Boost goodwill now, and profit when it’s time to sell.

This article originally appeared in the November 2014 edition of INSTORE.

I recently came across a chairman’s report written by Warren Buffett to his Berkshire Hathaway shareholders some years ago.

In it, he spoke about his eventual realization that a business was not all about the tangible assets but about the intangible ability to regenerate profits without having to constantly reinvest in replacing depreciating product. Once he grasped this concept, it changed the way he viewed investments and set Berkshire Hathaway on its path to becoming one of America’s most admired companies.

It got me thinking about how it relates to opportunity within the jewelry industry (and Warren hasn’t been slow to spot this either). A jeweler has the good fortune to not have to replace large expensive machinery nor, if he has a forgiving landlord and a timeless décor, to invest significant sums in fixtures and fittings. This frees up the majority of capital to be invested in inventory, which can be turned over relatively quickly and offer a good return on ROI.

Given that many jewelry retailers are able to source some of their product from willing vendors on a memo basis, even this investment doesn’t have to be too onerous. Add in the positive cash flow nature of retail (get paid as you sell, pay for the goods much later), and there are many advantages to this type of business model.

This means that intangible factors can have a much bigger bearing on the value of a jewelry store. After all, if the business is profitable and it doesn’t require a major investment to meet capital commitments, then goodwill becomes a larger part of the asking price. In fact, I’ve seen jewelry stores sold where goodwill has been the major part of the asking price. The advantage with intangible value is that you can create much of it yourself for very little cost.

So what factors make a difference? If someone is looking to buy your business, he is looking for a model that works for minimal effort. Just as a renovated home commands a premium, so does a business that has as much as possible already in place.

1. Good systems. A well-documented system for every task creates added value in your business, especially if the new owner has no previous experience of the industry or of running a business. Often, you have systems in place but they are verbal rather than written down. Putting the system in a manual to be followed creates a paper trail that can be shown to the new owner as their business blueprint.

2. A current database. The first question for any new owner is “where will my sales come from?” Showing them a current list of customers that can be contacted is a recipe for future sales and adds significant value to a business.

3. Contracts. Written arrangements provide certainty for the business buyer. What are the lease terms? What exclusive deals are in place with vendors? How strong are the employment agreements? Vendor deals in particular can be sealed with a handshake but this doesn’t provide buyer certainty. Getting these arrangements in writing will add value to your business when it comes time to sell.

If you have plans to sell at any time in the next few years, you should consider working on these three areas now. The payback will be worth it when your business goes up for sale.

David Brown is president of the Edge Retail Academy. To learn how to complete a break-even analysis, contact inquiries@edgeretailacademy.com or (877) 569-8657.