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Positive Spin: Real estate is often key to a successful retail exit

Published August 14, 2019
Second in a series of articles by former retailer David DeKeyser.

Editor's note: David DeKeyser and his wife Rebecca Cleveland owned and operated The Bike Hub in De Pere, Wisconsin, for nearly 18 years. Last year, they sold the business and real estate to another retailer based in a nearby community. This is the second Positive Spin column by David DeKeyser. The first discussed various retail exit scenarios and made the case that retailers should aim for a high level of profitability, even if retirement is decades away. 

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So your mind has wandered a time or two about what it might be like to retire, or take a job working 9-5 with benefits and no worries outside of your own tasks and responsibilities, and maybe even make more money. There is an endless list of reasons to make changes in life, as there are people. Don’t get stuck doing something you are mentally over because it’s easier than moving on. Life is too short and besides, being unenthused will rub off eventually on everything you touch.  It’s not a failure to want something else; sometimes the bike shop ownership lifestyle loses its luster for even the most enthusiastic owners.  

At some point we all will no longer be the owner of our bike shop. Whether by choice and design, death or bankruptcy, nothing lasts forever. Planning starts today if you want out tomorrow. 

When my wife and I decided to sell our bike shop we were in a good position:

  • we were very profitable
  • our POS was dialed 
  • our books were in order and we could produce them at a moment’s notice
  • our tax returns verified our financials as well. 

All those things are critical if you wish to sell your business. I cannot stress them enough. 

Regardless of exactly how you sell your business, very few potential buyers will have the money to just write you a check and not care about your profitability or ability to produce your financial statements. The buyer, if you are selling, is going to need detailed financial information to secure a bank loan.  

Let’s talk about the most important things that will need to be considered: profitability and the space you occupy.

Profitability makes a sale (almost) easy 

Profitability is going to be the single biggest component of you being able to sell your store. If you can show profits of at least 15% or higher then you have something very compelling to sell, and congratulations! Future columns will get into some nitty gritty details of how you can attain that level of profitability.

What if you haven’t attained that level but the time has come to sell? You will have to show potential and a good reason why you weren’t able to produce. People with the money and energy to run a bike shop don’t grow on trees, so you better be ready to show someone the upsides.

Lease or property is key

Beyond profitability, a very critical thing to consider is whether you have a lease that can be transferred and if the property owner will extend a similar rate and lease structure to a new business owner. You will need to know this before you attempt to sell, as it could be a major tripping point. No bank is going to give potential buyers money if they cannot prove they have a stable place to do business. 

Likewise, if your lease is simply too much and a reason you aren’t profitable, selling is going to be tough. Moving and getting into a better lease prior to selling might be necessary. 

Owning your real estate is in my mind one of the simplest things you can do to insure your future ability to extract the value you have built. In many areas of the country this may not be feasible due to unreasonably high real estate prices. But prices for commercial real estate in many places are still affordable enough for many bike shops to be able to enjoy this very important tool for protecting the equity in the business (and of course your equity in the real estate).

Owning your real estate is in my mind one of the simplest things you can do to insure your future ability to extract the value you have built.

Always think as a business first. A location isn’t great if the rent is too high, the lease too sketchy or you think you won’t be able to afford it anymore in 10 years’ of rent increases.  Your business’s margins are most likely not going to miraculously start going up so you can handle those increases, so start now to shore up your long-term occupancy situation.

If you can buy property, you then own two businesses. The mortgage is going to stay the same and you will always be in a much stronger financial position. Even if your bike shop fails or never really produces you will have enjoyed some appreciation on your property or at a minimum built some equity. 

We owned our property and it was very helpful in our sale. The new owner originally was going to rent from us, which would have been great, but in the end the buyer wanted the property, which also was fine by us. We enjoyed a 60% increase in value over the time of ownership and our occupancy expenses (total with taxes, utilities, and repairs) averaged only 3.5% of gross sales.  The new owner will still be in a position of power regarding occupancy expenses and the area is only going to appreciate more. Spend some time investigating property ownership if you haven’t already.

The sales process - broker or not?

Unless you have family coming up behind you that will take over the business you will be looking outside your family for someone to take over. 

My wife and I were personally leery of using a broker as I had inquired into several bike shops for sale over the years. There were a few I was genuinely interested in and several were mere curiosities. I did my very best to not waste anyone’s time, but I was also learning an incredible amount of information by seeing the financials of businesses for sale. 

The main thing I learned, however, was that the brokers did not have a good handle on the business they were selling, and that just a few minutes with the owner would paint the picture with far more clarity. For this reason we felt that if we could present our business ourselves we could not only avoid the steep commission paid to the broker, but control the narrative. 

I will admit we were somewhat lucky, but it is worth knowing that a broker is a wall between you and the potential buyer that filters information. Brokers, on the flip side, are obviously pros at selling businesses and can navigate the very tricky legal and financial waters you will be wading into. I think for many shops a broker may be a much easier route to go.

The first people to sit down with as you develop a sales plan are your attorney and accountant. They can help you with the valuation and possibly come up with scenarios you had not considered.

Sell to employees?

I know a few shops that have sold to employees and it is always worth a frank conversation to determine if any of yours have interest. While they may not have the money in their pocket, they may have home equity, a relative or some other means of financing the business. Employees may also be the most motivated potential buyers you will come across particularly if they are long time and heavily invested emotionally. A great employee may also give you enough confidence to structure a buyout plan with little to no up front investment.  

We were very interested in selling to our long time store manager as he had shown the skills and enthusiasm to operate the business, along with a level of trustworthiness that is rare. Ultimately he did not want to be a business owner and happily transitioned with the new buyer. Entrepreneurism is not something everyone aspires to and kudos to him on having the self-awareness to realize that.

Sell to a competitor?

One of the most sensible buyers you may have is a competitor retailer. If you have a logical fit from a location standpoint, the same bike lines, or perhaps a different market niche, there are many reasons your (hopefully) profitable bike shop may be perfect for a competitor to acquire. We sold to a competitor and the important thing to note is that you will be sharing your secrets with a competitor, and should the sale not be consummated you have to be secure knowing your data is now in their hands. The biggest plus in selling to a competitor is that the SBA backed loans really favor a buyer with specific industry knowledge. 

One last thing

Last, I would highly encourage you to join the NBDA and buy their Cost Of Doing Business Study and see for yourself the potential profits you can make by examining the “high profit” numbers. 

Learn to read your financial statements and take ownership of your data.  In my personal experience discussing financials with vendors/ sales reps is probably not the best place to get advice as there is a bit a of a fox in the henhouse situation going on there. 

The single greatest thing that benefited our business and subsequent sale was that I personally did the bookkeeping. A good QuickBooks pro advisor coupled with an accountant to help guide you gives you complete control and knowledge of your business. It isn’t necessarily fun at first but will give you insights that will be missed without intimate knowledge of the details. 

Properly set up and post initial learning curve, I would estimate I spent about 8 hours a week at most doing the books. 

Finally, good luck wherever your bicycle retail store ownership journey takes you, and remember to not fall into the trap of thinking that you cannot make a good living doing it! 

If you have questions on retail management for DeKeyser, send them to bikezest@gmail.com.

Photo by Thomas Le on Unsplash

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