The latest business for sale that I analyzed was a retail business.
The store has been operating out of a single location for decades. Revenue and profits have been flat for the past three years. There is a small sales staff and they’re open for business 6 days per week, 7 hours per day.
The current owners are selling the business as well as the building and plan to retire and move out of state.
The price is high. They’re asking 5.4 times cash flow. They justify the higher price because they are including the real estate in the purchase which represents approximately 65% of the total purchase price.
The buyer should be able to secure a mortgage on the building and use the proceeds to finance a little over half the purchase price. The remaining purchase price would come from a seller note and cash.
I see a few problems with this business:
1/ Price is too high. Small, main street businesses typically sell for 1x to 3x discretionary cash flow. If you exclude the real estate from this deal and assume a market rent expense, the asking prices is 3.1x cash flow. It’s more reasonable but still on the high end for this business which hasn’t grown in the past three years. Of course, just because they’re asking for a specific price doesn’t mean the price isn’t negotiable.
2/ Competition. There are at least four clear competitors within the market. All four appear larger and are spending heavily on advertising.
3/ Size of the business. This is a small business and profits are not large. Even if the purchase price was more reasonable, without growing the business, I’m not sure there’s enough profit to justify the time and effort required to make the business a success. And as long as the business has been operating, for it to be as small as it is makes me worry that it would be difficult to grow.
4/ Growth is limited without opening new stores. This problem is common to most fixed location businesses. Each store has a size limitation due to drive times and physical constraints. There might be ways around this limitation but that will require changing the business model.
5/ Running a retail business is tough. Unless you can afford to hire a good manager, the owner of a retail business needs to be physically in the store at all times. The store is currently open 42 hours per week and probably needs to be open longer in order to grow. Taking vacations, going on swim trips, doing anything that takes you away from the business for any length of time will be difficult. From a personal standpoint, I’m not sure I want to impact my life in that way.
Due to the concerns noted above as well as other issues, I’m not going to pursue this business any further. But just going through the analysis exercise forces me to continue thinking more about what I’m looking for in buying a business. I have concluded that unless I find something that is truly unique with significant upside, owning a retail business is not something I am interested in at this stage.
As my pursuit to buy a business moves out of the idea stage and into reality, I am starting to better appreciate just what is involved both financially and how it will impact my lifestyle.
Onward and upward!
Readers, do you have any experience owning and operating a retail business? Is it as demanding as I think? Has it been worth the amount of effort invested?
Martin - Get FIRE'd asap says
Personally, I wouldn’t entertain the idea of owning a retail business for all of the reasons you’ve outlined here. Low profit margins, potential staff issues to deal with, either being tied to the business full time or hiring a manager, which can bring its own problems, just makes an opportunity like this seem too hard. By the sounds of it, unless the current owners can present a far more attractive proposition, it may be some time before they get to enjoy retirement. “Run Forrest, run”, I say.View Comment
Financial Slacker says
At this point, the only reason I would consider buying this business would be if I could transform it into something online with much greater scalability. But there is significant online competition with this idea as well.
As such, I’ll be passing.View Comment