Selling a Hardware Store or Garden Center

Where the money comes from

A hardware store sells a very large number of small items. A building supply yard sells lumber, drywall, roofing, doors and windows in large amounts to a smaller number of accounts. A garden center sells plants, soil, pots, tools and chemicals, with most of the year's income packed into a few spring and early summer months. Many owners run a mix of all three, and the mix shapes how a buyer values the business.

Buyers will ask for sales by department over several years. Paint, plumbing, electrical, fasteners and tools make up the steady core of a hardware store, and they usually come with good margins and repeat visits. Lumber and sheet goods move a lot of dollars but earn little on each one, and their prices swing with the market. Seasonal goods such as snow shovels, pool chemicals and holiday lights can add a nice line, though they leave the store with stock to carry if the weather goes the wrong way.

Contractor accounts are the piece buyers like most in a building supply business. A remodeler or a small builder who buys on account every week gives the yard predictable orders. Buyers will ask for a list of house accounts with their annual purchases, the terms you offer and the balances outstanding. A yard with a handful of large accounts will be asked about customer concentration, as described in our post on customer concentration. A yard with many mid-size accounts looks safer.

What makes one store worth more than another

Service brings customers back. The employee who can tell a homeowner which fitting will stop a leak, cut a pane of glass, rekey a lock, mix a color or match a thread is a reason people drive past the big box store. Buyers pay for that staff, and they ask how long each of them has been there and who could replace them.

Garden centers are valued in part by their growing operation and their plant stock. A buyer will ask about greenhouse space, irrigation, heating, shade structures, and how much of the nursery stock is grown on site and how much is bought in. Plants are alive, and a count of living stock can change with the weather. We recommend that sellers record losses honestly, since a buyer will see through a count that looks too perfect.

Membership in a buying group or cooperative, the kind that gives an independent store access to national brands, group pricing and a rebate at year end, affects value as well. Buyers will ask whether the membership transfers, what the rebate has been in recent years, and whether any commitments or equity stake remain with the owner. Some groups require approval of a new owner, which a buyer will want to know before they sign anything.

Delivery matters in building supply. Trucks, forklifts and yard equipment are significant assets, and a buyer will want to see their age and condition and whether any of them are leased. A well-run delivery operation helps a yard serve contractors who cannot leave a job site.

Inventory is the biggest number in the deal

For this kind of business, inventory is often larger than all other assets combined. Most sales settle it by a physical count near closing, valued at cost, on top of the price for goodwill. The buyer will not pay for goods that do not sell. Old paint, seasonal items from past years, discontinued plumbing parts, damaged lumber and plants that did not survive the winter all get marked down or left out.

The count of a hardware store can run to tens of thousands of separate items, which is why a point of sale system with accurate on-hand figures matters. A buyer who finds the system far from the shelf will begin to doubt the books. The best preparation is to run cycle counts through the year, sell down slow items, and keep records that tie to the balance sheet. Our post on getting your financials ready covers the other statements a buyer reads.

Timing affects the count. A garden center counted in early spring has a full stock of plants and soil, and one counted in late fall holds mostly empty benches. Both parties should agree on how the count is handled for a seasonal business and how the stock that arrives after the count is treated. This is also why timing a listing matters. A garden center put on the market in the middle of its slow season will show weak recent months, and the seller will want to explain why.

The records a buyer will ask for

Expect requests for business tax returns, monthly profit and loss statements, sales by department, the sales tax filings, the accounts receivable aging for house accounts, and the inventory reports. A buyer will look at gross margin by department, since a store that gives up margin to win contractor sales is a different business from one that holds price.

They will also ask for the lease or deed, the equipment list, the vehicle list, the buying group agreement, vendor accounts, payroll and the staff list, and your insurance. Contractor credit is worth a look of its own. House accounts that run past terms or that have never been collected are a quiet risk, and a buyer will test them. Our post on add-backs covers what a buyer will accept as an owner adjustment.

The property

Many hardware stores, garden centers and lumber yards sit on land the owner holds, and the land can be worth more than the business. A seller can sell the business and lease the land to the buyer, sell both together, or sell the business and keep the property for later. Each choice changes the price, the taxes and the type of buyer. Our post on real estate attached to the business walks through the options.

Yards and nurseries carry environmental questions that stores do not. Fuel tanks, chemical storage, fertilizer and pesticide handling, treated lumber and runoff are all items a buyer or lender may want checked. Some deals include an environmental review of the site. Rules vary by state and your attorney confirms what applies to your property. If you lease instead, the landlord's consent is needed, as we describe in our post on the lease as part of the deal.

What has to transfer

Along with the lease or property, the business needs its vendor accounts, buying group membership, pesticide and chemical handling permits, if you have any, the sales tax account, the point of sale software, the delivery vehicles, the website and the phone number. Any contractor credit terms and house accounts need a plan. Employees need the most thought. A long-time counter employee who knows the contractors is worth a conversation before a buyer arrives.

What tends to sink a sale

The owner is the store, and contractors call him by name. The inventory count falls short of the books. A big-box store opens a mile away, and sales drop in the months before listing. A buying group will not approve the buyer. The property has an environmental problem nobody checked. A few large contractor accounts are behind on payment. These are not rare, and most are visible a year before listing.

How to prepare

Start with the count. Sell down old stock, record what is damaged, and tighten the system. Collect old receivables from house accounts. Write down the details that live in your head, such as which contractor gets which price and how orders are loaded. Cross-train a manager so the store runs without you, as we describe in our post on owner dependency.

At Business Advisors of America we start with a valuation built from your own numbers, prepare the package that buyers and lenders expect, and screen buyers before they learn which store it is. If you want to read more about selling a hardware, garden or building supply business, the sub-industry page is a place to start.

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.