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David Brown: Lay Your Exit Plan Now

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Knowing what potential investors are looking for is the key to a good price.

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[dropcap cap=P]reparing a business for sale is not something that can be done quickly. Potential owners will be looking at a new store’s balance sheet, and many of these assets and liabilities can’t be transformed overnight. Profitability can’t be improved with a click of the fingers; planning is required.[/dropcap]

[inset side=right]A purchaser would expect a return on his investment of somewhere between 20 and 30 percent.[/inset]So what aspects should a business owner consider in order to groom his business for sale?

The primary factor in determining what a business is worth is profit. A new owner is purchasing a future income stream — the value he places on your business is relative to the return, and he will be comparing this return against what he would gain by investing his money elsewhere. A purchaser would expect a return on his investment of somewhere between 20 and 30 percent.

In addition to maximizing your profits, here are a few factors that will add value to your business:

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BAND ALL YOUR TAKINGS. Some stores don’t declare all their income in an effort to avoid tax. This may save you 20 to 50 cents on the dollar in tax by not reporting income, but when it comes to selling your business, that $1 of profit is worth $3 to $5 to the value of your business.

REDUCE UNNECESSARY COSTS. Many businesses don’t look at their overhead costs until they have to, which could be too late. A smart buyer will look at your financial performance for at least the last three years. Tidying up your act the year you wish to sell is leaving it a little too late. The big three costs for any retailer are wages, advertising and rent.

REDUCE INVENTORY. Make sure you aren’t running more inventory than you need, as this will create extra costs through freight, staffing and display. Make sure the inventory is fresh. A smart buyer will look at the age of your inventory and offer only cents on the dollar if it is too old.

LOOK AT THE INTANGIBLES YOU CAN PROMOTE. How much competition do you have? How long has the business been established? Are you able to stay on and assist with the transition? How large and tidy is your database? Does the business rely entirely upon you to succeed? This one is particularly relevant. We all know Mr. Indispensable whose staff can’t make a decision without him and whose customers always ask for him even if they only want a battery. Many of these owners enjoy being tied to their business. Sadly, when they come to sell their stores, the true value of the business will be walking out the door with them when they leave. Don’t leave yourself in this position if you can help it!


David Brown is president of the Edge Retail Academy, an organization devoted to the ongoing measurement and growth of jewelry store performance and profitability. You can contact him at [email protected]

This story is from the May 2010 edition of INSTORE

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