If you want to buy a shop then an obvious question immediately arises: selling what products?
Do you want to buy a grocery store, hardware store, clothes shop, pet shop, toy shop, garden centre, or card and gift shop? These are just a few of the many sectors among shops for sale. If you’re still undecided then consider what fields your interests, attributes and CV might best equip you for, plus the pros and cons of these retail segments.
Let’s say you’ve previously worked in the food industry. Food retailers like grocery or convenience stores are highly recession-resilient (though less so at the premium end of the market), since everyone needs to eat. However, stock is comparatively difficult to manage and prone to wastage given the dictates of sell-by dates.
Perhaps you have expertise and connections in the jewellery world? Jewellers can generate significant revenue from modest floor space and relatively few sales but have obvious security overheads and anxieties.
Location and footfall
It’s obvious that a busy high street, shopping mall or transport hub are all dream locations – and accordingly come with expensive leases.
However, prime spots are generally less critical for uncommon retailers like antique shops or musical instrument specialists since they usually have little or no nearby competition and enthusiasts will seek them out.
And a suboptimal location is perhaps generally less of a handicap in the smartphone age when customers can preselect shops based on online customer reviews before they leave their house, and navigate to them using Google Maps.
Nevertheless, location remains a hugely influential factor in takings for businesses ranging from florists to bargain stores. It’s vital that you acquaint yourself with the retail landscape in South Africa if you’re to strike the right balance between the right location and an affordable lease.
Valuing a shop
It’s also important to understand how a vendor arrived at their asking price since many overvalue their businesses (not necessarily maliciously – nevertheless they seldom undervalue their assets).
The margins between products’ wholesale and sale prices, as well as the volume of sales, are major drivers of value.
A jewellery shop typically has high margins but low sales volumes, while a grocery store would have the reverse, for instance. A mobile phone shop, however, could have strong margins and decent sales volumes, as they sell an expensive product for which demand is huge.
Such favourable fundamentals would increase the multiple typically applied to profits by a value. The asking price must also factor in physical assets like premises, stock and equipment – all relatively easy to value according to the market rate.
The valuation of intangible assets – like brand, intellectual property and customer relationships – is more based on guesswork. Evidence of repeat custom can support a higher valuation, though a bedrock of regular clientele matters less in a high footfall, touristy area.
Human capital – the expertise and competence of staff –– is an important factor in building repeat business, particularly for retailers like cycling shops, mobile phone shops or jewellery stores, where customers really need and expect impartial knowledgeable advice.
Gauging a shop’s potential
But if the outgoing owner is a prime source of this advice then it could undermine the valuation – unless you’re confident you can match his or her prowess in the field.
This relates to another hard-to-measure intangible, the business’s potential to thrive under your ownership, which should determine whether you’re willing to match the seller’s asking price. Another example: the shop is flourishing in an undesirable location partly through an exceptional marketing strategy – are you confident in your ability to sustain this marketing success?
Conversely, a struggling operation situated in a high footfall location could land you a bargain if you can envisage a strategy for transforming its fortunes. A unique selling point can also suggest potential to survive adverse consumer trends. For instance, a bookshop with its own café offers customers an experience that Amazon cannot match.
Once a price is provisionally agreed it’s time for due diligence. This includes scrutinizing paperwork (lease documents, profit and loss accounts, inventory, employee contracts and so on), the physical assets and how the business operates day to day.
If a business broker has mediated negotiations and your identity remains unknown to the vendor, you could visit the shop as a secret shopper to witness the business’s strengths and weaknesses on display during a normal working day.
Depending on whether due diligence reveals any hitherto undisclosed problems, you can proceed on the agreed terms, renegotiate or abandon the deal altogether.
Before you sign the final purchase agreement, it’s worth asking the vendor to stay on for a few days or weeks after the sale to show you how things work, especially if you’re new to retail.
It’s also worth researching how to run a shop as much as possible in advance of the switchover to new ownership.