Most retail companies have a seasonal component when business is robust resulting in strong revenues and profits for a multiple month period. Several years ago, IBA sold an award-winning hot tub and spa dealership (http://blackpinespas.com/) that generated significant revenue out of temporary retail venues at fairs and home shows. The prime time to sell this business was before the summer fair season commenced, so a buyer could get an immediate return on investment and receive transition training support during a critical time period for the business model.
The most common seasonal revenue spike for retail businesses occurs during the holiday shopping season between Thanksgiving and New Year’s Day. This creates a surge of mergers and acquisitions activity related to the purchase and sale of privately held companies and family owned businesses in the retail sector during Q3 and early Q4 of the calendar year with a majority of the transactions being completed between late July and early November. If you are a business owner with a company in the retail sector with strong revenues during the holiday season that wants to sell their company for a premium value, you should be on the market now!! After the holiday season, sales are still possible, but they traditionally occur at a discount in Q1 & Q2 because a significant percentage of annual profits will likely not be reaped for 6 – 12 months.
The primary reason that retail businesses sell at a premium value during the next twelve weeks in the marketplace is because of two straight forward return on investment calculations. To assist in understanding the calculations two business sale scenarios are provided.
Scenario 1
A retail business with slightly increasing year over year revenues of $4,000,000 (2017) and an EBITDA percentage of 15% ($600,000) is brought to market in July for $2,000,000. It is a known fact that approximately 40% of revenues ($1,600,000) and 55% of profits ($330,000) are generated by the business in November & December annually. A transaction is completed November 1 for $1,800,000. Assuming 2018 matches 2017 in financial performance, the buyer in this scenario would generate approximately $900,000 of profits on the investment in the first 14 months of owning the business (A 50% return on the total investment). If the buyer injected cash equal to 25% of the purchase price ($450,000) into the acquisition, a 200% cash on cash return on investment would occur for the buyer during this time period before debt service. Continuing the analysis out to 24 months (November 1, 2020) the return on the total investment would be 67% and cash on cash return would be 267% after two years. Incremental increases in return on investment of only 17% and 67% from where the investment was at after 14 months.
Scenario 2
A retail business with slightly increasing year over year revenues of $4,000,000 (2018) and an EBITDA percentage of 15% ($600,000) is brought to market in January 2019 for $2,000,000. It is a known fact that approximately 40% of revenues ($1,600,000) and 55% of profits ($330,000) are generated by the business in November & December annually. A transaction is completed March 1 for $1,800,000. Assuming 2019 matches 2018 in financial performance, the buyer in this scenario would generate approximately $600,000 of profits on the investment in the first 12 months of owning the business (A 33% return on the total investment). If the buyer injected cash equal to 25% of the purchase price ($450,000) into the acquisition, a 133% cash on cash return on investment would occur for the buyer during this time period before debt service. Continuing the analysis out to 24 months (March 1, 2021) the return on the total investment would be 67% and cash on cash return would be 267% after two years.
Looking at the two scenarios objectively as an entrepreneur making a business investment decision which scenario is better in terms of short term return on investment and the generation of working capital to run the business during slower months in the calendar year? This difference is the reason why retail businesses sell at a premium before their busy season and at a discount after the season is over. Sale prices were placed at the same value ($1,800,000) in the scenarios to illustrate a point. It is my professional opinion that if the subject business were brought to market the business selling on November 1 would sell at a higher value than the one selling on March 1.
The sale of a business for a premium value requires knowledge, experience, and a strong professional skill set. IBA has been the premier business brokerage firm for the sale of retail businesses in the Pacific Northwest since 1975. If you are interested in selling a retail business in 2018, we would welcome the opportunity to provide you with a professional opinion of the market value of your business and an overview of the services we offer our clients. IBA is currently representing a broad spectrum of retail businesses for sale ranging from a motorcycle dealership to a natural grocery & pharmacy and from a premium brand apparel chain to a 50-year-old florist shop.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.