Seasonal BusinessesBusiness For Sale
Seasonal businesses come in all shapes and sizes. A snow cone truck will thrive when the weather’s hot and won’t generate a profit when it’s cold out – there’s just not enough demand for snow cones when there’s snow everywhere. A hotel or go-cart track at the lake might generate all of its revenue during four months of the year and sit idle or even closed for the remainder. A cotton gin has a narrow window where it generates all its income for the year at harvest. Many businesses operate seasonally. The question we’ll answer today is: Can you sell a seasonal business? The answer is: You bet. The best time to sell is BEFORE the peak season. Sellers who want to capture “just one more season” before selling might put a lot of money in their pocket, but doing so will reduce the purchase price when the season’s over. Here’s why:
- 1. The busy season cash flow provides an immediate return on investment for a buyer. This translates to working capital which also allows them to service any debt. Buyers will pay more for the privilege of “riding the wave” in the busy season.
- There is typically more inventory on hand before the busy season and a buyer will generally have an easier time financing inventory up front instead of having to dip into capital reserves to buy it later. Note that high inventory levels could also drive an acquisition out of a buyer’s price range, so avoid overstocking.
- Make sure everyone (broker, buyer, banker, etc.) fully understands the seasonal nature of the business so that they can structure the deal appropriately. This will often involve a line of credit, possibly some seller financing, and perhaps the bank suspending principal and interest payments for a few months to allow cash to build.
- If the seasonal business is growing, there will be permanent cash flow needs and temporary cash flow needs – both must be considered or the business will not be able to fund its growth.
- Structuring the deal matters. Sometimes it just won’t make sense to include the inventory in the value, so the broker will assign a value plus inventory (whatever it happens to be at the time). This can work well for buyers with sufficient access to capital, but can scare some buyers because they don’t know exactly what their exposure will be. The broker may also recommend assigning a tolerance (+/-10%) at closing to allow for a reasonable level of inventory swing.