Most business models have seasonal variance resulting in stronger and weaker months in terms of sales and profitability. Typically, the variance between the strongest month of the year and the weakest is not more than 20% greater or less than the average monthly revenue for a twelve-month period. The greater the variance between the most profitable and least profitable months during a twelve-month period, the greater amount of cash flow management ability is necessary to navigate a successful year for the business.
Many entrepreneurs find owning a business with strong seasonality of revenue attractive because hard work and strong business acumen are significantly rewarded financially over a period of multiple weeks or several months. Seasonality can also facilitate delegation of management during the off season by ownership, travel, living in a second home, and pursuit of other passions.
Business models with robust economic seasons commonly can be placed in one of the following four categories:
Tourist Oriented Businesses – The four seasons of the year can create a tourism generated local economy and demand for products or services in specific locations. In the Pacific Northwest, the Pacific Ocean and Cascade Mountain Range each have locations that are tourist destinations during specific times of the year. At the height of season, accommodations can be sold out, restaurants have long waits, service providers booked out dates, and retail stores filled with shoppers seeking souvenirs to substantiate memories of long, warm summer vacation days or the beauty & activities in winter wonderlands. Tourism can also be driven by short term location specific events like the Cannon Beach Sandcastle Competition, Tulip Festival in Skagit County, Lavender Festival in Sequim, whale migration, and grape harvest and crush at the wineries in Walla Walla and Willamette Valley.
Holiday Oriented Businesses – The most common seasonality for business models results because of holidays. It is common for shopping mall and E-commerce based businesses to do 40% or more of their revenue between Thanksgiving and New Year’s. Additional holidays other than the nearly universally celebrated holidays of Christmas & Hanukkah can also drive business revenues. Florist shops have strong seasonal revenue spikes for Valentine’s and Mother’s Day; costume shops and pumpkin patches for Halloween; and restaurants & bars for Cinco de Mayo and St. Patrick’s Day.
Event Oriented Businesses – Events can artificially create seasonal revenue for businesses. Many business models generate a significant percentage of their profits for the year from shows (Boat Shows, Home Shows, etc.) or fairs (Puyallup, Evergreen, Oregon State, Bellevue Arts & Crafts, etc.). IBA, over its 45-year history as the premier business brokerage in the Pacific Northwest, has sold companies that generated strong revenue annually from the sale of boats, hot tubs, greenhouses, kitchen remodels, and Little Giant Ladders at events.
Weather & Season Driven Business Models – Specific business models require certain weather or a time of year to create customer demand. Lawn care businesses are in high demand during the summer. Gutter & window cleaning companies thrive during the spring.
The successful sale of a business with significant seasonality in its revenue stream requires knowledge & experience. Some of the considerations related to the sale of a company with annual peaks & valleys over a twelve-month period in its revenue stream include the following:
- Cash Flow Management – Managing the cash flow of a business with seasonality in its business model requires knowledge, experience, and strong business acumen. Knowledge & strategies can be conveyed and risk mitigated in a business sale through having an experienced staff and/or a quality transition of ownership. One issue worthy of assessment from a cash flow management perspective is how debt service post acquisition will be handled during the slow time of year for the business.
- Staffing, Merchandise, & Business Resources – One of the challenges for ownership with a seasonal business model is when to ramp up staff to insure quality customer service and capturing the maximum amount of available business during the prime season and when to downsize staff to an offseason appropriate size. Hiring too early or letting people go too late can have a detrimental impact on annual profits. Retail business models with seasonality require significant planning in terms of merchandise selection and depth. Nothing is worse as an entrepreneur than having willing & able customers who cannot find appropriate product to purchase or having seasonal merchandise (e.g., Christmas or Halloween decorations) after the holiday has passed that either needs to be deeply discounted to convert to cash or carried for 10 months until it is customer attractive again. Planning is also required for equipment and infrastructure. A bike or boat rental business in a beach town that has all of its equipment sold out daily did not purchase enough equipment to serve its customers in the prime season. Conversely, if under 50% of the equipment is in use during “high” season, an owner likely has not properly assessed the equipment needs of the business model. It is prudent when acquiring a business with seasonality for the buyer to contractually engage the seller for transition & administrative support with company preparation and execution for peak months.
- Timing for the Business Sale – Strategically the best time to acquire a business with strong seasonality in its revenue stream is a couple of months prior to the start of the prime season. This acquisition timing allows for the optimum transfer of knowledge from the seller to the buyer related to the company, training on & implementation of “best practices” for the business model, and the best cash flow scenario for the business. An acquisition immediately prior to “high” season allows for the buyer to build working capital to allow for expense & debt service coverage during slower months and from a return on investment perspective the buyer to experience two “Christmas” seasons in less than 15 months front loading the return on investment related to the acquisition. The typical business sale at IBA, a firm with a reputation in the industry for selling businesses quicker (3 – 9 months from entering the market) and with higher probability (We successfully complete 80 – 90% of our engagement projects annually) than most of our competition, involving a seasonal business model is recommended to start 6 months prior to the start of the relevant business season. For example, we recommend that retail business models relying on the Christmas/Hanukkah shopping season enter the market shortly after federal tax returns are filed in the spring and that landscaping businesses enter the market early in Q1.
The successful sale of a business with strong seasonality in its revenue stream for a premium value requires strategic planning, strong professional sales ability, knowledge, and experience. If your business is experiencing a strong summer season in the presently robust economy with near full employment and you would like this to be your last summer at the helm of your ship, we would welcome the opportunity to meet with you and provide an overview of our client services. Summer oriented business models should be on the market no later than January and optimally when the leaves start to change color. Something for entrepreneurs with businesses in Long Beach, Seaside, Long Beach, and Bend to consider when vacationing families and customers start to return home for school and work in the autumn after the end of summer Labor Day weekend.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities 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”.