As an owner of a seasonal business, you are probably wondering:
When is the best time to sell my business?
Our busy season just ended and I’m burned out - do I have to wait to sell?
How do I get the most value for my seasonal business?
We have guided many owners of seasonal companies through the process of selling for the past 20 years.
There are a few things you can keep in mind to prepare to sell your seasonal business at the right time and for the highest value.
In this article, we’ve generated a list of the top five things you should consider when selling your seasonal business to maximize your profits and sell successfully.
Let’s get started.
1. Timing the Sale of Your Seasonal Business
In a seasonal business, you’ll want to sell at the start of the off-season but the buyer will want to purchase at the beginning of the busy season.
Why? Both parties want to avoid the loss that occurs during the less profitable months of the year.
But, because business valuation is holistic, most buyers will submit a lower offer if the deal is set to close during the off-season. The seller won’t have to operate the business during the slow season and that may entice them to accept this kind of offer.
Assume you own ABC Seasonal Company (above) and you receive two offers:
Offer 1: $2,275,000 with a closing date of October 31, 2021
Offer 2: $3,000,000 with a closing date of March 31, 2022
Your slower months are November - March.
With that in mind, which offer is better?
Offer 2 might look better on paper, but the offers are basically equal.
Why? Because with offer 2 you will have to keep operating the business through the slow period and incur the $225,000 loss the business experiences from November - March.
You will also have to purchase $500,000 in inventory before the sale (which is included in the sale price of $3,000,000).
Without taking taxes and other non-financial factors into account like burn-out, these two offers are very similar.
MIDSTREET TIPIn the real world, buyers will often offer slightly more to take over at the start of the busy season because it reduces the risk that they will run out of capital.
We recommend selling about midway through the off-season to split the carrying costs between both the buyer and seller. Carrying costs are fixed costs during the slow season such as rent, insurance, and utilities.
Following this recommendation allows the buyer to receive adequate training during the slower months, helping the transition and protecting the legacy of the business.
Set a target inventory level and price based on the closing date. If the business sells later, the purchase price will automatically go down to cover the carrying costs. The target inventory will be the amount of inventory you plan on having at the target closing date.
2. How Much Working Capital Does a Buyer Needs to Run Your Seasonal Company?
You’ve probably heard the term working capital before.
This is the money you have in the bank plus money owed to you by customers (accounts receivable) minus the money you owe vendors (accounts payable).
When a buyer takes over in a small business transaction they will have to build up to your historical level of working capital.
Even if some cash or accounts receivable is included in the deal, it is rare for full working capital to be included in the business sale for lower middle-market companies.
One detail buyers will pay close attention to is “post-closing liquidity.” This will be the amount of cash they will have on hand to:
- Pay employees
- Buy inventory
- Keep the lights on
If your business is heavily seasonal and loses money during the off-season, a buyer will have to bring or borrow the money required to stay open during the slow season. If they take over right before the busy season, the working capital requirements will be much lower.
3. The Records You Should Maintain for Your Seasonal Business
Buyers will often request additional financials for seasonal businesses. Examples of requests we’ve seen include:
- Monthly profit and loss statements for the past year
- Monthly balance sheets for the last year
- Seasonality index (% of sales each month) if available
- Historical inventory levels per month or purchases of inventory per month
- List of customers with sales per month
Having some of these records available to show a buyer during due diligence will speed up the process.
When you work directly with a broker, they will be able to include information on the seasonality of your business in the confidential information memorandum.
4. How Long the Training Period Will be After the Sale of Your Seasonal Business
Depending on when you sell, the training period might include some time allocated for the next busy season.
If you sell at the start of the busy season there is a good chance the training period will immediately follow the sale. This timeline will provide the new buyer with hands-on training as the business is in full swing.
However, if you close at the start of the off-season there is a chance that the buyer will request training the following busy season or they may try to establish an hourly consulting rate for further questions.
5. How You Can Smooth Out the Seasonality of Your Business?
Seasonal businesses can be riskier because of their slower months, so to make up for that, you can try to smooth out your seasonality. You analyze your off-season to come up with products or services that you can offer to keep revenue more consistent.
There are two ways you can smooth out seasonality:
1. Add product lines on a different seasonal schedule:
- Sports retailers can sell hunting equipment in the fall and winter.
- Hold events or specials on holidays during the off-season.
- Landscapers can offer snow service depending on their area.
2. “Widen the season”
- For some businesses, the season will widen naturally.
- Other companies will run sales programs for the slow season.
However, sometimes these strategies will not work. Some companies aren’t able to widen their season because external factors limit it.
Sell Your Seasonal Business Successfully
Selling a seasonal business can be a challenge, especially if you’re not working with a broker who has sold seasonal businesses before. If you get used to the rhythm and execute your sale at the correct time, you can successfully sell.
Now that you know that buyers’ offers can vary based on the projected closing date, you can pick whether you would rather close at the beginning, middle, or end of your off-season.