Dive Shop for Sale???

[Mack Diver]

Thanks Daniel. I hope to keep sending divers down there. With any luck, I'll get one to sneak me along in a gear bag.

Mack

 

[xiSkiGuy]

Find a copy of Dive Center Business Magazine (published by the folks at Dive Training Magazine). The November 2005 issue (Vol. 8 No. 11) had an article on buying and selling a dive shop.

 

[rsdancey]

Any information will be helpful.

I've been involved in many acquisitions and mergers over the years. I can give you some guidelines for pricing.

First, know that most entreprenuers overvalue their businesses. They always believe in the idea that things are getting better, not worse, and that the value of the "sweat" they put in is vastly larger than the value of inventory & fixtures. Many people value by year, as in "I've been doing this for 10 years, so I want "X" dollars" (often "X" is how much money their wives tell them they could have made if they'd stayed in that corporate desk job in the first place....)

Second, you have to evaluate the brand equity of the store you want to buy. That is, do divers in the area actually think the store name is a good one. Buying a bad store means you're actually acquiring a liability - all the people who think it sucks, who have to be convinced that there's been changes. In my experience, other than national chains, most small retail outlets have negative brand equity with the larger community, even if they have high brand equity with a small, dedicated cadre of customers. Don't do your research on people who shop in the store - do your research with the people who don't.

Third, there are some traditional valuation models that you can use as a starting point to negotiate. The conventional wisdom for most generic businesses is that they are worth 3-5 times the current 12 months net profit of the business (assuming that the business is not growing at a sizable clip, doesn't own or control licensable technology or intellectual property that is underleveraged, and doesn't have a limited franchise or monopoly arrangement of some kind.) In other words, if in the past 12 months, a dive store shows that it made $12K in net profits (that is, revenue minus every expense of all kinds, including owner draw), it would be worth between $36K and $60K.

(A note about inventory & fixtures: In the event of a bankruptcy, it is common to make about ten cents on the dollar for these things. Don't value them at purchase cost, value them at replacement cost. Get on eBay and see how much it would cost to re-buy the stuff in the store. If you are assuming liabilities (i.e. money owed to a manufacturer for inventory on hand) then that inventory has no value, and doesn't get counted as an asset. In the very unusual situation of a store with a lot of modern, salable inventory, that was already paid for, or a lot of custom built fixtures that add value (like a good blending station, or custom racks for equipment like tanks or regulators) you would consider assigning those assets some value when deciding on the price you'd offer. Be careful though - this kind of valuation usually requires expertise gained through years of retailing. You may need to hire an outside opinion to get a fair estimate of worth.)

Many small businesspeople don't run their businesses for profit - this is counterintuitive, but stick with me. If you are the owner of the business, and you don't have partners who expect a draw, all the money that you show as gross profit is taxed, and a big chunk goes to the state and the IRS. If you can figure out how to spend that money constructively, it doesn't get taxed. So maybe the shop owns a truck, which the owner happens to drive every day. Or a laptop computer (or home computer) and internet access. Cell phones. Maybe money is spent on staff trips to "shows" in Hawai'i, Vegas, Florida, etc. And whoever is actually running the store gets paid. Maybe they get paid peanuts (very, very common), but they might be taking a pretty big salary out of the business (or, in this day and age, a dividend or owner draw to minimize personal income tax).

The result of these things is that the business may be more profitable than its books show. You need to sit down (probably with a CPA) and review the actual line by line expenses, and decide how much money should be considered "net profit" for the purposes of that 3-5x multiple. Current owner is taking $50K a year in salary, and you can make due with $30K? That's $20K more annual proft (plus potentially more in the form of reduced payroll tax, etc.)

Flipside - if the owner is taking nothing, and you need to take a salary to operate the store, net profit just got reduced by the amount of money you plan to pay yourself (or plan to pay yourself above what the current owner is taking). Some people operate a retail store at "cost" - someone else in the family pays the household bills, and the store is a way to get wholesale pricing for gear, connect with the community, and be productive rather than sit home and watch TV. - but not a way to make a living.

Lastly, be sure you talk about important contracts like leases, and distribution agreements with manufacturers. Many are non-transferable. That means that if you buy the business, you may not buy the right to operate it the way it has been run in the past. You may find that you have to make up-front cash expenditures (new rent deposit, for example, or new franchise fees). Remember to account for that cash when you consider the price - it's coming out of your pocket as a part of the cost of buying the business, and it should reduce the price.

My gut instinct (no data to back this up from the SCUBA industry, but from a more broad based retailing anlaysis background) is that you're probably much more likely to maximize value if you start a store from scratch as a transition to another store closing. Find someone who is at the end of their ability to operate, and make it easy for them to close - buy inventory, fixtures, maybe pay off some old debt, etc. Then replace that store with a new store, new name, new management, new location, but similar geography, and work to bring over the old stores' customers as well as create new business. Most retail stores fail in 12 months, and the 5 year survival rate of retailers is less than 10%, so there are normally always opportunities to find someone willing to hang it up if they can be made partially whole. For some reason, "let me help you close" is always cheaper than "let me buy you outright".

You can always throw in sweetners, like free air fills or a fixed markup over cost that's lower than SRP for the previous owner to help smooth the transition.

At the end of the day, be prepared to spend more money than you thought you would, and to get a deal done, you're likely to have to compromise by paying the vig for someone else's deluision of value. The alternative is to be super-paitent, be willing to suffer through months (or years) of negotiations and emotional peaks & vallies, while you wait for an unstoppable deal to materialize.

Good luck! Please keep us informed as to your progress!

Ryan

 

[vkalia]

That's an excellent summary, Ryan. As someone who used to do M&A before buying a dive center, I think you've touched upon pretty much everything worth mentioning. It needs to be made a sticky, or put into a FAQ or something.

Mods?

The only comment I have to add is - it is amazing how quickly a passion can become a job. Be very sure of one thing: when you have to justify your investments, worry about your financials, do accounting, etc., your love for diving *is* going to get strained. Be prepared to find a way to recharge the passion, otherwise it is going to become "just a business" for you.

Vandit

 

[mdb]

My gut instinct (no data to back this up from the SCUBA industry, but from a more broad based retailing anlaysis background) is that you're probably much more likely to maximize value if you start a store from scratch as a transition to another store closing. Find someone who is at the end of their ability to operate, and make it easy for them to close - buy inventory, fixtures, maybe pay off some old debt, etc. Then replace that store with a new store, new name, new management, new location, but similar geography, and work to bring over the old stores' customers as well as create new business. Most retail stores fail in 12 months, and the 5 year survival rate of retailers is less than 10%, so there are normally always opportunities to find someone willing to hang it up if they can be made partially whole. For some reason, "let me help you close" is always cheaper than "let me buy you outright".

I have been in our industry since 1972. Twenty five of those years as a sales rep. Rsdancey has it spot on.

 

[menemsha43]

Interesting post there Ryan. Good reading

 

[Darnold9999]

Great thread. One additional piece. To become successful in a people oriented business like diving you must either really like people or be able to fake it really really well. A love of diving is not enough - you have to like interacting with divers.

 

[Scuba Brad]

Wow..........good luck

Happy Diving

 

[Michael Schlink]

A few things that are helpful when thinking about getting into the dive business
1) Some knowledge of how to run a small business, the learning curve can be costly
2) Retail selling ability-"Nothing happens until something's sold"
3) Marketing, advertising, merchandising- all connected to each other but different
4) A VERY good TRUSTWORTHY accountant

 

[ScubyDoo]

The locations you mentioned are pretty much saturated with dive shops and they open and close on a regular basis.

That may certainly be true of coastal areas where dive shops are a dime a dozen, but opportunity abounds in inland communities where the local population is just beginning to discover the wonderful world of recreational diving, and dive shops are few and far between. My local dive shop opened its doors over 25 years ago, and today is considered one of the top dive shops in the country (Top 10 DEMA). The owner has made money hand over fist, and there's no sign of a slowdown whatsoever. I was speaking with him just last week, and he was talking about early retirement. My first thought was...Hmmm...I wonder if the store will be up for sale?? I would not only love to own and run that dive shop, I would love to improve upon it. Im not going to give any secrets away here, but Im an architect by day...and I have the full service dive store of the future all planned out and ready to build. And believe me....its much much more than just a dive shop.