Retail Dogma

Buying a Retail Business

Buying a retail business can be a great option for many people who don’t want to start a retail business from scratch. In this article, we are going to guide buyers on what to look for in a business that is offered for sale.

Not only would we look for problems in the business to avoid them, but we would actually want to look for opportunities for growth and development.

Such opportunities are what could make the business a good deal, as they are not captured and reflected in the price yet, but they are easy to fix or grab.

So, let’s start!

What to Look For Before Buying a Retail Business?

Before you even go and meet with the seller, start by gathering general information about the business and look for the following.

Location

While assessing the location of the business, make a visit to the retail store on different days (weekdays vs. weekends) and at different times of the day (morning vs. evening).

The idea is to get a feeling of the traffic patterns to this location at different times, and figuring out the peak hours for this business.

You would also want to check out other stores at the same location, and whether more people are opening business there or if stores around are closing shop. This is a very good indicator on how business is going in this area or at this mall.

If it is located in a mall, check the anchor store at the mall, the mixture of tenants and how well this mall is doing when it comes to marketing the property.

Customer Profile

Assess the brand itself and the customer profile it is serving.

Try to draw a persona for what would be the typical customer for this store, and whether you believe you can serve them in a better way, by improving the products at the shop or adding new categories to the product assortment.

Key Competitors

Look for the key competition for this business. Are they present in the area? Are they opening? Or were they here and started closing down.

Try to estimate how much the competition is doing per day vs. how much this shop is doing, and whether this could indicate a room for growth for you.

Questions to Ask Before Buying a Retail Business

Then you can start asking more specific questions to the business owner.

What Are The Store Lease Terms?

Find out if the lease agreement is transferrable, and if there is a specific lock-in period in the agreement.

Get all the details about the total amount to be paid, because the rent usually includes additional fees and taxes.

You will need all this information to create your own financial projections for this store and see if it is feasible to acquire it.

Who Are The Key Suppliers?

Find out about the suppliers of this business and do your own due diligence on them.

Are they going to stay in business? If not, can you easily find other suppliers at the same quality and price range? What are their payment terms, shipping terms and order lead times?

Can you source the same products at better prices?

You might find a great opportunity in this area, where you can source the same products at better rates and terms, and quickly improve the performance of the business.

What is The Existing Team Structure?

Speak to the team and spend some time with them. Find out how things are run at the store, and the capabilities of the team members.

You can often improve the business just by upskilling the team or by hiring a great store manager to lead them.

A D V E R T I S E M E N T

Branch Specific Information

If the business has multiple branches, get specific information about each branch.

Has there been any locations that were open and closed down? and why did they?

How much is each location contributing to the top line, as well as the overheads of the business? Is there any sign of cannibalization between some locations?

You might find that you can turn around the business, just by consolidating it and closing some of the locations that are weighing it down.

What Numbers to Look at When Buying a Retail Business?

When you analyze the financials of the business, look for some specific metrics and trends.

Sales Trend

Look at the sales trends over the last 3 to 5 years.

Shopify Business Growing Sales

Is it growing or declining?

If it is declining, is it because of inventory issues?

A lot of time, retail businesses suffer due to inventory mismanagement. In this case, this could be an opportunity for you to fix.

Gross Margins

Always analyze sales together with gross margins. This will show you if those sales are affected by heavy discounting, or are coming organically.

Check if the margins of this business are healthy and in line with industry’s benchmarks. If they are lower, see if you can improve them through better product sourcing and merchandise planning.

Net Profit

Analyze the trend in profits, and see if it is growing or declining. Check all the different lines of the P&L statement and look for opportunities for improvement.

Read our article on P&L management.

You can still make money as an owner out of a retail business, even if its P&L is breaking even, as you will be paying yourself a salary.

P&L Management Multiple Retail Stores

If it’s a multi-unit retail business, ask to see the P&L by store, so you can assess how each location is contributing to sales and profitability and how you can improve on that.

Inventory Metrics

Calculate the inventory metrics out of the balance sheet and see how this business compares to the industry’s benchmarks on those metrics.

Retail Business Benchmarks

KPIs like GMROI and Inventory Turnover will tell you a lot about how this business handles its inventory and how productive and profitable it is.

The Real Value of Inventory & Other Assets

Finally, try to find out if the business is applying correct valuations, when it comes to calculating and reporting their inventory. Are they accounting for stock obsolescence and factoring it in?

Same applies with assets and fixtures, when it come to depreciation.

Inventory valuation might be part of the business valuation process, so you want to make sure it is calculated correctly.

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