A recent case study on Toronto's Elixir Organic Spa reveals the challenges of finding buyers in an unpredictable economy.
Trevor Hood, Partner and Vice-President, Corporate Finance Division provides his expert valuation view on Elixir's situation.
The Story
Elixir Organic Spa is Toronto’s first 100 per cent organic spa, offering non-toxic, chemical free products and treatments. Over the past 11 years, owner Lynn Shulman, experienced steady growth but since the recession, annual growth of 20 per cent steadily dropped to single-digits. Nevertheless, the company remained profitable and is situated in the desirable real estate area of King Street West.
As Shulman’s retail sales started to surpass her spa treatments, she considered selling Elixir to open a natural beauty products ecommerce store. However, after six months on the market with no offers, Shulman began to realize just how difficult it is to sell a small business in Toronto.
Unable to sell, Shulman moved the spa to a smaller location to reduce overhead costs and focus more time on online retail sales. This new location offers more retail space and an area that can be converted into a shipping department once Shulman saves enough to open her new ecommerce store.
It’s important for owners like Shulman to understand the value of their business; otherwise when it comes times to sell they run into trouble. Being able to get a credible and objective valuation of your business is important as valuation can play a critical role in negotiations over the sale of a business, succession planning, or achieving other important financial goals.
An Expert View
By Trevor Hood
When business owners decide to try and sell their business immediately, they tend to run into trouble. We say at least three to five years of planning to go into a sale. The first stage is understanding how potential buyers will value the business. If that value isn’t in line with your expectations, you can then take steps to improve profitability, highlight strengths, and address different weaknesses over time. We don't have financials in Lynn’s situation so it’s hard to say whether her expectation is reasonable, but when your business is under $1 million it’s very tough to find buyers, because those businesses are often very dependent on the owners. Also, listing services could end up impacting your business if customers know you’re looking to sell. The alternative — doing a confidential search for buyers — is an expensive process. I like the fact that she’s being creative, extending the business and adapting it to the new venture. The other option is to wind it down, and depending on what lease she has, that could end up costing money.
Always assume that your business is for sale. Always anticipate value scrutiny. Being proactive will help you drive up the value of your business. If you have any questions please contact Trevor Hood, Partner and Vice-President, Corporate Finance Division at (905) 633-6353 or Adam Foley, Manager, Corporate Finance Division at (905) 633-6342.
