How to Sell a Clothing, Apparel or Jewelry Store

How a buyer values a store

Most small retail stores sell on a multiple of seller's discretionary earnings, with inventory handled in one of two ways. Either the price includes a normal level of inventory at cost, or the inventory is counted at closing and added to the price. Both approaches are common, and the difference matters because a store with slow stock can look strong on paper and carry a lot of dead product underneath. Our posts on seller's discretionary earnings and add-backs explain how the earnings number is built.

For a boutique, a buyer looks at gross margin by category, the markdown rate at the end of each season, and how much stock is more than a year old. For a jewelry store, the questions shift to the mix between fine jewelry, watches, repairs and custom work, and to how the store accounts for metal and stones. Repair and custom work usually carry better margins than finished pieces, and buyers like them because they bring customers back.

The inventory question

Stock is where most retail negotiations get difficult. A buyer will want a count by a neutral party shortly before closing, and they will ask how you value what is on the shelves. Seasonal apparel loses value quickly. Last year's coats are worth much less than this year's. Jewelry holds value better, though gold prices move and a buyer will want to know how the store hedges or marks to market.

Consignment and memo goods need their own line. Many boutiques carry designer lines on consignment, and many jewelry stores hold pieces from vendors on memo. That inventory does not belong to the store, and a buyer needs a clean list of what is owned and what is held for someone else. Customer items matter the same way, such as watches left for repair and rings left for resizing. They belong to the customer, and the store should be able to show where each one is.

Shrink is the other number a buyer will check. Theft, damage and counting errors all hide in the gap between what the register says was sold and what the shelf says is left. A store with a small and stable gap looks well run. A store with a large or growing one looks like a problem the buyer will have to fix.

Customers, brand and sales channels

A buyer wants to see who comes back. A customer list with purchase history, from the point-of-sale system or a loyalty program, tells them more than a tour does. They will look at how many customers shop more than once a year, what the average ticket is, and whether the best customers are tied to a salesperson or to the store.

Online sales have changed the picture. A store with an e-commerce site, a social media following and an email list has a customer base that does not depend on foot traffic. Buyers will ask how much of the revenue comes from the site, what it costs to get an online order, and how many of those customers are new. They will also ask who owns the website, the domain, the social accounts and the email list. If a freelancer built the site and holds the logins, sort that out first.

The brand matters if it carries weight. A store that sells its own label or designs its own jewelry can command more than a store that resells other people's goods, because the buyer is paying for something the competition cannot copy. A store that sells major brands has the opposite exposure, since the vendor can change terms, open a competing channel or move the line to another retailer down the road.

Vendors, terms and contracts

The relationships with suppliers are part of what a buyer is purchasing. Many apparel lines are sold through authorized dealer agreements with a limited number of stores in each area, and the vendor may have the right to approve or refuse a new owner. Jewelry stores often carry lines under similar arrangements, and may rely on a trade credit line from a supplier that will not automatically continue for a new owner.

A buyer will want to see the vendor list with terms, credit limits, return policies and any exclusive rights. They will ask whether the open orders for the coming season are secured, because a store sold in the middle of a buying cycle has commitments the buyer inherits. Our post on recurring revenue and contracts covers the reason buyers care about commitments that carry forward.

Gift card and layaway balances are liabilities, and a buyer will want a count of them. So are customer deposits for special orders. These are usually dealt with in the purchase price at closing.

The lease and the location

For a store, the lease is close to the business itself. A buyer is paying for the address, the foot traffic, the neighbors and the visibility from the street or the mall. The lease needs enough term left to pay back the buyer's investment, with a renewal option at a rent the buyer can live with. Percentage rent clauses, co-tenancy requirements and radius restrictions all deserve a careful read.

Landlords have to consent to an assignment, and mall landlords in particular tend to want to approve the new operator and sometimes the buyer's financial statements. Our post on the lease as part of the deal explains how that conversation tends to go. Start it early. A store with a strong sales history and a weak lease is a hard sale.

What tends to sink a sale

The recurring causes are familiar. Inventory that is older and heavier than the owner described. Sales that run through cash and never reached the books. A lease that ends too soon. A vendor who will not approve the new owner. A manager or lead salesperson who leaves when word gets out. Customer data that cannot be exported from the register system.

Jewelry stores carry one more issue, which is insurance, security and the handling of precious metals and stones. A buyer will want to see the insurance history, the vault and safe arrangements, and the record of any loss.

Getting the store ready

Clean up the inventory first. Mark down or sell off the old stock, count what remains, and separate owned goods from consignment and customer items. Get the point-of-sale reports to match the tax returns, so that the story told by the register is the same as the story told to the IRS. Put the website, the domain and the social accounts in the name of the business. Talk to the landlord about the term.

If you are thinking about selling a clothing or jewelry store, we start with a valuation built from your own numbers and prepare the materials a buyer will ask for. At Business Advisors of America we work with owners from that first valuation through the closing.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.