What’s Your Business Worth?

Written By:
Jay Jacobowitz
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As you think about your future, you may be wondering what your store is worth. When it comes time to sell, if you are realistic about value, you’re more likely to succeed. Many natural products retailers I know run into trouble because they confuse the emotional value their stores hold for them personally with the dollars-and-cents value in the eyes of the buyer.

Like the MasterCard commercial says, the value of all your years of toil, your unconditional 24/7/365 commitment to your customers, and the sacrifices you’ve had to make in other areas of your life, are priceless. But in the eyes of your buyer, those values become “good will,” meaning that after you leave the business, your buyer will expect your customers to continue to shop and provide the store with the same profits that you’ve enjoyed.

So, in the end, for a closely-held business such as your store, it is your annual net profitability—the money consistently left over after covering all normal operating expenses, and before taxes—that the buyer will pay for. The more net profit you show on your bottom line, the more your business is worth. And, it is not just the absolute dollars in profit, but the growth in profits from year to year. If your store has been steadily increasing net profits each year, there will be a multiplier effect on the value of your business that the buyer will pay a premium for.

Avoid Pitfalls
Here are a few tips to help you put your business in good shape to sell and to make your negotiations go smoothly.

1. Show your profit. Because retailing is a “cash” business, it is tempting to report only a portion of your sales and pocket some cash. While this may feel great today, when you go to sell your store, you’ll have a hard time explaining that your sales are actually—wink, wink, nod, nod—higher than what’s showing on your books. A buyer won’t pay for that.

2. Inventory is included. Your profits do not occur without inventory. Inventory and profits are inseparable. Therefore, your buyer will expect to open the doors with sufficient inventory to produce the same profits as you. A buyer won’t pay for inventory separately, or for excess inventory. If you’ve got too much inventory, now is a good time to start winding it down.

3. Take back paper. While we all hope the buyer from heaven waltzes in with cash, the reality is most small businesses have to take back some kind of note. Be prepared to hold 20 percent of your deal in a term note with monthly payments for a few years.

4. Cry now. Recognize that your identity is closely tied to your business and that you will feel uncomfortable—depressed even—in the event of a sale. Prepare yourself now. Life will go on. Good luck and good selling! WF

If you are interested in learning more about valuing your business, you can contact Jay at Jay@retailinsights.com, or (800)328-0855, ext. 10.

Jay Jacobowitz is president and founder of Retail Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a comprehensive marketing service designed especially for independent natural products retailers. With 34 years of wholesale and retail industry experience, Jay has assisted in developing over 900 successful natural products retail stores in the U.S. and abroad. Jay is a popular author, educator, and speaker, and is the merchandising editor of WholeFoods Magazine, for which he writes Merchandising Insights and Tip of the Month. Jay also serves the Natural Products Association in several capacities. He will next be speaking at Natural Products Northwest, scheduled for Thursday, October 20, 2011 in Seattle, on the topic of “To Keep and Win Customers Today, Tell YOUR Story”. Retail Insights® will be exhibiting at the show, and will also be exhibiting at Natural Products Expo East in September. He can be reached at (800)328-0855 or via e-mail at jay@retailinsights.com.

Published in WholeFoods Magazine, August 2011