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David Brown

5 Steps To Make Your Business More Salable

Build net profit and control your inventory tightly.

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AFTER YEARS OF hard work building up an asset that they hoped would provide for them in retirement, many business owners are finding there is nothing left at the end of the day when they come to cash in their chips. And we’re not just talking businesses that struggle — I’m talking about businesses that are making a very healthy profit each year.

How many of you know a fellow store owner who has been in this situation? I had friends recently close down at the end of December in a store that had traded for over four decades and was making a large six-figure profit. They were in their 70s, had decided to quit but could not find a buyer interested in taking over their store. Sadly, this scenario is far too common.

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Here are five steps you can take to help this situation:

1. Drive every possible dollar of net profit. Most business owners generally try to minimize their net profit to reduce tax, but this ends up costing them as they approach retirement. Jewelry stores are bought and sold nowadays based on a multiplier of net profit, so every dollar could be worth $4-6 to them when they sell … not to mention they can use that net profit to retire debt or create retirement wealth while they still own the business.

2. Establish and achieve an optimum inventory level … one that delivers maximum GMROI while still satisfying your customers. Most stores are heavily over-inventoried, and the store is not an asset unless it generates turn and margin. Many are emotionally invested in their inventory, but no prospective buyer is going to want their old stock at any price. Nor do customers. Guess what is left after a successful GOB? The old stuff!

If Business A has $100,000 of profit on $400,000 of inventory, and Business B has $100,000 on $700,000, then both would sell for the same multiplier of profit. Store B may well be left with either an inflated value that would put a buyer off because they have inventory to clear, or be forced to find a way of disposing of the surplus product.

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3. Transition the owners’ personal skills and responsibilities from “business operator” to “business owner.” No one wants to buy a business (or certainly not at full price) where the current owner is the No. 1 asset in the business (i.e., does a lot of personal sales, buys all of the inventory, does the marketing, is the main bench jeweler, etc.). There is too much uncertainty about what will happen to the performance of the business the day after the highly involved owner departs.

4. Build a strong team. Sometimes this involves outsourcing such things as repairs, custom design, marketing, social media, bookkeeping, etc. to effectively handle all day-to-day responsibilities. Note: this takes time, patience and perseverance.

5. Be visible online and on social media … it’s one of the first places prospective buyers will look.

In a market where supply exceeds demand, you need to give yourself a competitive advantage if you want to cash in that nest egg. It can happen, but it requires a strong level of grooming and preparation. The return, however, is well worth it.

David Brown is president of the Edge Retail Academy, a force in jewelry industry business consulting, sell-through data and vendor solutions. David and his team are dedicated to providing business owners with information and strategies to improve sales and profits. Reach him at david@edgeretailacademy.com

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Deb Schulman says once she and her husband, Ron, decided to retire, she could feel “the stress start to leave.” The owners of B. Alsohns Jewelers in Palm Desert, California, the Schulmans had heard about Wilkerson over the years and contacted them when the time was right. Wilkerson provided the personalized service, experience and manpower it took to organize their GOB sale. “We are so impressed with the way Wilkerson performed for us,” says Ron Schulman, “I’d send high accolades to anyone who was interested.”

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David Brown

Maybe You Don’t Need to Sell More Jewelry After All

How to balance the competing goals of raising sales volume and increasing your margin.

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AS DECEMBER APPROACHED, most jewelers were looking for some positive momentum in the lead-up.

Our November store data showed a slight increase in the right direction, with store comparative sales for the 12 months ending November 2019 showing an increase of 1.2% versus the same period a year prior. This might not be a figure that sets the world on fire, but given some of the recent stutters in results during 2019, it served as a promise of what might be to come.

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Sales of $1.921 million were up $22,000 from 2019’s $1.899 million, and over $90,000 up from the 2017 figure of $1.829 million. Sales units of 5,957 were down 7% on 2018’s 6,376 items sold for the rolling 12-month period, with average retail price per item increasing 8% to $322 from $298. Markup held its own at 85%, resulting in the average store seeing gross profit rise 1.4% from $872,000 to $884,000.

As we often discuss, growing your profitability can be something of a juggling act between maximizing your margins and increasing the volume of sales you make. Improving your bottom line can seem like an “and/or” argument – if I increase my price will my sales volume go down or stay the same? If I lower my price will the sales volume go up or will it make no difference? At the extremes the answer is usually yes – a 50% increase in price is almost certain to reduce the number of sales you make. Likewise cutting your prices by 50% should increase quantities sold. The question however is will it be enough to make a difference? In many of these scenarios the increase in the positive aspect may not be enough to counter what you have lost at the other end.

Let’s look at the scenario of choosing between an increase of 1% in prices versus a 1% increase in volume. It’s important to understand they don’t both have the same impact on profitability as we’ll demonstrate with the scenario below.

Jane runs a profitable jewelry store with the following numbers:

Fixed costs per annum: $250,000 (rent, salaries etc.)
Variable costs: $65 per unit (freight, commissions, goods purchased, etc.)
Sales: $1 million
Volume = 10,000 units

The scenario above would result in a profit of $100,000.

Raising Volume by 1%

Now let’s say she increases the volume by 1%. The fixed costs would remain constant, but her total variable costs would go up to $656,500 due to the extra expense of selling the additional items.

Sales would be $1.01 million, which is the same as raising the price by 1% and holding the volume steady. By raising the volume by 1%, Jane would increase her profits by $3,500 or a 3.5% increase in profit.

Raising Price by 1%

What would happen if she raised the price by 1% instead while maintaining the current sales volume?

Sales would still be $1.01 million, an increase of $10,000. At this level the variable costs would remain constant ($650,000) because we just raised the price per unit and didn’t have to buy or sell more items.

Fixed costs would also remain the same. This would result in an increase in profit of $10,000 – a 10% increase in profit, a figure that is $6,500 better than just increasing sales volume by 1%.

So, if you’re weighing up a strategy to build your business profitability, it’s important to know that not all methods work the same. Given this information, it may be better to concentrate on a plan that increases margins while maintaining sales volume rather than looking to build volumes at the expense of margin.

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David Brown

How the Power of Compounding Returns Can Make You Very Wealthy

Start early and continue to reinvest.

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ALBERT EINSTEIN CALLED it the 8th Wonder of the World — and it’s been a source of wealth building for many of the world’s richest people. And yet, the power of compounding interest is still one of the most misunderstood concepts in business and investment.

The power of compounding applies to business ownership just as surely as it does to investment decisions. Investors like Warren Buffett have built their fortune on businesses that offer a strong return on investment that can then be reinvested back into those businesses, or other businesses, that can continue to deliver similar returns. Compounding has allowed him to build an initial capital of less than $1 million back in the 1950s into a fortune of over $70 billion today.

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So how does it work? Well, I’m sure you’re aware of the leverage that can be achieved by reinvesting your returns to create still larger returns. What many people underestimate, however, is the power of how compounding can build up returns very quickly.

The graph above shows the impact of $1,000 invested in year one and earning a rate of 8 percent per annum — not an unrealistic return, and certainly less than most businesses would be expected to return given the risk. Over the first 30 years, the impact is gradual, as the investment slowly grows to a level of $10,062, or ten times the initial investment.

At this stage, a tipping point is reached. Over the next 30 years, it again grows ten times to reach $101,250 by year 60. And again, the next 30 years shows a growth of ten times, but now the investment grows in excess of $1 million by year 90 — all from an initial investment of $1,000. In just the next ten years, from year 90 to year 100, the investment doubles in size, adding the equivalent in that ten-year period to what was achieved in the first 90 years combined!

Now 100 years is more than the lifetime of most people, but the point is still well illustrated, and this example does not take into account the addition of extra capital. If the investor had added another $1,000 every year for 100 years, the total sum reached by year 100 would reach just over $29 million!

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This example shows the power of compounding, the benefit of continuing to invest more money each year which then compounds and, most importantly in my opinion, the power of starting early. This point is best illustrated by comparing someone who starts investing an annual amount from age 20 and stops at age 28 versus someone who doesn’t start until 28 and continues to invest that same amount annually until they are 55. If both people earned the same rate of annual return, who would have the most money at 55? Believe it or not, the person who invests from age 20 and stops at age 28 is still able to achieve a higher level of wealth than the person who starts later but invests for longer, even though the later person paid more money in. The power of compounding can make up for the first person no longer investing from age 28 onwards.

Both your business investment and personal investments need to consider the power of compounding when you make your decisions. You work hard for your money — there’s no reason your money can’t be working hard for you.

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David Brown

Here’s How to Succeed at Succession Planning

Be sure to consider these four areas to prevent unnecessary conflict.

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MONEY CAN BE A sensitive topic to talk about. Generally, people don’t like to discuss it even in the privacy of their own home. Yet, not talking about your financial situation can make a significant difference in how much of your wealth is passed on to other family members. Whether it’s a business being passed on or the wealth that it has created, careful planning is required.
Government legislation is constantly evolving in this area. It’s important to set up for the passing of wealth and to ensure this is compliant with the current laws.

Here are some things to consider:

1. Inform family members of what may be coming their way. Give them the opportunity to prepare for the financial impact an inheritance may have. More than one family has been undermined by a sudden arrival of wealth they didn’t expect and couldn’t handle. Such preparation can help them to plan their ownership and tax structures to handle it effectively.

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2. Be sure to involve key stakeholders. Be selective about who is involved in the decision-making process, the administration and the final beneficiaries. The process can be daunting and potentially alienate family members and cause unnecessary conflict.

3. Ensure a single unified vision. Particularly where parents are concerned, it’s important to ensure a consistent message is communicated about the ongoing management of the family business. If there is to be a successor, there needs to be an agreed upon approach as to who it will be and how it will be handled.

4. Don’t wait too long to pass on ownership and responsibility. If the business is to go to the next generation, a grooming process is recommended to ensure the transition is smooth and the successor has done their “time.” You should always be prepared for an unexpected event that may speed this process up faster than you intended — it’s better to be over-prepared in this area than under-prepared.

Whether a business is being passed on or the wealth that the business has created, it’s important that the vision is clearly communicated regarding how the legacy will be passed onto future generations. Sharing this vision can be an effective means of making sure the succession plan goes as smoothly as possible.

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