How to keep a successful independent venue from ‘retiring’
The tragic story no one wants to hear - your favorite, popular, neighborhood institution, the one that has the only ‘insert-unique-product/service-here’ in town and anchors the area’s history - is going out of business because the owner’s next of kin don’t want to carry it on and they can’t find anyone else.
What to do? What to do?!
There are some city/neighborhood efforts to identify young entrepreneurs who want to continue the business, but that may not be the easiest route, as they’re often more interested in fulfilling their own vision, which helps explain why the owners’ kids are looking elsewhere. What may be a more viable approach is to assist the existing staff in continuing the business, or a former resident ‘retiring’ back to their home town, says Al Jones, Regional Development Officer for South Central Montana, and one very savvy economic development expert.
Al’s detailed synopsis follows:
"From a bank perspective, especially a small town commercial lender, this isn't an easy deal as it'll be very thin on collateral (leased space? old fixtures? rapidly obsolescing inventory?) and most of the value will be the cash flow (based on current management's sales and inventory skills), the client database (which banks still have a terrible time putting a value to even though it may be the most enduring value in the business), a long proven track record in that location and market (which does carry a lot of weight with bankers)...and the owner will likely want some "blue sky" in the price to address the intangible values of the store he or she has built over the years. So a highly leveraged bank loan for a young person to buy this will be both the expectation and the hardest road to take.The most successful transitions for a business that's deeply client-connection based like this would be to work with the store's salespeople to help them buy it, perhaps as a 2-3 person partnership. Not only would that go the farthest in maintaining a solid business, it would also unleash long-considered ideas for improvement from people intimately familiar with the store's clients (rather than just trying to mirror a store elsewhere a new owner had visited or worked in.) The bulk of the financing would likely be based then on home-equity loans, personal savings, family and friends of the store salespeople which is why several together might pull the pool up to sufficient size. The encouraging thing is that often the salespeople in this sort of store are doing it because they love clothes rather than being completely reliant on the wages so there may be considerable credit capacity in their households to do this. The store owner is far more likely to accept direct payments and part of the profits as a buyout than require a lump sum payment from a bank loan when they know and trust the new owners as they would these, and that makes these enormously more doable (but also means having a cranky old lawyer look hard at the contract as if the business does too well the owner wants more money, if the business flags the new owners want to delay, diminish, or stop
payments, agreeing on what profits are is a thorny thicket, etc.)
From my own experience structuring some of these as an SBDC officer and looking back at how they worked out, the ones where it was an existing employee generally grew considerably as they had so many long-accumulated insights that previous owners hadn't let them try. Ones where the buyer already had 10-30 year work histories, accumulated net worth, and often a fresh perspective worked out maybe half the time (the other times they lost a lifetime's accumulation of assets as well as the business.) What Heartland is pointing out is that it's a comforting fantasy to hope the town's "young people" can take over businesses not already owned by one of their family members and make them work...capital and capacity just aren't there in most cases. It's the not-so-young folks you're trying to lure back...the ones who've been away 10-30 years, long enough to try other things as well as start a family that now would benefit from their parents' hometown (and extended family) environment. In many cases they're moving back from high-cost housing markets so sufficient equity to buy or secure a loan for the business comes from sale of their home on the coasts.
We've tried 5 and turned down more of using our regional Revolving Loan Fund to help eager young couples take over existing small town businesses (grocery store, butcher shop, Radio Shack, convenience store, home decor and furniture store) on the dangerous concept that the business is essential to the town so having an unqualified and highly leveraged new owners is better than closure. Despite frantic efforts, only the butcher shop worked out and the home decor store is running at far below what the brilliant former owner had built it to over 40 years-through a tremendous customer database he built on index cards.)
You have to look very, very hard at the management capacity and the deals and realize that while retailing looks to be the simplest business model out there, survival requires a lot of retail management experience and specialized skills. Someone obsessed with fashionable clothes is usually
dangerous in these stores' ownership as their inventory tends to be overwhelmed by their own personal tastes rather than the tastes of their actual clients. You want someone obsessed with knowing their clients and making those clients look great, feel great, and find enduring value in the
pieces.
So putting out the word to the mothers and grandmothers in town about this being a business opportunity one of their long departed offspring might find alluring would be the most powerful step, if the existing employees don't have the capacity or interest in taking over the store."
Very informative, Neil. I really like the great ideas linked with pragmatic implementation/financing information from smart and experienced people. Saved in my Economic Development “know how” file.
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