The subtitle of a Van Morrison album is, ‘No Plan B’. The album comes to mind as I wonder the aisles of a show and see so many vendors exhibiting whose service is to help you close your business. Just before starting to write this column, an e-mail was received from a couple that had been in business for 35 years and were looking at closing their doors.
They stated their business had been on the market for three years and without producing a sale, they were asking if it was time to consider, ‘Plan B – closing the store’. This is not the first time this scenario had been discussed, but to this writer, Plan B is not a good alternative.
While they mentioned visiting with their attorney and accountant, it appears the conversation is a few years too late. When you want to sell a business, these discussions need to be held about five years before you want out.
There is a different strategy to operating a business through the last few years and the preceding years of the retail life cycle. When you are operating your business, as the owner you have an advantage that most people do not get.
Most people get a W-2 at the end of the year and there are a minimum of tax and medical deductions they can take. The owner of a business can do a lot more. From having the business provide you with a car to giving your children a salary instead of an allowance, there are many opportunities for the small business owner to place a lot of expenses within the operation of the store.
Of course, this makes the store earn less, but there something neat about paying your children to take out the trash at the store and being able to pay them money as a legitimate business expense instead of giving an allowance which is not tax deductible. You are not as concerned with the bottom line of the business when you are getting these perks.
However, when someone wants to buy your store, in addition to looking at the store they will want to look at as many as five years of financials. This is the same five year time frame we were just mentioning.
When the buyer is going to offer a contract, they are going to pay for the inventory at landed cost, a fair valuation of the fixtures, equipment and the build out of the store, and the best part – ‘good will’ or blue sky’ money which is calculated as a multiplier of the average of your net profit for the last three to five years.
Stop and do the math for your store right now. Look at the net profit for the past five years and add those numbers together. Divide by five to get the average, and then we will assume your buyer is going to offer you 2.4 times that average amount. Nice pile of money?
That explains why for the last five years you own the store, you want to get all of these ‘marginal expenses’ out of the business. Look at all of that other money we talked about in inventory, fixtures and other items. If you take ‘plan B’ and close the store, you are getting none of the blue sky or good will, pennies on the dollar for the fixtures, equipment, and build-out, and your now empty building is not only worth less, but your insurance is going to be more expensive for an empty building.
Definitely, ‘no plan B’ wanted here. Perhaps the people writing this week would think about changing the way they are selling their store if they knew how much money they could get by selling the store.
Questions for our prospective selling couple? They would include:
How many different brokers have you utilized in these past three years? Were each of them specialists in small business? Where have they been advertising the business? Have you had someone give you a qualified business evaluation so that you know you are asking the right price? Have you considered keeping the building but selling the business?
There are a lot of questions to be asked when you are thinking about selling the business. Definitely the questions need to start well before the date you are ready to get out. And in light of what you can get from selling a going business, there should be ‘no plan B’.