If you're like
most retailers, you
cherish your store with all the love a
mother lavishes on her child. And
you hate the idea of selling your
"baby" to some stranger.
Fact is, though, there are many reasons why you might reach a decision
to "cash out." Maybe you're looking at
retirement with an eye on the golf
courses. Maybe your children don't
feel like taking over the shop. Or
maybe you'd like to take the cash you
get from a sale and invest in another
Whatever your reason, deciding to
sell is one thing. Doing it right is
SETTING A PRICE
Like most people contemplating the
sale of a business you probably have
one paramount question: "How
much can I get."
Coming up with a realistic selling
price is critical, after all. You don't
want to leave money on the table by
selling for too little. "Your business
may very well be the most important
asset in your life," cautions Roger
Winsby, president of Axiom Valuation
Solutions, a consulting firm in Wakefield, Mass. "You need to have a realistic valuation done before selling it."
Let's look at one ballpark estimate
formula called "the earnings multiple." This calculation values a business based on the cash it generates or
its annual "cash .ow." To figure the
value of your own business, start with
your annual bottom-line profit figure. Then add back what you have deducted during the year for interest, taxes,
depreciation and amortization. The
resulting cash flow number goes
under the acronym of EBITDA (pronounced "eh-buh-ta"). That stands for
"earnings before interest, taxes, depreciation and amortization."
Businesses are often valued in
terms of a multiple of cash .ow. "For
smaller companies, the sales price almost always comes out around fourto-six times EBITDA," advises Rick
Rickertsen, managing partner of Pine
Creek Partners, a private equity firm
based in Washington, D.C. So if your
business's EBITDA is $300,000,
then your business may sell for $1.2
million to $1.8 million.
One more formula is called the
"owner's cash flow multiple." This
one is often used in the case of a
small retailer where the owner has
been withdrawing a high annual
salary. The analyst determines
owner's cash flow by starting with
the operation's annual bottom-line
profit figure, then adding back interest, taxes and the owner's annual
compensation. Retail operations
often sell for one to three times the
Simple formulas will take you only so
far. Your business, after all, is like
none other and possesses a host of
characteristics that will affect its selling price. "To get a realistic valuation
you need to thoroughly analyze your
market, your industry and your business position within that industry,"
notes Kurt Myers, a valuation analyst
in Goodlettsville, Tenn.
This valuation should be done by a
specialist who addresses issues such
as regional economics, the presence
and quality of competition, your own
business's growth trend, the quality
of your management team and even
the extent of your customers' loyalty. Long-term contracts to supply services and goods can help in.ate your
selling price. So can a lean and effective inventory situation.
An analyst will also try to determine your organization's goodwill,
because that also affects value. "Goodwill includes many intangibles," says
Mark DiQuattro, a business valuation
analyst in Belleville, N.J. "They include the value of past advertising,
the state of your customer and client
relationships, and your employees'
proprietary knowledge and loyalty."
Does all this sound like a lot of effort. That's because it is. A professional valuation for a retail operation
of any size can take nearly two
months. And in the final analysis the
process will still not generate a completely reliable number.
Fact is, it's the buyer who sets the
selling price — and businesses often
have different values to different buyers. "Special considerations for retail
include the length of leases and the
density of the population in the surrounding region," says Jim Rabe,
managing director of Willamette
Management Associates, Portland,
Ore. And if your outlets are located in
an area attractive to an expansionminded chain, your selling price will
The value of single-unit retailers is
especially affected by the local economy. Two retailers, each with $3 million in annual sales, will have far different selling prices if one is located
in a high-growth region and the other
is in a slow backwater.
Skillfully analyzing business value
is beyond the reach of most anyone
but a specialist. To find an individual who can do the job search the Web
sites of these two professional organizations: the Institute of
Business Appraisers, at go-iba.org; and the National Association of
Valuation Analysts, at nacva.com.
Don't overlook other sources of
advice. Your regular accountant, for
example, will help you determine
the strong points of your enterprise. And how about individuals with
businesses similar to yours in other
parts of the country. Some of them
may have been looking into a sale
on their own and can share valuable
PREPARE FOR THE SALE
We've already covered some factors that
might in.ate the selling price of your
business. Conversely, one characteristic
can depress a sale price considerably
and sometimes even block a deal: the
lack of a durable management structure
in an organization where profitable operations too often depend on the continuing presence of the owner.
"Any buyer will want assurances
that your business either has a management team that will stick around
or has a second level of management
ready to take the reins," notes Winsby. "To make your business saleable
you need to have people and systems
in place for the future. If you do not
make yourself irrelevant to your business, it will be hard to sell."
If your own continuing contribution to a business still represents a
good part of your organization's
value, you may consider providing
your services in some way to the new
owner. "It is not unusual for a previous owner to stay around either part
time or on a consulting basis," says
DiQuattro. "That also gives the employees some comfort that the old
boss will be around. It alleviates fears
FINDING A BROKER
You will also obtain some insight into
your possible selling price from brokers, who match people with businesses to sell with those who want to buy.
Maybe you've already heard from
some of the many business brokers
who like to cold call companies and
ask them if they would like to go on
the block. "There is a group of business brokers who shop companies
without a lot of knowledge about
them," says Rickertsen. Once these
brokers get the go-ahead from a business like yours, they run around and
track down potential buyers.
You will want to find a broker with
experience selling businesses similar
to yours. Ask for referrals from your
Chamber of Commerce as well as
from other businesses in your area,
especially those that have been recently sold. You can also find brokers in
the database of the International
Business Brokers Association Web
Another source for brokers is
the database maintained at BizBuy
Sell.com. This Web-based marketplace is attempting to bring more
buyers in touch with sellers by capitalizing on the nationwide coverage of
the Internet. "Industry data state that
as much as 40 percent of businesses
are sold to buyers outside their immediate area," points out the company's
general manager, Mike Handelsman,
who claims over 2,500 brokers and
40,000 businesses are currently listed on the site.
PLAN FOR SUCCESS
Getting the best price for your store
takes careful planning and patience. "The whole process of evaluating a
business and closing the deal typically takes from six to nine
months," says DiQuattro. You may
well need a month just to get your
paperwork together, including
copies of customer agreements, employment contracts and leases. Obtaining a professional valuation
might take a couple of months, then
going to market can take three or
four months — or longer.
Of course, you might be one of the
lucky ones who sell their business in 60 days. Just avoid the temptation to
rush to market. Invest the necessary
time to understand your retail organization's position in the marketplace,
and then price it right. "If you really
want to sell your business, pricing it
correctly is critical," says Rabe. "If you
overprice the business, it won't sell. And if you under price it, you'll leave
money on the table."
What It Costs To Sell
Selling your retail operation can put a lot of cash in your bank
account. You'll quickly discover, though, the truth of an old adage:
"You have to spend money to make money." It
can take some serious dollars to hire the professional assistance you
need to put your
business on the selling block.
How much. Here are a few estimates from Rick Rickertsen, managing partner of Pine
Creek Partners, a private equity firm based in Washington, D.C.:
A lawyer with experience in mergers and acquisitions may well run from $10,000 to $100,000, depending on the size of the deal.
Who will intermediate between your company and the marketplace. Maybe
an investment banker, with charges typically running from 3 to 5 percent of the selling
price. Business brokers may handle smaller deals, with fees often ranging from 5 to 10
percent of the sale.
You will need a set of audited financials prepared by a CPA. This
could run some $40,000 for a small business.
• VALUATION PROFESSIONAL
A specialist may charge from $20,000 to
$25,000 for determining a fair price for your business.
Some costs are monetary. Others are psychological. "Don't overlook the intangible
costs associated with selling your business," warns Dr. William Rupp, dean of the college
of business at the University of Montevallo, Montevallo, Ala. "It may well happen that the
people who buy your business lack your passion for the organization. They may just be
wondering, 'How can we make money with this.' and the answer may involve cutting many
of the things you have long considered important."
Maybe the new buyer will terminate some of your favorite personnel, reduce benefits,
or even cut back on the quality of goods and services, cautions Rupp. If you have agreed
to hang on as a consultant you may find yourself in emotional turmoil as a result.
Breaking The News
When should you tell your employees about an impending sale of
Timing the announcement can be difficult. You don't want to
announce a sale so far in advance that you cause unnecessary
workplace turmoil. This would be especially damaging if you
finally decide against selling because you think you can get a
better price later.
On the other hand, waiting too long has a downside: Putting a
business up for sale is far more difficult to keep secret than you
might realize. Once the rumor mill starts grinding, your best
employees may resent being kept in the dark. Worse, in the
belief they may soon lose their jobs, they may jump ship for competing retailers. That can leave you holding a business with
"There is no upside in telling your people," counsels Dr. William Rupp, dean of the college of business at the University
of Montevallo, Montevallo, Ala. "If you tell them early you are a
'quitter.' If you tell them late you are a 'cheater.'"
Some consultants advise informing people just as the buyer
has come to a final agreement. "The best way to tell your
employees is one by one, all on the same day," says Mark
DiQuattro, a business valuation analyst in Belleville, N.J. "Schedule a half hour or an hour to talk to each, so they don't
find out little by little and the gossip mill starts. Start with your
senior employees and work down."
Avoid announcing the sale in a group meeting, advises
DiQuattro. Frightened employees will start asking questions that
are difficult to defuse in front of everyone, such as:
• "Don't you care about the employees."
• "Will the new owner fire us all."
• "A chain like ours got sold and they let go of half the employees. Will that happen here."
Consider locking in your best employees with one-year contracts. This will do more than help them feel secure when they
hear about a pending sale. It will also assure your buyer that
your top talent is aboard for the long haul.
Phillip M. Perry is a New York-based writer and consultant.