Preparing Your Store For Sale – Part One

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If you are like the majority of owners of U.S. independent natural organic products stores, you are the founder. You may have started your store 20, 30 or more years ago. If you are thinking about selling, this means you probably don’t have children interested in, or capable of, taking over the business. While our suggestions here apply to any independent natural products retailer interested in selling her or his store, some of the illustrations we use may be particularly relevant to founding-generation owners and their mature stores.

Getting Ready

As you might imagine, there are several things you need to do to create a successful sale. The most important of these—but maybe not the first one you’ll think of—is to prepare yourself emotionally. Really? Yes, really. The reason is, particularly for founders: your identity; your sense of who you are in the world. For the last however many years you’ve owned your store, your name has not simply been “John Smith.” It has been your name plus your business identity: “John Smith, Owner of Natural Health Foods Store.”

Unless you have developed a bunch of hobbies outside of work, or have grandkids ready to be spoiled, or have your next career move already planned, you are going to have to deal with reverting to just your given name, “John Smith.” And that may be uncomfortable. You may miss having the sense of purpose that was connected to your professional business identity.

My main concern here is not for your emotional well-being. It is so you can isolate your emotions from the hard job of negotiating with buyers, business brokers, vendors, accountants, spouses, lawyers, and anyone else who will influence you in the process of selling your store. If you want to check to see if your emotional attachment to your business identity may get in the way of selling your store, look no further than the value of that check you are imagining right now that the buyer is signing over to you at closing. How many digits to the left of the decimal? Seven?

From my experience helping independent natural products retailers prepare their stores for sale, it is the rare business that can command a seven-figure pay day. Sure, there are plenty of independent retailers around the country whose businesses are worth well over a million dollars; they just aren’t necessarily for sale right now.

Valuation

As a small business owner, you probably spend your days running your business, not thinking about how much it is worth. At the moment you decide you are ready to sell, the process of valuing your store—or stores—may seem a bit murky. Business brokers, accountants, bankers, financial advisers and consultants all seem to have specialized, complex and often competing methods for valuing a business. Indeed, in the business-valuation industry, experts can differ by a factor of 50 percent for the same business! Add to this, changing federal tax policies and corporate-structure laws, and it is easy to feel lost.

But there are a few financial basics you can apply that will anchor you to a realistic range of value for your business. A value that you can defend. Think about it as you would any investment. Do this by putting yourself in the shoes of your prospective buyer. If you were buying your business, or any other asset or investment, your main concern would be how soon you will get your money back, and then how much future profit you will make.

Profit

For natural products stores, profit is what is left over each year after all operating expenses. Operating expenses include inventory, payroll, rent, utilities, and advertising, among others. After you get done paying for all of these, you have what is left, which is your annual profit. A buyer of a natural products store will be most interested in this number, since profit is what tells her or him how soon the purchase price will be fully repaid, and what future earnings they can expect.

Let’s stop here for a moment, and do a “red flag” check. If you don’t know what your profit is each year, you may have a problem. Here’s why: if you don’t believe, with a high level of confidence, your annual profit, how is your prospective buyer going to believe what they are buying is real? Worse, you don’t want to be at the mercy of your buyer and their broker and lawyer deciding what they think your profit is, and therefore the value of your business. That’s a terrible feeling. So, this is where you may want to start preparing for a sale: get a handle on your annual profit.

In my 40 years advising independent retailers, I have seen a wide range of profit reports. Everything from third-party audited and complete detailed statements of income and expenses, to penciled scribbles on the back of a napkin. You probably fall somewhere in between. Wherever you are, you need to develop a consistent and convincing way of describing your annual profit, going back up to five years. This is the set of numbers your prospective buyer will most want to see.

Growth

After profit, the most important factor in valuing a retail store business is its annual growth. As you know, recent annual growth for the natural products industry overall has slowed from its historical double-digit rate to mid-single digits, and for most independents, to low single-digits. Growth is important to the buyer because it directly affects profit. If your buyer can count on profits increasing by, say, 5 percent per year, they will get their money back that much faster, and will earn larger profits in the future.

But if your business has not been growing, has flat or declining sales, your buyer will be nervous that this downward trend may accelerate after they buy your store. If this is the case for you, expect your buyer and their broker to tell you they must reduce estimates for your expected future profits, and therefore reduce the value of your business.

Refrigerators and Freezers

When you opened your store, you made what was probably your largest business investment ever: fixtures and equipment. Chances are, these are the same fixtures and equipment you’ve had since day one. Thinking that they are saving money, many independent retailers often repair rather than replace refrigerators, freezers and other equipment. But a new owner will want to replace—and may soon need to replace—these expensive “fixed assets.”

A smart buyer will want to see these fixed assets listed on your balance sheet. The balance sheet is the financial report that tracks your original investment in refrigerators, freezers, computers, checkout counters, shelving, floor coverings, ceiling treatments, lighting and equipment in non-retail support areas including kitchens, food preparation and storage. Each year, your balance sheet should be reducing—depreciating—some of the value of these assets, and if you have never replaced them, their value on your books today is likely zero.

If this is the case in your store, your buyer and their broker will want you to give them some money to bring the equipment and fixtures up to date. As you know, this will be expensive. The sad result is, the give-back you will have to make on fixtures and equipment will directly reduce the value of your sale, possibly by a lot.

Inventory

One of the most common misunderstandings selling retailers have is assuming the value of their inventory is somehow separate from the value of their business. It is not. Why not? Because in order to support a certain level of sales—and therefore profits—you must carry a certain level of inventory at all times. Although inventory value moves up and down, it is really a type of fixed asset, like your refrigeration. You couldn’t remove your refrigerator and still generate the same level of sales. Likewise, you can’t remove your inventory and still hit your sales numbers.

Now, inventory values can and do change from week to week and month to month, as do your accounts payable for that inventory. And this is where sellers may get confused. The answer is to agree ahead of time, with the buyer as part of your negotiations, on the appropriate, typical level of inventory for your level of sales. If things are going well, and negotiations are smooth, you should be able to reach an understanding with your buyer that you will deliver a certain amount of inventory, give or take a percentage point or two, at closing. Any amount above or below this target becomes an adjustment at closing, to the good of the seller if inventory is higher, or to the good of the buyer if inventory is lower.

Scratching the Surface

As you can see, there are many things you need to consider in preparing to sell your store. Understanding and paying attention to these few, most important factors will help you reach your goal with the least amount of stress. Once you are ready to put your store on the market, expect to spend six months to a year, depending on your particular situation, trade area, the economy, and the quality of advisers you choose.

If you would like advice, have questions, or would like to share your experiences, please write to editor@wfcinc.com, or contact me at the email address below. Good luck, and good selling! JJ

Jay Jacobowitz is president and founder of RetailMerchandising insights Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a comprehensive consumer marketing service designed especially for independent natural products retailers. With 40 years of wholesale and retail industry experience, Jay has assisted in developing over 1,000 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. Jay can be reached at (800)328-0855 or via e-mail at jay@retailinsights.com.

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