Smart shopping for a retail business

There are so many retail businesses for sale. It may be a good time to fine tune your wish list.

Smart shopping for a retail business

Potential retailers need to understand the market in which they will be operating. The retail industry is dominated by the larger players (the top five have nearly 50% of the $250 billion market) and franchises (predicted to be 20% of retail outlets by 2015).

This means that the average retail turnover outside the big players is about $750,000. With a number of mid-sized retailers in this mix, the majority of the nearly 200,000 retailers have a turnover of less than $500,000.

With this in mind, don’t expect a retail business to have a large turnover. Next thing to look at is margins.

Traditionally retailers have aimed for a gross margin of 50%, however with Australia’s population now accustomed to discounts this is rarely achieved. Margins will also need to be considered in line with the shelf life of stock. The shorter the shelf life, the more actively the stock needs to be managed – this is particularly true for fruit, fashion and similar items.

One of the key ways to manage this is by marking down the stock. So when looking to buy a business, try and determine the starting margins, average margins and clearance margins. Then make an assessment on margin management and whether you can do better.

Stock turnover. The slower the stock moves, the more expensive it is to finance. Review stock levels, order patterns and sale patterns. Consider what the average stock value is and how much this would cost to finance.

Also look to see if you can improve on this. For example, a business with a turnover of $500,000 may have 50% of its sales in the two months before Christmas, and yet carry the same stock levels all year. You could save money by adjusting the stock levels accordingly. Also see if you can negotiate stock on consignment rather than buying it at the outset.

Customer traffic and sales conversion. When buying a business one hopes that with a few minor adjustments you can improve its performance and subsequently your return on investment.

In retail, an indication of a store’s potential is how many people go past the store, and more importantly how many people go in. An indication of its operational effectiveness is the proportion of visitors that buy, and the average transaction spend.

Also important in this mix, particularly if the lease is nearing renewal, is how many of the visitors were specifically looking for the store, and how many visited because of its location. Related to this is the level of advertising spend, and how much this drives the traffic.

Finally, consider your own level of knowledge and interest. It is important to have experience in the product; it is dangerous to assume everyone has your taste and priorities. It is essential to have an interest in retailing. If the considerations outlined above don’t interest you, then perhaps retailing is not for you.

Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment. BizExchange has a directory of independent advisers and business brokers and information on valuations.

For more Selling Your Business blogs, click here.