Help me help my mom sell her business so she can retire
April 29, 2021 5:21 AM   Subscribe

My mom (mid seventies) has run her own clothing boutique for the past couple of decades. She's in a town / geographical area that's growing like wildfire, and her store is in a great, highly-trafficked (leased) location. She has a good relationship with the building owner, who's also semi retired and owns a bunch of buildings and businesses in town.

The shop did will through COVID and is roaring back with new and old customers this year. The shop has been profitable every year and has a large following of loyal local customers.

My mom and a pair of potential buyers had the business appraised at around $250K last year. The appraised value was discounted due to COVID uncertainty. Removing that discount and accounting for fantastic 1st quarter sales would probably lead to a $300K-$350K valuation.

The potential buyers last year balked (they were a pair of individuals who decided they weren't ready to plonk down the appraised value), but are still around and interested in buying. An issue is that the business is now worth more than when they spoke last year.

Basically, I'd like to help my mom find a buyer for her store at a fair price so she doesn't have to wind down operations and potentially take a big loss on the way out. She's worked hard building something of value, and I would like for her to realize that value while she is healthy, then retire so she can travel, etc., but I'm not sure how.

Note: My mom already has reasonable retirement savings and could just choose to shut the store down, but it would be much better for her if she could sell it, instead.
posted by syzygy to Work & Money (12 answers total) 1 user marked this as a favorite
A lot of what you describe in your first graph sounds to me that the business IS your mom. She doesn't own the building; management and marketing are based on her tastes and associations. Like many successful sole-proprietorships, like old fashioned diners or restaurants, if the central person doesn't own the property, there isn't much to sell.

I'm really not normally a pessimist, but...

This is a tribute to your mom, that she has alone made a thriving business.
posted by tmdonahue at 5:34 AM on April 29 [3 favorites]

An issue is that the business is now worth more than when they spoke last year.

Well...a business is worth what people will pay for it.

It sounds like she has a motivated buyer at a different price than the appraised value. She could take what they will pay + X% of the profits or something like that. Or she can list it and network for other buyers (I would start with owners of similar businesses in outlying areas where they might want to take on a second location.)

I'm not sure how you're figuring she would take a big loss - is that based on inventory? If so, she could wind it down inventory-wise before selling at the lower price, too.

It's wonderful what your mom has done, and hopefully you can help her appreciate the value she's added all long.
posted by warriorqueen at 5:43 AM on April 29 [6 favorites]

...the business IS your mom

I would take issue with this statement; it is not an impediment to her selling the business. This was me some years ago. Because my business was a B2B service operation, where the client referred to the service as "DrGail's process" fergawdsake, there were also naysayers who insisted there was nothing to sell. In your mom's case, though, there's a bit more distance because the customers are buying the products she's selling. While her active involvement may help sales, especially if she's some sort of supersaleswoman, I suspect her customers will still frequent the boutique and get used to the new owner. So she definitely has a saleable asset.

After consultations with my accountant, I ended up selling my business for a down payment plus a percentage of revenue for the next two years. This seems to be a fairly standard template, with the down payment, percent of revenue, and duration all adjustable as needed to suit the parties and the business.

*Who* she sells the business to is a marketing problem, though, which is well beyond my expertise. If the current prospects are being difficult, perhaps some of her customers might either be interested or know someone who is.
posted by DrGail at 6:32 AM on April 29 [5 favorites]

A reasonably long term lease at a set value in a growing location is an asset, above and beyond whatever inventory and goodwill exist in a business.

There are people -- often, but not always, these people are also commercial real estate brokers -- who help sell small businesses as going concerns. Has your mother looked into employing a business broker or a business sales consultant to get the most money for her business? The appraiser who did the work last year might have some leads to offer on who to use for that.
posted by jacquilynne at 6:39 AM on April 29 [10 favorites]

I have bought and sold a retail business. The broker who sold it was marginally competent, his greatest skill was making sure he got paid. A broker contacted me about selling it when I was already considering it, they were seriously incompetent. So I sold it on my own. The value of a business is in inventory, customer loyalty, equipment like racks and register, name recognition, and especially in having established accounts with many vendors, including the lease, as well as being a running enterprise. The inventory can be tallied and priced at cost in some agreed-on way. Typical pricing is a percentage of gross annual revenue or gross profit plus inventory at cost.

Make up a brochure with pictures, list of assets, and an overview of sales and profits. Not too detailed, this is a prospectus. Email sales reps, ask if you can send it to them, and would they send it on to interested parties. I told sales reps the store was for sale and a sales rep bought it. Is there a trade show coming up? Take a 1 page prospectus and pass it out, talk to people. Consider an ad in a trade magazine, esp. if there's an industry association. I think the Wall St. Jrnl. has a businesses for sale page, not sure if it's important, but a bit of research will help you find the places to market the store. The approach I'd use is the payback period for buying the store, and the excellent income to be made.

When I bought the store, the owner was on a boat sailing in the S. Hemisphere, she was motivated, and she she loaned me half the purchase price, at a good rate, and I paid it diligently. Your Mom is unlikely to find a buyer quite as diligent, but it may come up.

If she has to have a Going Out Of Business sale, the value of the inventory will be quite discounted, and the fixtures, etc., will mostly be given away or left behind. Now is actually a great time to buy or launch a business, but potential buyers may not realize that. I wish her the best; being a woman business owners isn't as hard as it was, but when she started, there were a lot of obstacles.
posted by theora55 at 6:40 AM on April 29 [8 favorites]

Also, in the US, most of the value of inventory has already been taxed; she will make some tax-free income there.

The cost of retail inventory is deducted only when the inventory is sold, so as a retailer increases inventory, they aren't getting the tax break. When I sold my store, the income tax was quite low because of that. #DepartmentOfPleasantSurprises
posted by theora55 at 6:43 AM on April 29 [2 favorites]

I had a relative that was a small business broker. They specialized in cash businesses. How do you value say a strip club that takes in mostly cash. The taxes paid are not the amount of actual income. They would actually sit with the owner and manager for a few days watching the cash. As pointed out above though, the business, like anything else, is worth what the next person will pay for it. As an options floor trader, I always knew what the "fair value" calculation was for my position, but there is no window to go cash out at fair value. Wouldn't your mom rather have $250k than zero? So what if some broker says it is worth 2 times sales so it is worth $375k? Tell the person who is valuing it at that price to make a bid. Do not get hung up on fair value or appraisal value. Worry about what she can get for the business.

I would see if there is a small business broker in the area. I would then ask that broker for a list of clients that sold or bought. Call a bunch of them and ask if the broker was added value. Then, sign a few months contract, not too long, to have them broker the business. Give them a bottom line price that your mom will sell, but make it higher than the actual bottom line. Also a time frame. If your mom has the luxury of say a few years to sell (does not sound that way) she can be patient waiting for a better bid.

Your mom's lease has value. If the economy is doing well where she lives, she may be able to sublet it for a profit. Her inventory has value even if that is not 100 cents on the dollar. Her good name has some good will value.

She could agree to sell it but stay on as a commission sales person for say a 6 months while the new owner gets to know the clients and the business. There are a lot of creative ways to sell that mitigate risk to both the buyer and the seller (your mother).
posted by AugustWest at 6:57 AM on April 29 [3 favorites]

its not clear to me why you think the business is now worth more than the potential buyers thought it was during the pandemic. you say the value was lowered due to covid, but the only interested buyers still thought it was too high - there is no objective value to your moms business, only what someone is willing to pay her to take it over.

what is she really selling? the brand and goodwill associated with it, mostly, as she doesnt own the physical plant. theres inventory too but i would imagine that represents a small percentage of the appraised value (ive never been involved in retail so perhaps im undercounting it).

Someone looking to plunk down 250k needs a plan to recoup it - that would be based on their anticipated costs and revenues. How much would sales take a hit with ownership turnover? if this person thought they had a winning brand/idea why would they purchase one from your mom?

At the end of the day, if rolling up the carpet on the business is an option you/she are considering, theres no reason not to go back to last years buyers and see what they think they'd be willing to offer. i wouldnt compare that to what you think it should be worth today, or even what they offered last year, because neither of those things seem to be options in the present market (unless you think there would be other interested buyers - you never know and perhaps some of the people moving into the well to do area are also seeking business opportunities - but id always prefer a live lead to a potential one any day).
posted by Exceptional_Hubris at 8:32 AM on April 29

People buy & sell businesses all the time -- current owners may want to retire or do something else (like your mom); and buyers have various reasons (and amounts of money) too. The trick is figuring out what kind of buyer will value the shop highest, and how to reach people like that.

If the shop mostly runs itself, a buyer will probably be looking to buy a money-printing machine, and they'll pay based on the amount of money it has printed in the past. If the shop needs a competent operator, then the buyer will probably be looking to "buy a job" (that pays more than they could get elsewhere, or affords them more flexibility or whatever). (This type of buyer may have a manager that they plan to put in place, turning a "must be competently operated" business into a money-printing business.)

If the shop must be run BY YOUR MOM (say, because she's got the great eye for styles people like, and knows her customers personally and calls them up when she gets a new piece she knows they'll like) then she might need to stay on (and get paid) during a transition while the new owner develops a style and customer relationships.

On the price side, a buyer might have all the cash and hand it over in a lump sum; this is probably the way your mom gets the lowest price. A common alternative is an earn-out: the buyer pays a down payment and then pays the rest of the price out of the profits of running the store. Those payments often dry up if the new owner isn't very good at business, so the purchase price needs to be higher, and your mom has to have some expectation that she won't actually get much more than the down payment.

A business broker, or better yet, a lawyer who does small-business transactions, can help your mom figure things out.
posted by spacewrench at 9:23 AM on April 29 [2 favorites]

Response by poster: Thanks for all of the excellent advice, so far! I don't think the business is my mom, or has to be run by my mom, although she would be interested in staying on in a limited capacity during a transition phase. She'd like to retire, but she would also like the opportunity to work one or two days a week.

My mom has four employees who have all been with her for several years (it's a big shop - 3000 sq ft). Those employees are well-known in the community and well-loved by the customers. Folks love my mom, but my mom isn't the only reason they come to shop at the store.

My mom has started taking one of the employees (also half of the pair interested in buying the business last year) to market with her, to help her get used to choosing inventory.

Also, I think there's a reasonable amount of good will in a successful business (always profitable + profit on a growth trajectory in a dynamic, fast-growing community) that's been in the same location for two decades. It's well-known even outside of my mom's city - people come to shop from neighboring (and sometimes even more distant) cities. She even has regular customers who order from other states.

Additionally, I'm pretty sure the landlord would be willing to sign an extended lease at an attractive price, even knowing that someone else planned to take over the store. I'm pretty sure about this, because my mom has already discussed it with him, and he seems amenable.

As DrGail mentioned above, I think a large part of the issue is marketing the business to interested buyers. If friends and employees are the only ones who know you want to sell, you're likely to get less interest and a lower bid than you would if you cast a wider net. I feel relatively confident that she would get a significantly larger offer if more people / the right people knew the business was for sale.

I keep thinking it would be good to get the word out to her customers - I'm sure there are other ladies in the relatively wealthy area who have disposable cash and would like to have an excuse to get out of the house a few days a week to run a popular and successful clothing boutique.

We'll check into business brokers, local attorneys and real estate brokers. We'll also reconsider having my mom finance part of the sale, although she's not super excited about that option - she doesn't want to be the one to come around and try to collect her payment if the business isn't doing great in the future. She saw that happen to a friend of hers (the friend wasn't able to make the payments she'd agreed to when she bought a business that subsequently declined).
posted by syzygy at 11:12 AM on April 29

Something to consider might be setting it up as a CO-OP and sell shares in the business to both employees and customers.
posted by Lanark at 12:11 PM on April 29 [2 favorites]

I would see if there are any COVID grants or if she could hire a consultant who is a specialist in getting businesses ready for franchising or resale. Your mom has intellectual property and systems in her head and these people could help develop an operations manual. Then your mom can appoint a general manager and get them ready to run the business without her. From there, with your mom now out of the business but available for consulting to the new owner, she'll be in a much sweeter spot to sell. With the right help and supports -- I'm not in the US, but it's possible the SBA or a women's entrepreneurship program could help -- she should be able to do this fairly quickly. Worst case scenario, she still has the business and it could run without her. If she could maintain a profit of $25k a year and run it like this for another 10 years as a hands-off owner, she could also sell at that later point and she'll have potentially pocketed the same amount of after-tax income. She could also look at other structures, but she should start with getting herself out of the business and getting someone to run it.
posted by Chaussette and the Pussy Cats at 12:47 PM on April 29 [2 favorites]

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