Exit Planning for a Hardware Store: How to Build Value in 5 Steps
Profitable hardware stores are in high demand and often sell quickly.
Small business ownership can often be a bumpy, unpredictable journey but also incredibly fulfilling and adventurous. Entrepreneurship isn’t for everyone but those that pursue a career in owning a business of their own generally have no regrets and become addicted to finding ways to turn passion into an income. The small business environment in America is steady, which puts business owners in a very advantageous place when it comes to planning the next step for their business. If you have been thinking about selling your business, there are several factors to consider including your business’s financials, the economy, your industry, and buyer demand.
The hardware store industry was hit hard during the 2009 recession but due to flourishing construction and housing markets, hardware stores are finally back to their post-recession highs. The current state of the economy has led to extreme growth for the hardware store industry and those growth factors include high disposable income, homeownership rates, low home improvement costs, and the fact that millennials are starting to buy homes. Because of these drivers, the hardware store industry is expected to see 7% growth in 2017 with an annual revenue of over $180,000,000. These numbers put the industry on track for an extremely bright future and entrepreneurs emerging from Corporate America looking to invest have taken notice. While many independently-owned hardware stores have fizzled out due to the competition against stores like Home Depot or Lowe’s, there is still high buyer demand for independents. It’s very difficult to open a new hardware store so ‘do it yourself’ entrepreneurs are seeking to buy established stores and depending on the financials, these store often sell very quickly and for full price.
Have you thought about a plan for the future of your hardware store? It’s never too early to begin working on an exit strategy and the first step is getting a professional valuation on your business. Valuations don’t just tell you how much your business would sell for, they can also show you ways to improve so that you are able to get the best price possible when you are ready to sell. We have helped sell a few hardware stores over the years and have provided some formulas to give you an idea of how pricing is calculated. Please keep in mind that only a true business intermediary can tell you the value of your business and these formulas are merely a guide.
- 45-50% of annual sales + inventory
- 3-3.5x SDE + inventory
Now that you have an idea of how pricing is configured, you can begin making adjustments in your business to ensure you get the highest dollar when you are ready to sell. I have included 5 tips on building the value of a hardware store and hope they will help you on your journey towards an exit plan.
Location matters when it comes to many types of businesses. While even the smallest towns in America have a hardware store, it is often difficult for independents to compete with the big box stores in these locations. Lowe’s, Ace Hardware and Home Depot dominate the market in small towns and it’s nearly impossible for independents to contend against the massive inventory and low prices. While it’s hard to change the location of an established hardware store, it is good to be aware that buyers will prefer stores that are located in densely populated areas. That doesn’t mean that buyer will not be interested in a rural store, it just affects the pricing.
The internet is quickly becoming the preferred method of shopping for all types of consumers and to stay competitive in this digital age, your hardware store needs a website with sales capabilities. Having a website will not only increase your SEO rankings and chances of being found by clients, but it also allows you to better manage your inventory. There is no longer a need to have all items shipped to the store so that they can sit on the shelves until they are purchased; you can now advertise them online and only order what is spoken for. Home Depot reported that online sales increased by 25% in 2015 and that number is only expected to grow as e-commerce continues to emerge as the main method of shopping. If you do not have a website or a sales portal, there is plenty of time to implement this measure prior to selling but keep in mind that it is a lot of work. It may be best to hire an outside consultant to get this project up and running for you. Once you have an established website and you see some revenue being generated, you’ll have a great selling point to present to buyers.
It’s incredible how many business owners we meet that do not have an actual marketing plan for their business. These businesses are often doing really well financially, and yours may be too, but imagine how much more money it would generate if you put a little cash into an outbound marketing program. There are a variety of ways to catch the eyes of your target market and while a marketing plan will not deter buyers, it will boost your revenues and that will lead to a higher purchase price. Start by developing a web presence through a website, social media and a Google AdWords program. Then, you can get creative and targeted through content. Everyone has seen those Tasty videos of someone making quick yet delicious food in a 30 second video – why not try that with a DIY project? Studies show that nearly 70% of the customers that visit hardware stores are DIYers and these videos may inspire them to try a new project, which they will need to visit your store to get the supplies. For large scale home improvement, Lowe’s has run a very successful campaign targeting women. Lowe’s estimates that women initiate 80% of home improvement projects and have targeted this demographic and seen results. Remember that it takes time to see the return on a marketing campaign but it will increase your numbers and show buyers that you have a plan to keep clients in your pipeline.
Our society values the planet and since we have seen an increase in disposable income, more people are willing to spend extra cash on environmentally-friendly products. Our nation’s growing concern over energy, environmental impact, and global warming have increased the demand for green home products such as re-purposed tile or sustainable wood. You may also consider increasing the number of sustainable products offered in your inventory. You can still offer the products you always have, but by giving consumers a choice between regular light bulbs and compact florescent bulbs for example, you may see a new type of customer frequenting your store. The addition of green products to your offerings will increase your cash flow and build your reputation as a business that values the environment, which is very important in the home services sector.
Adding a product or service to your repertoire is one easy way to generate a new revenue stream and build a targeted client base. Hardware stores provide the tools needed to complete home improvement projects and when you think about it, the resources your store could provide are endless. For example, in addition to home improvement products and supplies, your store could offer equipment rentals. The equipment rentals industry is expected to grow to $56 billion by 2019 and your store could definitely capitalize on that. Equipment is expensive to acquire and maintain but negotiating a sublease or contract with a local equipment supplier could help you build your revenues. Another viable option would be the addition of installation services. Sourcing a local, reliable contracting company to assist your clients in installation services could also help you make more money and give you another great marketing ploy. Adding new services to your business offering will definitely help with cash flow, but will also show buyers that you are a leader in your trade and in growth mode.
If you have been thinking of planning your exit or just want to explore some succession options with a professional, the timing is right for the owner of a hardware store. It is expected to be a great year for the hardware and home services industries and if your financials area trending upwards, we recommend getting a professional valuation so you can establish your long-term goals and plans. Even if you are not ready to sell for a couple years, valuations are a priceless tool that all business owners can use to their advantage. When you are ready to take the next step, Viking Mergers & Acquisitions is here to assist. Let it the year you take your business to the next level. Call today for a no-cost, no-obligation valuation and take the first step to securing your future.