How to Sell Specialty Retail Stores

Specialty Retailing

Specialty retailing stores offer customers a specialized and focused line of merchandise as opposed to traditional retailing stores which offer a generalized line of merchandise in multiple product categories. Examples of specialty retailers include flower shops, furniture stores, equestrian feed stores, and sports equipment stores. The narrow focus of a specialized niche differs from traditional retailers such as convenience stores, discount stores, or department stores which offer a broad array of products. Many specialty retailers have quite unique business models in that they solely focus on selling consumer products such as barbeque grills, oil extracts, spices, teas, or clothing and apparel items with a specific and unique style and brand. The uniqueness of the offerings tends to create devoted and repeat customers.

Consumers Seek Personalized Shopping

Despite fears of Amazon leading to the death of everything retail-related, revenue from specialized retail stores has grown at a compounded growth rate of 4% over the last five years from 2020-2025. In large part, this is due to consumers seeking ethically and environmentally conscious local retailers who are able to offer specialized products that are “personal” to them.  Rather than purchasing custom-made jewelry from Bali over the internet, for example, shopping in a local apparel retailer that specializes in selling imported custom-made goods from Bali is a more personalized experience. Interacting with local proprietors and employees, learning about the background and selection of the unique merchandise, custom ordering products, and physically inspecting the merchandise are all difficult to replicate while shopping online.

Valuing Specialty Retailers

  • Valuing a specialty retailer requires a thorough review of its business operations, management structure, leasehold rights, and most recent financial statement (tax return or profit and loss report).
  • The median valuation multiple of specialty retailers in Florida is 2x the annual Seller’s Discretionary Earnings (SDE) or adjusted owner benefit.
  • The annual adjusted owner benefit – or true economic profits derived by a working owner – is the determining factor in the valuation of a specialty retailer, along with the current level of inventory included in the sale.
  • Many specialty retailers will not include the inventory in the asking price.
  • The buyer and seller will need to agree on a negotiated amount for the inventory – which often fluctuates dramatically – in addition to the regular asking price.
  • Factors that affect the valuation multiple for a specialty retailer include the longevity of the business (and hence the sustainability of the business model), the growth rate over the last few years, the product sourcing of the store and vendor relationships, the gross margins of the business (should be at least 40%), the location and lease, and any unique competitive advantages that differentiates the company in the marketplace (from a pricing standpoint or from a quality of product standpoint).
  • The most pertinent factors must be examined and given appropriate weight to the valuation multiple according to how likely the future earnings of the business will be affected.
  • The valuation range for a specialty range store may range from 1.5-3x the most recent annual adjusted owner benefit, with inventory often not included in the listed asking price due to its fluctuating nature.

Inventory Turnover Level

Inventory is defined as products produced or purchased by a business, and when sold is categorized as a ‘cost of goods sold’ on the income statement. The inventory turnover level is a measure of how many times a business sells or turns over its inventory within a 12 month time period. The inventory turnover ratio equals the annual ‘cost of goods sold’ divided by the average level of inventory. A high turnover ratio (over five or so) signals that a company is making efficient use of its cash and is not sitting on unsold or obsolescent inventory. The turnover ratio for a specialty retailer is a critical metric used by many buyers when gauging the health of the business. Specialty retailers with low turnover ratios should embark on efficiency measures prior to selling so their inventory level reflects no more than 2-3 months of gross sales.

Occupancy Costs

Specialty retail stores should generally spend no more than 10% of their total gross sales on total rent or occupancy costs. For a specialty retailer with gross monthly sales of $100K, total rent should therefore not exceed 10K/month. If rent exceeds 10% of total sales, a specialty retailer’s operating margins (or operating earnings divided by gross sales) may suffer to the point that the business is no longer profitable. Additionally, a strong specialty retail store should maintain gross profit margins (or gross profit divided by total sales) of about 40%, after which the occupancy costs, payroll, utilities, insurance, merchant fees, and advertising must all be paid. Allocating over 10% of total sales for occupancy costs leaves little room for specialty retailer stores to pay its other expenses and still realize a healthy profit margin. Specialty retail stores with low occupancy costs (and strong operating profit margins) relative to their gross sales receive a premium valuation.

Although competition from online retailing is always a threat to any brick and mortar retail store, specialty retailers may continue to thrive by drawing consumers seeking expert advice and a broad array of offerings within a specialized line of product merchandise. Key valuation metrics for a specialty retailing store include its inventory turn level and occupancy costs as a percentage of total sales. The valuation multiple assigned to a specialty retailer is based on its financial performance and the transferable customer goodwill associated with its branded identity.

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.