5 questions to ask before buying a retail business

Around half the Australian population has worked in retail at some time in their career, making retail our largest employer.

Retail includes restaurants, bookshops, hairdressers, dairies, hotels, and motels to mention a few. It operates everywhere, even from the comfort of people’s homes.

If you like dealing with people, retail is a great choice for a business. It generates good cash flow, is generally straight-forward to operate and is often an affordable option.  However, the industry can be unpredictable due its heavy reliance on buyer behavior, and technology and market changes.

If you’re evaluating a retail business to purchase, consider these key questions to ensure you choose a business that is the right fit and has everything you need for sustained profitability and growth.

Before buying a retail business ask these five questions:

What is the business worth?

This can be a tricky question to answer. Of course, there’s the obvious stuff like profitability and cash flow, but what is also worth considering is the inventory. Is it included in the price or is it priced separately? And most importantly, is it saleable? Even if you have plans to grow the business, you’ll still want to a solid financial starting point.

What does the lease look like?

For traditional bricks-and-mortar retailers, building leases are hugely important. Things to find out include: How is the lease structured? How long is the lease term (the longer the lease, the better security for your business)? What are the terms and conditions of the lease? And is it transferrable? In order to transfer a commercial lease, you may be required to provide details about your financial position and experience to prove you will be a reliable tenant.

What does the future look like?

What disruptors are on the horizon and how prepared is the business to face them? The main disrupter for the retail industry is technology and how it affects buyer behavior – not just the way they shop (e.g. online vs. in store sales and what presence it has online), but what they are influenced by and how (e.g. social media). Then there’s the looming and recently realised threat of international giants entering the market remotely. Consider what else could be coming and how agile the business is. On the flip side, what future potential can you see? Are there opportunities to diversify or improve the existing offerings?

How involved is the current owner?

The last thing you want is a business that is entirely dependent on its owner. It makes it extremely difficult – and maybe impossible – for you to replace them, but it will also decrease the value for when you want to sell.

Who are the customers?

To succeed in retail, knowing your customers is absolutely crucial. Can you identify them easily, are they easy to reach and what are their shopping/spending habits? Also, how big is the customer base? If the business relies heavily on just a few customers, this many not be sustainable in the long term and it will make the business less resilient to change.

The more questions you ask, the better prepared you will be and the more realistic your expectations. Other things to consider are the existing employees (will they stay on and would you want them to?) and why the owner is selling. Once you’ve done your own homework, enlist the professionals – the accountants, lawyers, etc – to seal the deal. For more tips on how to keep your business thriving, see our business resources page.

 

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