Q: I love my store, but I’m getting older, and to be frank, I would like more time to grow in new directions. I’m ready to start planning my departure, but all I have are questions at this point. Where does a ready-to-retire retailer begin?
A: Exit Strategies. As storeowners age and begin to look toward the future, the prospect of letting go of their business can be daunting. For most of us, this is unfamiliar territory and we tend to put off this type of planning until we are forced to do it. But with a little advance planning, you can definitely create a good exit plan and maximize the proceeds you receive.
When is the right time to retire? Should I plan to sell my business or is it best to close it? How do I place a value on my business? How much money would I receive if I sell versus just closing? Can I handle this myself or what kind of professional help do I need?
Preferably, you will have three years or more to create and implement your exit plan; however, sometimes illness or other life circumstances, including lack of profitability and cash flow, can move that time table up to just a few weeks or months. Let’s examine both selling and closing and also ascertain whether it is best to proceed on your own or to ask for the assistance of a business broker or retail liquidation consultant.
Planning—where to begin? The first place to start is with your accountant, tax professional, or financial advisor (in some cases all the same person) and your attorney. Let them know your plans so they can help you maximize your profit potential. Believe it or not, it is sometimes better for tax planning to close rather than sell a business and only someone familiar with your whole financial picture could advise you in this regard.
Your accountant is usually focused on helping you minimize your tax liability, therefore showing less profit. But as you prepare for a sale, you will want to maximize your profits, which increases your tax liability, so getting good counsel early is critical to a successful sale. Having three years of growth and solid profits will make your retail store much more desirable to a buyer.
You also need someone knowledgeable to inform you about the legal aspects of selling your business. Do you sell stock in your company or just the company assets? A buyer may want only to purchase the business assets to avoid any unexpected liabilities such as unpaid sales tax or delinquent payroll taxes. An attorney or seasoned business broker can answer your questions, but make sure whoever you rely upon represents you exclusively, not the buyer or both parties.
More planning tips. Whether you sell or close, your customer list is invaluable. Capture as many email addresses, and other customer data, as you can. A new buyer will recognize the value of this list, or you will use it to have a more successful closing sale.
If the success of your business is contingent upon you, this can be a turn-off for any buyer. Begin delegating tasks and trusting your employees to follow the procedures you put in place. When a potential buyer sees that your employees can handle running the business without you, at least part of the time, you have definitely enhanced its value and sale price!
Remove any personal possessions or items important to you from inventory. If your sale is far in the future, begin to make a list of items on the sales floor or in the back room that you would not want to include in a sale. Don’t assume that they will have any real value to a new owner or that he or she will consider them integral to the visual merchandising of your store.
Create a complete asset list. You may already have an asset list that is recorded on the plus side of your Balance Sheet, but this list usually only includes larger purchases. Most purchases below a certain dollar amount (set by your accountant—often $250) are written off as business expense in the year they were obtained rather than carried on the asset list and depreciated over time. This means you may have fixtures and display items that will be sold with your store but do not show in inventory or on your financial records.
Change your thinking from long term to short term: If you tend to buy supplies in bulk, such as printer ink, trash bags, packaging (boxes and bags, giftwrap supplies), paper, etc., you may want to take a different approach. Typically, these items are included in the sale of a business without an additional expense to the buyer, so if you invest, for instance, a large amount of money in store packaging, you may not be able to recoup that expense. Clean, clean, and clean some more: Make sure that you thoroughly clean your retail space before you interview a business broker or entertain a prospective buyer. Make the place shine! A positive first impression equals more money in your pocket.
Other than the personal tax considerations mentioned above, the choice of whether to list your business for sale or to having a “going out of business” sale to close the business boils down to your bottom line. If your business is not profitable, or minimally profitable, it will be difficult to entice a buyer based on potential or your “blue sky” optimism. Sales are based on current facts, not future possibilities.
Establishing business value. Before putting your retail business up for sale, it is important to determine how much the store is worth. The length of time you have been in business, the demand for the types of goods and services you sell, the local commercial real estate market, and annual profits are all factors to consider when pricing your business. Overpricing may lead to few offers, while underpricing may cause you to lose money.
For this discussion, we are going to assume you do not own the building where your retail store is located. The vast majority of retail stores lease space. If you do own your building, the real estate has its own value apart from the retail business, and I recommend adding a realtor to your list of professionals to contact. Depending on financial advice received, you may decide to sell the real estate with the business or retain the property and lease to the new owner. Again, your individual tax situation will dictate the best path.
The value of your retail store is determined by assessing both tangible and intangible factors. A tangible business asset is one that can be touched, measured, and assigned a monetary value, such as inventory and fixtures. The word “intangible” in relation to business usually means an asset that cannot be seen or touched, but that is an essential part of the business nonetheless. Examples of intangible property might be customer loyalty, a prominent place in a community, as well as intellectual property such as a trademark or a strong brand identity. When a valuation is performed for the sale of a business, the strength of intangible property has great worth.
The basic components of the worth of your business are annual profits, value of inventory and fixtures, owner salary and “add backs,” and goodwill. As a general rule of thumb, you add the tangible assets and then multiply by a factor, usually 2.5 to 3 times, and then add inventory at cost. The multiplier you use will cover some of the intangibles, such as customer loyalty and community goodwill, and will vary depending on your location and the size of your business. (A customary multiplier will be different in NY City than in rural Ohio). Your accountant or a business broker can guide you on this.
Owner “add backs” are the other financial benefits you receive in addition to salary. Generally, these are things your business pays for that will not be costs to a new owner. Common examples include car payment, insurance (health, life, car), and cell phone. Also look at less costly items (they add up) such as postage and UPS fees, or personal office supplies you purchase through the business. Add these expenses together with your salary for a true picture of the money you, as owner, receive each year.
This number is multiplied by 2.5 or 3 to establish a base value for your retail business. Inventory at cost is then added to the total (no multiplier applied) to establish a total sale price. The inventory is added after the valuation because it will fluctuate before the sale and will need to be determined and agreed on by both parties a few days before the sale is final.
So, for example, if you have $5,000 in annual profit, and you receive a salary of $20,000 a year plus $6,000 in owner benefits beyond your salary, then your base valuation would be $5K + $20K + $6K, for a total of $31,000 X 2.5 = $77,500. If you have $50,000 in inventory at cost, you would ask $127,500 for your business today.
To determine the actual amount of money you would receive if a buyer agreed to pay this amount today, you would need to deduct from the sale price any payables still owed to vendors, bank or credit cards loans, any other loans (such as borrowed from individuals), costs associated with the sale (accountant, attorney, or broker fees), as well as your estimated personal income tax liability.
For every dollar you can add to your bottom line between now and the time you list your business, you stand to receive a minimum of $2.50. So, the time and energy and extra tax dollars you may pay in the planning process can be well worth it.
Deciding to sell. Once you have decided selling is your best course of action, you will need to create a business profile for potential buyers, or for interviewing business brokers, that explains how your business operates, what you sell (products and services), size of your store, number of employees, and a description of your customer base. You also will need to include profit and loss statements and business tax returns for the last three years.
If you are handling the sale yourself, obtain a non-disclosure form to be signed by interested parties so they agree not to make your proprietary information public. Only divulge detailed financials if you are sure they are a qualified buyer and truly interested.
I highly recommend hiring a business appraisal specialist to help you establish a price. If you hire a business broker, who usually takes 10-15% of the sales price if they find you a buyer, they will do the appraisal for you as part of their fee.
A seasoned business broker also will have multiple local and online advertising venues. If you are handling the sale yourself, visit sites like businessmart.com and bizbuysell. com to see how other businesses are advertised.
Legalzoom.com is a resource for a business sales contract, or a business broker will provide one. This document will outline the final sale price, what is included and excluded, and the financial responsibility of the buyer, such as down payment, final payment amounts, and due dates. Regardless, have your attorney and accountant review the proposed document before you sign anything!
There are many details involved in the successful sale or purchase of a business, and I recommend hiring a topnotch business broker if possible. They will be able to walk you through the specifics and timetable of what you need to do when. Their job also includes mediating if an issue comes up between buyer and seller, and that service alone can be well worth their fee. A sale is much more likely to close without major problems if you have professional assistance.
Another matter is whether or not you will agree to “hold paper” or finance part of the sale. Many brokers will tell you that you must do this for a sale to happen. I disagree and strongly suggest that you hold out for a buyer who can pay cash or secure their own financing. Retail stores fail all the time and no matter how well you vet a prospective buyer, you have no guarantee they will continue to be successful and able to make the agreed upon payments.
Perhaps the most important consideration, at least in my mind, is the emotional aspect of letting go of your dream, your “baby.” Selling affects not only you, but your employees and your customers also. Who you sell to, how you approach the sale, and how public or private you make the transition are all key decisions that need to be carefully considered.
If a quick sale is not required and you have the benefit of longer term planning, take as much time as you need to converse with and get to know a prospective buyer. If you work with a business broker, you will be introduced only to buyers who have the financial resources to meet your asking price. But having money to purchase should be just the first hurdle to cross. Have a conversation about their dreams for your store, their plan for your employees, and where they see the store in five years.
Give careful thought to your employees when you sell your business. The new owner may say they will keep everyone, but they have no obligation to do so. Loyal, long-term employees should be informed that you are listing your store for sale, so they can be part of the process and have time to think about what they will do for employment if things don’t work out with the new owner. Even if you are counseled to keep the sale private until it is finalized, let your key employees in on the secret.
Even before a sale is pending, begin the process of truly letting go of any attachment you have to the store you have built. New owners often change much of what you created, to make your business their business, even if everything is already profitable, stable, and running smoothly. If you stay attached to the “way things were,” you invite heartache and pain. Let go, embrace the change, and find new things in your future to look forward to experiencing.
Deciding to close rather than sell. You may choose to work with a professional retail liquidating company who will help you maximize inventory sales and sell fixtures—everything except the walls! A knowledgeable partner to help you avoid pitfalls, set up a marketing plan that has proven results, and focus on getting you the most profit in the shortest amount of time can be a godsend. The consultant fee may be a percent of the closing sale or a flat fee. Services range from being onsite and handling all aspects of the sale to sending you a do-it-yourself going-out-of-business sale kit. As a general rule, you can expect to capture 100 to 120 percent of your store inventory cost working with a consultant.
You also can decide to handle the sale yourself. If you do this, set a closing date and then work backwards. How many days/weeks do you want to conduct a sale? How many tiers of price reductions do you envision? Part of this will depend on how much inventory you have on hand. You might decide on three weeks with a new price reduction each week (such as 35 percent, 50 percent, and 75 percent), and then price all your fixtures in the last week or as they empty of merchandise. The length of your sale will then determine the starting date.
Once you know the start date, you can decide where and when you want to place advertising to amplify your foot traffic, order window posters and banners, send out press releases, email your customers, and post notices on social media.
Closing sale tips
- Investigate your state laws. Some states have strict regulations on going out of business sales. Have plenty of sales help on hand the first week, especially the first few days.
- Make your sale as short as possible to limit overhead expenses.
- If you do hire a liquidation firm, be sure to ask for references from past sales as well as an outline of how the sale will be conducted. I have not worked personally with any liquidation consultants but have heard favorable reviews for G.A. Wright & Associates and Power Retailing.
Final exit steps
- After the doors are closed, or the new owner has taken over, there are a few more tasks to complete.If your business is an LLC or Corporation, you will want to formally dissolve the company, so you are not liable for taxes and filings.
- Notify your vendors and creditors of the change, if you haven’t already.
- Cancel any licenses, registrations, or permits you no longer need.
- If you use a trade name, cancel it with your local government.
- To comply with labor laws, be sure your employees are paid by their last day of work, or soon after. Your state may require any vacation or unpaid leave be included.
- Pay final employment taxes and check the box on the form that states this will be your last return.
- Close your Federal Employment Identification Number (EIN) by contacting the IRS.
- You will want to close your business bank account(s) once you are sure all checks have cleared, and you will no longer have business income to deposit. And, close your business credit cards.
- Maintain your business records for 3-7 years depending on the suggestion of your accountant.
Selling or closing your retail store can sound complicated and a bit overwhelming, yet taken step-by-step, a successful business exit in which you feel pleased emotionally and financially is possible. Educate yourself, be diligent, and make thoughtful decisions. Much good luck in your next exciting life adventure!
Published in Vol31/Issue 5/2017
Author: Kim Perkins
Kim Perkins is a business consultant, author and national speaker. She is the former co-owner of Elysian Fields, Books & Gifts, located in FL. As a consultant, Kim specializes in helping small businesses achieve financial health and excellent employee relations.
