – just look at Amazon’s entry into the sector.

Why is it that few business owners adequately plan for retirement or gaining the best return? Sometimes it’s avoidance – the realisation that a retailer’s career is coming to an end can leave them feeling that they lack a purpose and still others avoid the issue because the prospect of planning can be too daunting. Whatever the reason, it is a subject that needs to be tackled ahead of time.

Most succession issues fall into two camps: those owners who have an obvious successor to take on the business and those who don’t. Here are several factors that need to be considered for those who do have a successor lined up:

• What will they pay? The issue of money and family has been the root of many fallouts since the beginning of time and the process of planning a succession for a family member can be complicated. Obviously it will not necessarily be viewed as an arm’s-length transaction in the way that a sale to a stranger might be; however, it needs to be balanced against the ongoing requirements for income that the seller may have.

• When will it happen? Working towards a deadline can provide certainty for all parties involved; this isn’t just a financial issue but can be one involving leadership and direction as well. Nothing provides greater business frustration for an offspring than finding a parent who won’t let go. These issues need to be communicated with a clear handover date set.

• Will it be financed? Family successions almost always involve at least some degree of financing by the seller, often on generous terms. How this will be dealt with is an issue for both parties, including the expectations of repayment. The agreement should be laid out in a written document so it is clear to the borrower what is to be repaid and what may ultimately be forgiven.

• Do other family members need to be considered? If the business will pass to just one sibling the consideration of the others must be involved. How this will be arranged, what compensation the others will receive and what price the buyer will ultimately pay must be discussed and agreed by all parties ahead of time.

Alternatively, here are the factors that should be considered for those without a successor who will need to sell the business:

• Is the business saleable? Everyone likes to think their business is worth money but in reality this may not always be the case. A starting point could be to ask the question, “Knowing what I know now, would I pay money to purchase this business if I was starting again?” The answer can be enlightening!

• Who will help with this process? Is there a broker, advisor or even trusted friend who can provide a sounding board in this event? It’s important to gather all necessary advice and information at the start of the process, particularly around issues of tax. Further, while brokers and financial advisors can provide the theory of valuing a jewellery business, they may not necessarily be abreast of the market reality, so also consider enlisting the services of industry-specific consultants that have been involved in numerous jewellery store valuations.

• What is the deadline? Again, retailers need to work towards a date ahead of time. Too often business owners make a decision that they plan to retire within six to 12 months. This seldom provides suffcient time for a business to be successfully groomed for sale.

• Will the seller leave in finance? This is an issue best addressed ahead of time. It’s very easy to be swayed by a willing buyer when the time comes, especially if the business has been on the market for a while. If business owners are able to set their expectations via the cold light of day ahead of time it will make it easier to decide what is in their best interests.

• What needs to be done to groom the business? This will be the owner’s biggest job and can take many months and even years to prepare properly for if one wants to maximise the sale price the business will receive.

Prepare to sell

Now that the importance of having a succession plan and the options available when it comes time to sell a business have been discussed, let’s turn to the process of preparing for a sale and how to improve value for the best return.

If there are no obvious successors for the business then the preferable option is to sell. If the business plays a key part in retirement plans then maximising the value will be important, and if it represents the only savings an owner will have available then it becomes crucial.

The process of maximising business value starts well before an owner looks to contact a business broker. A small business is like a large ship – it takes time and effort to get it in the direction it needs to go if it’s not facing the right way in the first place.

The good news is that increasing the profit of a business creates leverage in the asking price. Every $1 in additional profit that can be achieved over and above a fair rate of return can add anywhere from $4 to $6 to the asking price received. An extra $10,000 in super profits can be worth $60,000 to the bottom line asking price. There is a strong incentive to getting the equation right.

Here are some key steps that will go a long way to building the value that a business has to offer and ultimately its saleability and asking price:

• Build the business’ database – A buyer is purchasing the future earnings of the business based on the current earnings being achieved. They want to be sure that current trends will continue, and one way of providing them with some certainty towards this is to make sure they are able to communicate with current business customers. If there is no way of re-engaging past customers, be it through email, mail or social media, then a buyer will question how they hope to continue the selling track record. It becomes a game of hope that they will be reluctant to play.

• Reduce debt – The expense of servicing debt can cut heavily into profits and reduce the ultimate asking price. Is the debt adding to the business profitability or draining cash reserves? Decide if the debt is helping to progress the business and if it isn’t look to the following strategy – sell unnecessary assets.

• Sell unnecessary assets – Determining the optimum stock level for the type of business is an important step to allow for the clearing of non-contributing assets, such as surplus inventory, that can put money into the owner’s bank account without reducing the asking price of the business. If it doesn’t impact profitability then its elimination won’t lower the asking price. Conversely, keeping it will see owners requiring more from the purchaser that they may be reluctant to offer. Removing these surplus assets can go a long way to reducing debt and cutting the servicing costs as mentioned above.

• Revisit costs – When was expenditure last analysed and when did the owner last ask themselves if the expense was contributing to profit? We can be guilty of allowing fat to creep into the system but remember that every dollar added to the bottom line has a multiplier effect on that asking price.

• Defer investments – Owners shouldn’t focus in the short-term at the expense of the longer-term; however, if there are investments in new equipment or assets that will have a long-term payoff rather than a shorter-term gain then it might be worth revisiting whether those decisions are best left until later. With many potential buyers assessing the business based on current rather than future returns, new areas of growth may not provide an immediate return and might benefit the buyer without them having to pay for the privilege.

• Set up systems – A buyer wants to know that business follows a formula. If businesses don’t currently have documented systems in place then it’s time to implement this step.

• Detach from the business – Is the business dependent on the owner? Unless the owner is planning to stay on this can be a serious killer to business value. What percentage of the business sales does the owner contribute? A buyer will be wary that much of the business goodwill will disappear out the door when the owner leaves so it’s important to show them the business functions well regardless. They want to buy an income stream, not a job.

Implementing each of these steps will take time but the rewards will be worth it in the final asking price.

Recognising the need to plan ahead for succession is half the battle. Business owners should take the time now, regardless of age, to give some thought as to what may eventuate and what their ideal situation would be.

David Brown

Contributor • Retail Edge Consultants

David Brown is co-founder and business mentor with Retail Edge Consultants. Learn more:

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