How to Sell and Value a Retail Business
The retail industry is poised for growth after two years of pandemic-related complications.
According to Deloitte’s Retail Industry Outlook, 54% percent of executives are expecting retail to grow up to 5%, with 32% of executives expecting growth of 5% or more during 2022.
As a result, activity in the retail industry will remain high. If you’ve been pondering how to sell and value your retail business, and you are wanting to know what it’s worth, you may be in a good position.
It’s a matter of evaluating your opportunities, ensuring the value of your store is as high as possible before you enter the market, and working with an experienced broker who can help you sell your business for the maximum amount.
What Factors Make Retail Businesses Valuable?
There are many signs of a healthy retail business. The good news is, you can influence these factors for the better, as long as you plan out the sale of your retail store and brand for up to a year or more in advance of going to market.
Some of the numbers a retail business owner should try to maximize include:
Average Order Value (AOV): The average dollar amount customers spend when buying in-store.
Average Transaction Value (ATV): The same as AOV, but for e-commerce websites.
Foot Traffic: The number of customers visiting your retail location.
Conversion Rate: The ratio of sales to total foot traffic (or online, the ratio of sales to total web traffic).
Sales Per Square Foot: Your store's revenue for each foot of physical in-store space, calculated as your sales divided by total square feet.
Customer Retention Rate: The percentage of your customers that return to buy again.
Net Profit Margin: Your bottom-line income, after accounting for all taxes and costs.
Year-Over-Year Sales: A percentage expressing how much your business has grown in terms of sales, from one year to the next.
Inventory Turnover: How often items in your inventory need to be re-ordered, as a result of sales.
A strong showing in each of these metrics will be tied to healthy revenues and profits, and overall, will make your retail store more valuable to a buyer.
Hard assets include your inventory, real estate, furniture, racks, shelves, and equipment such as cash registers and modern technologies used in-store. Soft assets include vendor relationships, brand, customer loyalty, and social media accounts.
These assets may be very valuable to buyers and investors and often figure into valuations of retail businesses.
The more customers you can turn into loyal repeat buyers, the more value you’re bringing to your brand, which will attract new buyers. You can accomplish this through maintaining an eNewsletter, engaging past customers with regular promotions, creating a loyalty or rewards program, and hosting events.
A larger market size for the niche you’re operating in — whether you run a clothing store, home goods outlet, or a convenience shop — will mean more competition. However, it also means more customer opportunities. This is further affected by your location, and the other businesses you’re competing with locally for the same customers.
In general, operating in a market that’s thriving in your area, bringing in a lot of customer foot traffic, and outperforming similar local retail brands will make your business more attractive to investors and buyers.
Formulas Used To Value A Retail Businesses
EBITDA and SDE are two common valuation formulas that are used in valuing retail businesses. A broker can calculate these for you to determine a range of selling prices for your business.
Using EBITDA As A Valuation Metric
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It is a formula that adds back common business expenses, and is multiplied by a certain number (namely, a “multiple”) to project what your retail business will sell for.
Retail brands that use up-to-date technologies to manage their daily operations have a solid roster of repeat customers and show strong year-over-year sales may sell at higher multiples. EBITDA is more commonly used to value retail businesses that bring in more than $1 million in revenue per year.
Using SDE To Calculate Value
SDE stands for “Seller’s Discretionary Earnings,” and it follows the formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, and other transactions listed as business expenses) = SDE.
SDE adds back expenses that can be of personal benefit to the business owner, and which may have been reasonably incurred in the process of running the business. Examples include travel expenses, home improvements, and salary.
SDE may be more applicable to smaller retail businesses that bring in less than $1 million in revenue annually, and that are run by just one person.
For both EBITDA and SDE, a retail business can fetch multiples anywhere from 1.5x to 3x or more, depending on numerous variables that affect the business’s value. The best way to sell your business at higher multiples, ultimately, is to lower the risk for prospective buyers of your business.
How To Reduce Risk And Attract Buyers To Your Retail Business
Buyers want to be sure they’re avoiding extra burdens when buying a retail brand. Lower the risk in your retail business over the year before you sell (or longer), and you’ll give yourself the upper hand in negotiations with buyers.
Position Your Business Against Market Size
Even in a large and competitive market, you can make your retail business valuable by honing in on a niche and building a distinguishable brand.
A niche approach makes your brand more memorable and may entice customers to return to purchase again. A unique brand also gives savvy buyers a chance to market the business in new ways to new pools of customers, whether online or at your physical location.
Inventory management is an important part of ensuring costs don’t get out of hand. Review your stock counts regularly, use analytics, and have a process in place for quickly replacing underperforming stock.
Focus On Increasing Important Sales And Revenue KPIs
It’s crucial to raise numbers like your average order value (AOV), conversion rate, year-over-year revenue, and net profits to show strong sales performance.
These go hand-in-hand with maintaining a consistent positive cash flow. By showing that your sales are regular and growing, you’ll be able to prove a return on investment for the next business owner.
Upgrade Your Technology
Up-to-date tech infrastructure is important for retail businesses to stay competitive today. Savvy buyers, accordingly, will be looking for it to be already in place.
One of the core systems you’ll need is a point of sale (POS) system. This software and hardware combination can often handle contactless (mobile) payments, customer tracking and relationship management, inventory management, and more. Leading solutions include those by Square, Lightspeed, and Shopify POS.
Depending on the size of your store and the complexity of your operations, it may be important for you to have a modern shipping and logistics solution, and security systems as well.
Build An eCommerce Presence
If you don’t currently allow purchases online, consider doing so. An e-commerce website can be a big boost to your brand and a significant extra source of revenue.
An eCommerce site will help you diversify your retail income streams, as some customers prefer to shop online and you’ll be able to reach customers outside of your store’s serviceable area. It will also help keep your brand up-to-date and competitive with other retail businesses, which buyers will want to see.
Use Digital Marketing
Digital marketing is a great way both to drive foot traffic to your physical store, and web traffic to your eCommerce website and social media profiles.
A combination of strategies such as search engine optimization (SEO), paid advertising, social media posting, and email promotions can bring you many more customers, while also increasing how much they spend with you on average.
It’s important to keep up with your competitors, many of whom are actively advertising. According to Statista, digital advertising spends in American retail reached $27.38 billion in 2019, and was projected to grow to $35.5 billion in 2021.
Savvy business buyers and investors will be looking for established digital marketing processes that will keep bringing in new customers.
Once you have the mindset of reducing risk, you’ve learned a large part of how to sell and raise the value of a retail business. It’s time to consider what kinds of buyers you’ll engage with, and how.
Finding Buyers And Preparing To Sell Your Retail Business
Many different types of buyers may be interested in your retail business if you’ve done the work of raising its value. It’s important to know what kind of buyers you might be dealing with, as well as some key steps in the process.
Consider Who Might Buy
One type of buyer is another retail business that wants to add to its own brand. It might be a competitor, or a much larger operation seeking to expand into your area and take over the market share.
Another category of buyers includes venture capitalists, especially if there’s an opportunity to drill down within your niche of retail products, due to your brand being unique and having a strong following.
In addition, websites like BizBuySell and BizQuest are online marketplaces where you can list your business for sale online. Private online groups, and social media outlets like Facebook, are other places you can make connections with buyers.
It’s important to be cautious, however, as not all buyers are qualified or willing to transact fairly.
Do Your Due Diligence
Your due diligence as a seller includes all activities related to shoring up your business’s legal and financial matters and preparing the assets for a neat transfer to the next owner.
Make sure you’ve documented the standard operating procedures (SOPs) for your business. This will lay out everything that must happen daily for your business to run, from staff responsibilities and procedures for customer interaction protocols to setting up and closing down for the day.
You’ll also want to be sure that, as the owner, you’re as far removed from critical daily tasks as possible. This is attractive to potential buyers of your shop, as it shows they don’t have to be intensely hands-on in running the business from the start.
Make sure insurance and vendor contracts, intellectual property, and other key assets are all transferable to new owners. If your employees will stay on after the sale of your business, that’s another essential asset you can highlight in negotiations.
Working with a broker is the best way to connect with qualified buyers who are prepared to make you a decent offer.
Work With Raincatcher
If you’re considering how to value and sell your retail business, and you’d like to maximize the financial returns on the sale, talk to Raincatcher.
Our brokers specialize in the retail industry, from large brands to small independent shops. We know what it takes to appraise, raise the value of, and successfully sell a retail business.
With a Raincatcher broker, you’ll get all the assistance you need in completing your due diligence, ensuring a smooth closing, and selling your retail business at the highest price possible.