What to Think About When Buying a Retail Business
If you are interested in buying a retail business, there is a lot to consider. There is an old saying that retail hinges on three factors: “location, location, location.” While true, it is not always the case. When looking at a retail business, you must analyze what “drives” the customers to the store and are there enough customers within geographical proximity to support the profitable operation of the business.
What Brings in the Customers?
Location:
If the business has a great location and relies on its location for much of its success, then you will absolutely need the assurance of a protected location that:
- Has in place a current lease between the business owner and the landlord that is transferable/assignable to you and is long-term. You may (most likely will) need to negotiate additional lease terms with the landlord to give yourself at least five to ten (5-10) years of a guaranteed location. Do not minimize the importance of the lease terms and remaining duration of the lease if the business is in a retail center with a mix of co-tenants.
- Is there an anchor tenant that brings customers to the location? If so, then you will want to know how long their lease remains, and if they have any plans to relocate in the near- term. Also, be certain that this anchor tenant is solid financially – think about all the poor merchants who have relied on K-Mart, Sears and Barnes & Noble. Will Best Buy be around in 10 years? The stores surrounding certain retail businesses have found, or are facing, disastrous consequences when an anchor store is closed or downsized.
- Is there any planned road construction that can impact the business? Typically, major roads undergo some form of construction every ten years or so. Visit the planning office of the municipality, County Planning Board, or NJ DOT to research when the last work was done. Additionally, research what plans, if any, may be in place for future expansion, major repairs or relocations on the main access road(s) to your location.
- What about new and better competition? New competition is a fact and your future reality. Is a Wawa convenience and gas station coming into your marketplace, a Starbucks, Chipotle, Chick-Fil-A… you get it! Above all, think about every possible situation that can impact the location of your prospective business and investigate it thoroughly.
Product Offering
If the business operation is driven by the unique product(s) it sells, you will want to be certain that you can continue to sell the same type(s) of products your customers want. If this function is performed by a key employee, you may want to “lock these employee(s) in” with a generous compensation package or have them own a minority interest in the business as well. However, if you are not 100% comfortable with performing this function yourself or are not the type that has an “eye” for the product, you may not be well suited for this business.
What’s a Retail Business Worth?
Just like any other business, there are no “golden rules” to rely upon to establish the value of a retail business. The main issue must always be how much profit the business is making, not just annual sales. Sales without profit are worthless sales, generally speaking. Profitability dictates the purchase price. Inventory is one element that confuses many retail business purchases. You need the inventory to drive revenue. It may or may not be treated separately in the price.
Notwithstanding this, the combination of profit and inventory cannot result in an over-inflated purchase price.
When it comes to inventory, your investigation must evaluate whether the inventory is “saleable” and in what time frame it can be sold. Specialty retailers often have an abundance of obsolete or slower-selling products. This inventory must be discounted heavily in the valuation. For more information on how to value a retail business, go to the page “How to Value a Business” (click here).
What to Do Next?
Lots of people have made lots of money operating a retail business. You too can be successful. But you will want to weigh all the factors to be certain that this type of business fits both your strengths and the lifestyle you want.
TESTIMONIAL
In my negotiations with a large international corporation, Fredrick P. Niemann worked with me to the end. They were thoughtful and proactive in identifying the issues of concern to me, issues I hadn’t even thought of. I was very satisfied with the services they rendered.
Cheryl Scheidler, Wall Township
Fredrick P. Niemann Esq.
To discuss buying a retail business in NJ, contact Fredrick P. Niemann today. He is here for you. Please email him at fniemann@hnlawfirm.com or call him today toll-free at (855) 376-5291.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey Buying a Business Attorney