Are You Thinking of Selling?

By: Tom Shay

From: IGC Retailer, Best of Show Issue, 2012

 
Are You Thinking of Selling?

A retailer friend of mine “urgently” had to talk to me. Something “out of the blue” had come up, and he wanted some input. When we got into the conversation, the surprise was that another local retailer had said to him, “I would like to buy both of your locations. Would you be interested in selling?”

While this was surprising, even more surprising was my friend’s comment to me: “We’ve never thought about selling the business. What should we do?”

Never thought about selling the business? How can you operate the business without any idea of how you’re going to get out when you’re ready? Exiting a business requires forethought and a plan that is set into action well before the decision to sell is made. Think Five Years from Now When you decide you want to sell your garden center, it shouldn’t be for sale starting today. It should be a decision that says your garden center is going to be for sale five years from now.

Now, the strategy of expenses should change. You will want your garden center to be as profitable as possible because when you have a perspective buyer, he is going to want to see as much as your last five years of income statements.

The buyer is likely to offer to purchase your inventory at “landed cost,” or the cost of the inventory sitting at your garden center. This cost is higher than the cost of inventory according to the vendor because there is freight and labor to have the inventory ready for purchase.

The buyer will likely pay you for the fixtures, equipment, leasehold improvements, land, building and several other items - tangible and intangible - that you have determined to carry value. As an example of intangible, you may have a long-term assignable lease with an attractive rate that you would sell to the buyer.

The buyer will look at the profitability of the business over the last three to five years. You have shown your garden center to be a worthwhile endeavor, so the buyer should pay additional money for the ongoing business, which is often considered to be the dollar amount of three to five years of profitability.
Once you get to the point that the dollar amount has been agreed upon, the structuring of the sale becomes a point to be determined. Of course, there are taxes to be paid by somebody - you or the buyer - at some point for this transaction.
If you are selling fixtures and equipment for more than what your balance sheet says they’re worth, the government will likely look to you for taxes on the difference in the sale price and “book value.” That three to five years of profitability, often referred to as “good will” or “blue sky,” is also an item to be taxed.

There are even more complications, but this is where your accountant earns his pay. Structuring the sale so you’re paying the least amount of taxes and delaying those taxes as long as possible comes into play.

Perhaps you take that profit and roll it into another investment or business. You might not take all of that money at once from the buyer by becoming an “advisor” or “consultant” with an annual pay from the new owner of your garden center. Take this into consideration.

When an offer comes from “out of the blue,” there’s little that can be done to change what has already happened. However, if you’re thinking about selling your garden center sometime in the future, it will take a plan.

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