Retail Businesses – Acquisition, Valuation, Litigation Support Observations

October 2018

We have valued numerous retail businesses for open market transactions, tax purposes, and litigation support and assisted on financing in a variety of retail sub-industries. As such, we have some general thoughts for individuals or businesses looking to transact or conduct due diligence in the retail space.

Retail businesses, in general, encompass a wide variety of industries and due to the changing trends in the industry, many retail businesses are exposed to a wide variety of factors. Retail businesses range from restaurants to drug stores to gasoline service stations to grocery stores to apparel & miscellaneous stores, among others. Each of these sub-industries pose different issues other than the key considerations that one has to consider when valuing retail businesses.

We explore some of the key areas that might pose problems when valuing businesses or conducting due diligence, we examine some general trends in the retail space:

  • Cash: Many retail businesses, such as restaurants, are cash businesses. Accordingly, we, often, conduct a couple of forensic checks to ensure that the financial statements presented to us are the right sets of records.  We understand that most small businesses, often, do not have the internal controls to ensure that financial reporting is accurate or timely. Alternatively, some small businesses have the incentives to understate income or expenses, depending on the business owner’s goals. As such, we often advise buyers to exercise a healthy level of skepticism when examining the financial statements. A couple of our team members have, recently, begun the process to become members of the Association of Certified Fraud Examiners and, as such, we are hopeful that we can add further value to clients, in these matters.;
  • Minimum Wage: Whether the business is a tiny restaurant or a public entity such as Amazon in the online retail space, the wage that companies pay their employees has been on a rise. Given that most retail businesses employ individuals with minimal education and/or work experience, these businesses must abide by the local regulations and pay, at least, the minimum wage in their respective regions (Ontario, Illinois, Florida).  Any business owner must consider whether they must pay a higher wage than mandatory to retain much of the workforce for an extended period or to compete with other retail businesses such as Amazon, who might offer other incentives to their workforce. Alternatively, these businesses can give consideration to automate away most of their minimum wage workers;
  • Cost per square foot: Usually one of the biggest predictors of failures, the cost per square foot might seem like a minimal consideration until one realizes that Rent & TMI is the biggest fixed cost that a retail business must overcome, constantly, over the long run to succeed. As commercial cap rates have compressed over the past decade, the cost to acquire or to lease premium high traffic locations have increased significantly. As such, many retailers must be aware of their fixed costs and the turnover required to generate a decent contribution margin;
  • Monetizing numerous channels: As the world evolves, the businesses that compete in the retail space have begun to find new grounds to compete on. Companies such as Amazon, with it’s move into the online retail (books, technology, clothing etc.) and now into retail as it relates to grocery and popular items, have forced competitors such as Walmart to Costco to Ikea to begin to consider their strategies going forward. Restaurants, for example, from McDonalds to a mom and pop restaurant can use their own delivery channel or partner with companies such as JustEat or Postmates to access new channels available. Most larger entities take Walmart, for example, can plan ten years in advance and plan for the future; it has patented a storefront vending machine that could be used in apartment buildings, schools, and key infrastructure locations such as airports and train stations to sell high margin items;

  • Investment & Financial Metrics: Many businesses in the retail business often underestimate the investment required to maintain best practices. Also, many of these investments allow these companies to compete effectively in a tough retail environment. Investment into RFID and new technology allow companies to effectively impact their sales and profitability. By capturing various product turnover along with availability, companies can analyze their cash conversion cycle by isolating key inventory and focusing on turnover ratios and how they impact cash flows, by month; and
  • Franchisee Restrictions: Franchises are subject to many restrictions such as key supplier restrictions, branding restrictions and price restrictions to maintain the brand so that the parent entity can maintain quality. The parent entity can enforce restrictions and the operators must endure that for the benefit of the parent entity whether good or bad. Take the recent lawsuits in the case of the franchisees in the Tim Hortons dispute, however, the case can be argued that the parent entity is deploying the excess costs or profits, in their case, into further increasing their brand position.
  • Seasonality and Sales CyclesWe note that many businesses have a seasonality element to them and that one has to understand the underlying business to adequately value the business. Given that valuation is at a point in time, the seasonality element has to be captured correctly. For example, take automotive retailers as we understand that these businesses have new inventory (new models) arriving during a particular time, say spring, and that older models go on clearance, creating pricing pressure on older inventory. Alternatively, department or grocery stores have sales cycles, in which occur during key seasons such as Christmas, Labour Day, Singles Day, Prime Day etc. or during month to month cycles.



At Minerva Valuation Advisors, we are trained, as business valuators, appraisers, bankers and financial analysts, in a variety of settings including in tax planning valuations, family law valuations, shareholder disputes valuations and merger & acquisitions valuations and advisory. We are not your typical business valuator or appraiser, we attempt to connect the dots using a variety of perspectives to give you some of our best insights.

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