Selling A Retail Business

Many different types of retail businesses are sold in the South Florida market. Retail-oriented businesses sell products or services to the general public from ‘storefront’ locations. Several factors differentiate the sale of retail businesses compared to service-oriented businesses. These include a special focus on the gross profits of retail businesses, the inventory of retail business business, the leasehold rights of retail businesses, and the location of retail businesses. Businesses such as restaurants, laundromats, convenience stores, liquor stores, car washes, pawn shops, check cashing business, and beauty salons are examples of commonly sold retail businesses.

Determine Adjusted Owner Benefit of Retail Business

The starting place when valuing a retail business is determining the adjusted owner benefit of the business.
This describes the true economic profit derived by a working owner from the business.
First, calculate the ‘EBITDA‘ (Earnings before Interest, Taxes, Depreciation, and Amortization) from the seller’s financial statement such as a tax return or profit and loss statement. Then the adjusted owner benefit is determined by including unrecorded cash (if proven), personal expenses of the owner (or owner’s family) that flow through the financial statement, the owner’s salary, and any other adjustments to reflect a working owner’s annual owner benefit.
For many family-run retail businesses, it is especially important to scrutinize who exactly works in the business.
If family members work in the business, their salaries and benefits must be adjusted to reflect their replacement cost at fair market value.
The ‘owner benefit’ must be adjusted to reflect this reality.
Generally, most small retail businesses sell for 2-4 times their adjusted owner benefit.
Larger or , truly superior retail businesses will sell for higher multiples.
Buyers of retail-oriented businesses focus on several key factors which affect the multiple of owner benefit.

Focus on Gross Profits for the Sale of Retail Businesses

The gross profit of a business is simply the total sales or revenue minus the Cost of Goods Sold (COGS). The COGS includes the direct costs associated with producing goods or services. For retail businesses, the resulting gross margin (or gross profit divided by total revenue) is an extremely important factor when determining its valuation. The gross margins reflect the pricing power of a business. Lower gross margins generally indicate a high competitive environment for the business, whereas higher gross margins generally indicate a lower competitive operating environment for the business.

Example of Gross Profits of Retail Business

Let us suppose that Bill owns Bill’s Bridal Shop and wishes to prepare his business for sale by examining the strength of his business model.
Bill sees that his gross sales in 2022 was $1M.
His costs of goods sold during 2022 (this includes all the costs of purchasing new inventory during 2022) was $700K.
This means that his gross profit in 2022 was $300K ($1m – $700K) and his gross margin was 30% ($300K/$1M).
Bill realizes that his kind of retail business should have gross margins of at least 40%, especially since he has high occupancy costs from his necessary storefront location.
As a result of his analysis, Bill decides to shift his business model to items where he is not competing with other retail chains.
This way he may exert more pricing power and raise his gross margins.
Eventually, this will allow him to get a significantly better purchase price when he ultimately sells his business.

Inventory Valued Separately

Inventory is not a physical asset that is generally included in the sale of a retail business. Rather, it is generally valued separately (at cost) and is sold separately from the business itself. The seller of the business should have an accurate report that itemizes the inventory by age and its approximate cost and retail value. The price paid for the inventory by the buyer – like all aspects of a business transaction – is negotiable between the parties.

Tax Implications of Selling Inventory

The sale of inventory is not subject to the typical capital gains taxes paid for the sale of business assets. It may, however, be subject to state sales taxes. Both buyers and sellers of retail businesses with a large amount of inventory should consult with their accountants to ensure they are in compliance with all federal and state tax laws. If the transaction includes inventory as a part of the purchase price paid for the business, then the purchase agreement should allocate the inventory portion for tax reporting purposes.

Importance of Lease When Selling Retail Businesses

A leasehold right refers to the right of a commercial tenant to occupy and use leased premises. Leasehold rights significantly affect business valuations for retail-related businesses. Buyers prefer retail businesses with long term leases and fair-market (or below-market) rental rates. Moreover, leases that grant the business exclusivity of a certain business model (such as Italian restaurants) within a busy commercial plaza are also preferred. Lastly, any attached improvements to the premises (or tenant improvements) are included in leasehold rights.

Location Location Location

It is often said that in real estate, the three most important words are ‘Location Location Location.’ With some retail businesses, a preferred location in a growing community with ample signage and visibility has enormous significance to its valuation. The value of many pizzerias, for example, is often greatly affected by its location and proximity to potential customers for delivery purposes.

Visibility Important Factor For Retail Businesses

Even with a good location, it is also important for many retail businesses to have proper visibility so that potential customers are aware of their location. In most commercial plazas, the landlord controls the use of signage by its tenants. Types of signage include traditional store front signage as well as ‘monument’ signage or signage reserved for tenants that is more visible to passing motorists. A friendly landlord and a favorable lease allowing a retail tenant to have necessary signage is of critical importance to the sale of many retail businesses.

Important factors such as pricing power (as reflected in its gross margins), location, leasehold rights, and inventory all uniquely affect the valuation of retail-oriented businesses. Sellers of retail businesses should consult a professional business broker who will determine their true owner benefit, and then value the business properly in order to achieve the maximum purchase price.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.