For Sale: “Great little antique shop … packed floor to rafters with inventory of all types … new owner won’t have to buy inventory for two years … make more money if new owner will keep longer hours and sell on the Internet. Priced at $349,000; Inventory value $299,000 (40% of retail).”
What a great deal – for the seller! For potential buyers, this business could be an opportunity for financial ruin.
Such “business opportunities” are commonplace. Recently I spent about two hours browsing business-for-sale websites, looking at antiques stores for sale. Having been both a store owner and business broker in previous careers, I continue to be curious about how various businesses are selling. I browsed several dozen antique stores for sale across the U.S. (There were more than 100 offered for sale; I just got tired of browsing.) All the listings were bright and cheery and seemed full of promise for new owners.
Some of these shops will sell for the right price to the right buyer and everyone will live happily ever after. Some shops will sell to over-enthusiastic buyers who don’t have a clue what they are getting into. Most will not sell at all; the businesses will close and their inventories will be liquidated.
For buyers, the roadblocks to acquiring an existing antiques business are greater than any other type of retail business. The problems are these:
The value of antiques and collectible inventory changes over time. As demand for certain items rises and falls, the value of the inventory will also rise and fall. Not your actual cost, but rather the value of the items to a new owner. Other retailers, such as clothing stores or gift shops, don’t have that problem; they inventory newly manufactured goods with predictable inventory values. When the value of inventory makes up a large percentage of a retail business’ selling price, correctly valuing an antiques inventory can be a major undertaking.
Antique stores typically have a high percentage of dead inventory. Inventory that has remained unsold for more than 18 months is dead inventory, and potential new owners would be foolish to pay for unsalable inventory.
Antique dealers are notoriously irregular record keepers. Few have the records that sophisticated buyers look for (and are willing to pay for), which includes three to five years of financial records, including income statements, tax returns, balance sheets, cash flows, inventory aging reports and operation manuals.
Business brokers and other sale facilitators are clueless about the antiques business. A “noted expert” quoted in the Business Reference Guide says “there are no rules of thumb for this type of business” and “the value of the business is really just what the antiques themselves are worth.” Nonsense. Profits and cash flow have value (ask any banker). Any business that can show regular profits and cash flow can get paid for that cash flow when the business is sold. It’s called “discounted cash flows,” and it’s one of the building blocks of the U.S. economy. Of course, the seller has to prove the profits and cash flow (see No. 3).
You would be astonished at the number of retailers who decide to sell their business as they approach the end of their lease. Without a lease, all a buyer is getting is inventory.
So, how can a serious buyer find a viable antiques business at a good price? Start by sorting the wheat from the chaff; eliminate the ones that are troubled and you’ll be left with a reasonable selection. If you’re looking to buy an existing antiques business, here’s how to do that.
Start with the real estate, not the antiques. Are you buying a building or leasing a space? A bad lease can kill a retail business faster than anything else. Remember, the rent you’ll pay is based on location, and the quality of a location is defined by its traffic. Landlords of free-standing buildings should know what the car count is in front of their building, and mall operators should know what their foot traffic count is. If they can’t prove their counts, scratch them off your list of possible purchases (unless they have great sales numbers).
Also, commercial leases vary from simple monthly rent payments to rent plus taxes, utilities, maintenance, common area charges, percentage of sales and more. If you don’t want to get stuck re-paving the landlord’s parking lot or paying for his new roof, make sure you understand the terms of the lease.
If the lease will not transfer, make sure that it is renewable at terms you can live with. If you have to move the business, then moving will affect your traffic, which will affect your sales, which will affect your cash flow. If you have to move a business, don’t pay for “goodwill” or discounted cash flows because all of that will change when you move. Also, be sure that the roads leading to your business will not move. A bypass is not good for business.
If the real estate looks good, make sure the seller is flexible on his inventory pricing. Don’t — under any circumstances — buy dead inventory. Don’t buy the previous owner’s mistakes! You’ll buy enough of your own mistakes in the future. If the seller is inflexible on his inventory value, scratch that business off your list. But keep tabs on the business because if the store has a fair amount of dead inventory, you can be certain that one of two things will happen:
The business won’t sell and you can cherry-pick the inventory at the liquidation auction. Or . . .
The business will sell and you can cherry-pick the inventory at the new owner’s bankruptcy auction.
There are two parts to negotiating the sale price of a business: The selling price and the re-payment terms. Terms are more important than price. He can have his terms if I get my price. I’ll give a seller his price if I can get my terms. You want a million dollars for your poor cash flow and dead inventory? Fine. I’ll pay you a dollar a year for a million years.
Lastly, don’t take advice from either an attorney or an accountant. The job of these professionals is to explain the facts and tell you (the buyer) what your options are. It’s your job to make decisions based on those facts. Lawyers are trained in contract law and accountants are trained to track assets. Let them do the job they were trained to do and nothing more.
For those who are interested in buying an existing antiques business, now is a good time to buy. Sellers of antiques businesses almost always wait too long to start the sale process. When they don’t get offers quickly they get desperate, prices come down and terms improve. It’s a buyer’s market; there are more shops for sale than there are qualified buyers. Serious buyers who are thorough and cautious can acquire a viable business at a reasonable price and terms. Why wait?
|About our columnist: Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. His column Behind the Gavel appears in every issue of Antique Trader. Learn more at www.waynejordanauctions.com, 276-730-5197 or firstname.lastname@example.org.|