Selling your store could be your ticket to moving to a new town, starting a different business—or transitioning to a comfortable retirement. Here’s what you should do now to make sure that exit strategy is open to you.
If retirement is in the picture for you (ever)—or moving to a new city or changing careers—selling your store may be the exit strategy you’re imagining. If so, it’s never too early to start planning, says M&A advisor Barbara Taylor of Allan Taylor & Co. in Bentonville, AR. “It takes at least a year, if not longer,” she says. “But really, you should start prepping your business for sale the day you start it.” Victoria Lyman, owner of Allegro Dance Boutique, saw that firsthand when she bought two different dancewear businesses (in Evanston and Barrington, IL) from owners who were retiring. “Don’t start thinking about your exit when you want to exit” is the lesson Lyman learned vicariously. A business mentor she’s worked with told Lyman she “has seen so many women who work their tails off and then want to retire, and that’s when they realize they have nothing to sell.”
Never Too Early to Start Planning Your Exit Strategy
So what steps can you take now, so that when you decide it’s time to move on, you can finish strong?
1. Start with your financial statements—your P&L, your balance sheet.
These and your tax returns are the foundation of what your business is worth—and what a buyer will scrutinize the most. “Show them to someone who sells businesses,” says Taylor. They can look at your revenues, expenses and profitability objectively, from a buyer’s perspective. Problems may surface—one reason you need lead time is so you can fix them. Are you showing enough detail about revenues so the prospective buyer knows how you make money?
What are your real profits? Buyers will want to know. How much are you living out of the business? Some owners fall into the trap of lowering net income to reduce taxes, but that makes the business look unprofitable, and no matter how much you explain, it weakens your position as a seller, Taylor says. “Everyone accepts add-backs [to profits], like expensing your personal auto, or your personal cell phone, or meals and entertainment, or a trip that’s half business.” Anything beyond that, she advises stopping a year or two before you want to sell. And if you take a draw, pay yourself a market-rate salary in case a new owner has to replace you. “Make it clear what the expenses are, and what goes into profit,” says Taylor.
2. Document all your processes.
Do you have job descriptions? An employee manual? Opening and closing routines? What about details on group pointe shoe sales events? “The knowledge can’t all be in the owner’s head, because you’re going to be handing operations over to someone else,” says Taylor. You’ll save having to explain everything that makes your business tick, and the new owners will have more confidence about being able to make a success of the business themselves.
When Lyman bought her businesses, she wanted to know things like: How many people are on your e-mail lists? What studios do you work with and who are your contacts at each one? Who are the important people I need to know? “For the Barrington store, the owner showed me a binder with all the special orders—this studio has a competition in January, so contact them in November and so on,” she says. “I could see how the store made its revenues, not just the numbers on the financial statements.”
3. Groom key people who know how your store runs.
Even though you’re the boss, make sure that you have other key people in place—a manager and experienced staff whom your customers know. Share real responsibilities, and do anything you can to encourage loyalty to the business, not just to you, advises Taylor. “Every buyer fears that customers aren’t going to come, and all the employees are going to leave,” she says. It will be a selling point if the buyer can reasonably expect to start out with competent staff members who love working at the business—and customers who respect them.
Sometimes staff end up being potential buyers. When it came time for Georgia Tetradis, owner of Beam & Barre in Greenwich, CT, to retire, she sold her business to Cara Milo, who had shopped at the store and then worked there for nine years. And as a college student Victoria Lyman worked at Before the Ballet in Evanston, IL, the first store she bought, spending five years learning all the ins and outs of the business, the market and its customers. The owner used to joke, “I should sell you this business.” Lyman, who was 24 at the time, would laugh, but then eventually she thought “Why not?”—and they started discussing a sale.
4. Get good professional advice.
You’ll want accounting help for fine-tuning your financial statements and tax advice on the impact of the sale on your personal finances. And well ahead of time, you’ll want to get an idea of how much your business is worth, because there may be things you can do to improve that price. A certified business valuation will cost $3,000 to $5,000; a business broker can do one for less. There are various formulas used—for a store, a common one, says Taylor, is a multiple of its pretax earnings (the multiple would be two or three for a really good shop with a strong reputation). Tetradis and Milo arrived at a selling price that was a percentage of the previous year’s sales (50 percent), plus the cost of the inventory, plus a little extra.
For businesses with inventory, that can have a big impact on a selling price, says Taylor, because of its seasonality and fluctuating size, which makes it negotiable. She advises getting rid of all stale and damaged inventory before a sale. Lyman,whose two store purchases were for the value of the store’s assets (fixtures, etc.) plus inventory, says that valuing inventory can be tricky. A seller might reason: Bloch just charged me $15, so it’s worth $15, and that’s what I’m counting it as in the value of the inventory. “But as a buyer, I may know I can use a fall incentive and get that same item for 18 percent off,” she says. “And it will be brand-new.”
In the end, says Taylor, there are no hard and fast rules about a selling price—“It’s worth what the buyer pays you.”
5. Have a plan for afterward.
“Naively, I didn’t think about what I was going to do after I sold the store,” says Tetradis, who was a buyer at Saks Fifth Avenue and then ran Beam & Barre for 31 years. “I was 58 years old. There are only so many ballet classes, only so many visits to the gym. Some people can retire and never look back. It was really difficult for me.” After eight weeks, she approached the owner of On Stage Dancewear in Manhattan and took a job working there part-time, happy to be free of the responsibilities of ownership and the one-and-a-half-hour commute to the store she owned in Connecticut, but still part of the dance community she loves.
The Bottom Line
Think about your exit strategy the day you start your business. If you hope to sell your business, and use the proceeds for a comfortable retirement or a new venture, plan the steps you can take now, so that when you decide it’s time to move on, you can finish strong.
Last updated September 12, 2019