Colordo Online Only Contemporary Quilitng Retailer

This is an online only craft fabric retailer that is located in the North West Denver Metro area. They have a huge selection of high-quality fabrics and sewing supplies, with over 15,000 products online and in stock located on site in their 13,000 square foot warehouse/office.  Crafters, Fashion Designers, and Home Decorating sewers love their fast service, huge variety, and custom cutting to their specifications.

The trailing 12-month revenues were 3.5M with earnings to September 30th of 374K.  The sales price has just been lowered to 875K plus inventory and would like a long term lease or to sell the building that they are in.  I believe that this has one of the largest equity building potentials of any business that I have represented in at least 5 years.  You can easily grow this business.   

We want to clarify two common questions/concerns and offer an opinion:

Inventory:   Inventory should be thought of as more valuable than cash for the following reasons:  The more inventory that the business has in stock, the more inventory you will sell and sell after the closing.  You will own the inventory on the closing day at its cost and the Seller will have already paid the cost to acquire it.  In addition, this allows you to finance the purchase of the inventory through a bank loan as part of the total purchase price.  When you sell inventory, you will recover the cost PLUS a profit.  This will also reduce or eliminate the need for working capital as you will turn inventory into cash every day from the closing date forward. 

Proportionality/Cost of the Building:  They take up 56.6% of a building they own which was appraised in December 2021 for 5.91M which is 3.39M proportionally(56.6% of 5.91M) while the other 43.4% should be looked at as an income property with positive cash flow because the NNN lease rates are higher than the proportional mortgage payments both now and for the future mortgage.  Details are below.  They have at least 50% of their warehouse space available for future growth which is very important to a buyer.  Most businesses needed warehouse space are at or near capacity already.  The building was custom built to their design so it is perfect in every way for their business.  Unfortunately, you will need a lot of liquidity to buy it and the business since the SBA won’t take into consideration the rents from the other 2 long term tenants(44% of the building).  It can be leased also but it is a big space which makes more sense to buy and build equity over time either with the business or within the first 2 years.  More details below.

For Sale:

ONLINE ONLY, CONTEMPORARY CRAFTING RETAILER

The trailing 12-month revenues were 3.5M with earnings to September 30th of 374K.  This is a profit margin of 10% which is good for retailers, and they did this with an advertising expense of only 25K which is less than 1% of revenues.  The sales price is 875K plus inventory currently estimated to be over 650K which they will sell for 500K making the total sales price 1.375M.

The owners state that they are not advertising/marketing people and that a marketing oriented new owner can grow this business much larger.  The location is using less than 50% of their warehouse space and the new owner can easily start a related online sales business using the same inventory which would have significant cost savings and overlap in inventory. 

The Sellers are husband and wife and will be retiring.  Both would stay part time if the new buyer wants one or both of them to.  They started the business in 1999 and have created a great foundation for someone who knows how to drive more online traffic to the website to take this to the next level.  The business has 25 mostly long term and very loyal employees who are passionate about what they do.  They have 2 “key” employees, an office manager who has been with them for 17 years and is has been thoroughly groomed to take over the main owner’s job when the business is sold, and a warehouse manager who has been there for 12 years and can fill in for every key employee also.

Neither owner are marketing experts, and this is who they think the buyer will either be already or will focus on post-closing.  They do very little social media and very little marketing, just a newsletter and attend some trade shows.  The best part of this is that this is exactly the right time for new ownership.  They are very good at what they do but the company needs a modern marketing team to take this to the next level.  There are many ways to grow this company but none easier than just making more potential customers aware that they exist.  They have 117,000 subscribers which sounds great but it is a fraction of the size of the worldwide industry.  Once a customer, they believe they will always be a customer.  People are looking for fun, hands-on hobbies for all ages that are not phone or internet based.

This well-known business has helped to modernize their industry through updated colors and patterns.   This company has built a fantastic foundation that the new owner can build on.   They have a fast and interactive website, 117,000 subscribers to their online newsletter, a great reputation as proven by their 4.8 star Google rating, 4.7 star Facebook with 12,448 followers, 95,000 Pinterest followers, emphasizes customer service, and has a custom-built office/warehouse which is only half utilized.  This all adds up to a very valuable foundation to future growth.

The business price has just been lowered again to 875K plus a discount on the current estimated inventory value of 650K that they will sell for 500K creating a total sales price of 1.375M.   This is an S corp. The business is being offered with the Sellers keeping their cash and collectable AR.  They have no debt and will pay off their AP at the closing.  They also have a building that they custom designed and built in 2018 for this business that is for sale or lease also.  The building was appraised for 5.91M and has been fully leased since 2018 or the new owner can have a 6-year lease with auto extensions at the market rate.  The building details are below and in the appraisal is in the data room and the potential lease details are in the miscellaneous word doc in the data room.

Details: 

This is a “Fulfilling and Fun” Business to Own and the Owners feel confident that they can teach the buyer the business easily.  They have created training manuals, have already created the perfect website and analytics to react to statistical trends, and built a roomy, employee friendly building customized to their business and employees.  This is not a business that can just double or triple.  This is a rare opportunity to create a large amount of future equity while loving what you do.  This would be great for a family, private equity, or a marketing expert who wants to benefit from his/her skills.  It is fun to grow a fun business.

Their location was designed and built by them and finished in 2018.   The building is on 2.35 acres, is 22,911 square feet of which they use 12,977 square feet with the rest split between 2 spaces leased long term to excellent on time rent paying leases, Velocity Outdoor and Boulder Environmental.  It has a leveling metal dock, high ceilings with room for a lot of additional inventory, roomy offices, several large bathrooms, air conditioning, a large employee area with a kitchen, a 1,000 square foot design studio, and is zoned industrial.  The entire building is being offered for 5.91M which is from an October 2022 appraisal.  The 2024 lease rate for the eQuilter portion of the building is 16.33/square foot NNN.  Part of the NNN is the CAMs which is 5.50/square foot which is 71,483 per year.  This totals 283,398 for the trailing 12 months which is 23,616 per month.  The building is in a great location in Boulder County Colorado because it is a growing area where the building is certain to continue to be more valuable over time.  Boulder is a limited growth-controlled county.

To purchase the real estate, the buyer will most likely put 10% down on a sales price of 5,900,000 with a 25-year mtg at 6 3/4% which would be an annual P & I payment of 440,244.  This is for the entire building, but this business only occupies and pays for 12,977 square feet out of a 22,908 square foot building which is 56.6%.  Adjusting 56.6% of 440,244 dollars which is 249,178 dollars.  The 43.4% of the building has two long term tenants generating lease payments in excess of what the 43.4% of the new mortgage payments would be so I will ignore that portion of the building for the business calculation.  The lease payments by the tenants taking up the 43.4% are higher than what 43.4% of the new mortgage payments.

The average annual PRINCIPAL portion of the payments over the first 5 years will have an average of 8,084 dollars per month going to pay down the loan in the form of principle.  Reducing your mortgage cost by 12 X 8,084 which is 97,004 per year.   Subtracting 56.6% of 97,004 which is 54,904 from 249,178 gives a net cost of 194,274 per year for the business portion of the building.  Adjusting this to past rent shown on the PL's.  The non-business 43.4% has and will have positive cash flow before adding the principal payments on that portion of the building.  The rent shown on the PL's is 71,374 higher than the rent schedule because of 5.50/square ft in CAMs for the businesses.  12,977 square feet.  A proper adjustment if the buyer buys the building would be by adding 71,374(CAM) to the 194,274 which totals 265,648 as the amount to be used to properly adjust the earnings spreadsheet with the purchase of the property.

The Seller will consider a lease with an initial period of 6 years or longer with automatic extensions.  The rate will be at the market rate which is what they are currently paying with a normal COLA and be the same as their blended mostly gross lease where they are paying the taxes and insurance, and the lessee is paying their portion of the CAM.