A recent USA Today article, http://www.usatoday.com/story/money/business/2014/10/30/black-friday-deals-all-month/18169743/, conveyed the information that retailers Amazon & Wal-Mart will start offering holiday season specials on November 1. The impact of the decision will be documented in the financial performance of the companies in November 2014 versus their competition. It also highlighted the importance of the holiday season to businesses that sell, distribute, manufacture, or transport products that are traditionally purchased in November and December. As the premier business brokerage firm in the Pacific Northwest, IBA regularly educates its clients on the impact seasonality in a business model has on the marketability and sale terms of a business. The value of a company the experiences seasonality in its business model will be highest prior to the start of the season and lowest following the season. This is true for several of reasons. The first reason relates to the generation of excess cash flow that occurs for the business during its busy season. This excess cash flow is very attractive to business buyers as it generates an immediate return on their investment and contributes to building sufficient working capital for the operation of the business. To capture this immediate return on investment, it is common for business buyers to pay a premium for companies if they can experience two “Christmas” seasons in 15 to 18 months in their first two years of ownership versus the standard 24 calendar months. It should also be noted that banks find this excess cash flow immediately post acquisition attractive when creating pro forma financial documentation for calculating debt service coverage during the underwriting process. Securing acquisition funding can be critical to successfully facilitating the sale of a privately held company.
A second reason retail, wholesale, and manufacturing businesses sell at a higher price preseason than postseason relates to value of their inventory. It is necessary to build up inventory in advance of an seasonal spike in sales or the potential exists that customer sales will be lost due to lack of desired merchandise. This occurrence will temporarily drive up the sale price of the business as the value of the inventory on the company’s balance sheet grows above the standard operating level. Inventory as a component of a transaction is traditionally purchased at the lower of cost or market value. Increased inventory value can have several impacts on a transaction. It can result in a buyer needing more capital to complete the transaction. This temporary financing need can be addressed by the parties with vendor terms, a line of credit, seller promissory note, or the sale of some of the inventory on consignment by the seller. The higher inventor y value can also price a business out of a buyer’s price range resulting in a need to wait to complete a transaction until the inventory value falls to a standard operating value. This can occur to a buyer either because of the total sale price of the business or due to capital requirements of the bank providing acquisition capital.
Another consideration when selling a seasonal business are the tax implications of the seasonal revenue. Basic logic says it would be best to sell a business after the prime season is completed due to the profits generated during the time period, however analysis of the tax implications of the profits often results in the conclusion that a preseason sale at a “fair market” price is in the seller’s best interest. The reason the analysis often reaches this conclusion is that business sale value can often be allocated to goodwill at a long term capital gain tax rate, while profits for a privately held company are often disbursed in a manner that will be taxed at a personal tax rate that is higher than the long term gain capital gains tax rate. It is our recommendation that a business seller always consult with their CPA regarding the tax implications of a transaction prior to finalizing the agreement.
Seasonality occurs in many business models ranging from mall based and E commerce retailers to hotels & restaurants located in locations influenced by tourism & weather. It is also found in marine businesses that work in the fishing industry of Alaska and veterinary hospitals. A professional business brokerage firm will incorporate the seasonality of a business model into their marketing strategy & pricing models in the best interest of the client. IBA has successfully completed sales involving most seasonal business models in the Pacific Northwest economy.
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 in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.