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What should you do when it comes time to retire from a retail business? Coopers and Lybrand, an international professional services company conducted a study of the retail industry to explore how retail stores are sold. It surveyed respondents operating approximately 12,000 stores and looked at a variety of means employed to sell the inventory and assets of retail stores, including the following four primary methods:
- Going Concern Sale – A store is sold to a purchaser who intends to continue operating it as a business and is willing to pay for some “goodwill” over and above the value of the asset.
- Bulk Sale – Inventory is sold in lots to a business owner for resale.
- Auction Sale – Inventory and other assets (furniture, fixtures and equipment) are organized in lots and sold at auction.
- Store Closing Sale – Inventory and assets are liquidated in a going-out- of-business sale.
Methods #1 and #4 are the most popular.
Retail businesses with large inventories sometimes have a higher asset value than an appraised value based on the store’s cash flow (the money that remains after all the operating expenses are paid but before the owner draws a salary or pays any debt service). This is especially true where the owner has been pumping profits back into the business to build up the inventory.
Suppose a retail store had inventory of $200,000 but a cash flow of only
$25,000. Over their five-year ownership period, the proprietors had taken little salary, choosing instead to plow most of the profits back into inventory.
Unfortunately, even if the sellers could realize the value of the inventory in a going concern sale, the $25,000 provable cash flow is insufficient to retire that much debt and still pay the buyer a salary. In situations like this, it is often a strategic alternative to sell off the assets through an orderly liquidation (store closing sale). In many such cases, a retailer will purchase additional inventory to showcase during the liquidation process. The words, “Liquidation Sale – Everything Must Go,” are great attention-getters and will drive traffic to a store when all other “motivators” fail.
In a going concern sale, inventory is valued “at cost” (what the seller paid for the inventory). However, in a store closing sale, an owner often offers discounts of 20 percent to 30 percent at the beginning of the sale. If a piece of inventory cost the seller $50 and was priced to sell at $100 (a typical keystone markup), a 30 percent discount would equate to a $70 selling price…$20 more than the owner would have realized on that item if it were included in the price of the business as a going concern. Even at a 50 percent discount, the owner will recover all the money that has been diverted to inventory.
Other advantages of a store closing sale include:
- A predictable store closing date; and
- 2) All sales are in cash and credit cards with no accounts receivable.
CCH Consulting, LLC helps retailers plan and execute store closing sales (for a fee, of course) to maximize the owner’s return. We analyze the best timing for a store closing sale, anticipate the return, contact media reps, train employees, price the merchandise and survey the competition.
If a business generates sufficient cash flow to substantiate a “goodwill” figure over and above the wholesale value of the inventory and other assets, an owner should consider selling the business as going concern . Two obvious advantages of this type of transaction are:
1)The business continues in operation, which often has an emotional value that is priceless to the entrepreneur who started it.
2) The employees retain their jobs, which is often a major concern to an owner with loyal, long-term employees.
Another factor impacting the decision may be the presence of an existing lease. If the business owner is the personal guarantor on a lease with five years left, he/she will either have to make arrangements with the landlord to retire that obligation early or sell the business as a going concern with the buyer taking over the remaining lease obligation.