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- Unraveling the Threads: Is This Sewing Business Worth the Investment?
Unraveling the Threads: Is This Sewing Business Worth the Investment?
Matt Bodnar
October 10, 2024
Today, let's unravel a potential acquisition that stands out and demonstrates why smaller businesses typically price the way they do.
This quilting and embroidery business in Tennessee is listed at $1.115 million with a seller's discretionary earnings (SDE) of $225K. As we thread through the details, it's important to think about whether the risk and the return on the deal really align and make sense.
The Price Tag That Doesn't Fit
Firstly, let's talk numbers. The current listing asks for a near 5X multiple on the SDE, a figure that raises eyebrows and red flags. To put it into perspective, a business of this size typically trades around a 2X multiple at the midpoint, with high performers reaching 3X. At almost double the high watermark, this deal is substantially overpriced at best.
The Debt Dilemma
Consider the financing: a 90% SBA loan would require you to fork out $115,000, with annual loan payments of around $170,000. You'd be left with a mere $50K annual cash flow post-debt service. While a decent figure on paper, this return is overshadowed by the risk of a $1 million+ loan, potentially putting your home and personal assets at stake for an income you could easily meet or exceed just by getting hired at many even entry-level positions.
The Risky Business Model
Let's unpack the business model: a small, six-employee, owner-operated retail store in the quilting niche. It's a sector fraught with competition from e-commerce giants and the store is doing only $900K in total revenue. You’re trying to do battle against huge and established players from a small retail store.
Moreover, consider the operational risk. The owner's husband had to step in to run the store, highlighting dependency on the owner for day-to-day operations. This isn't a passive income opportunity—you're essentially buying a job, and a precarious one at that.
The Inventory Illusion
A significant part of the pitch is the $500K inventory, which the listing purports to be worth more than $1 million at retail value. This sounds attractive, but let's not be swayed by retail illusions. In liquidation scenarios, inventory seldom fetches retail value. The cost basis or the net orderly liquidation value is often the more realistic figure, casting doubt on whether the inventory truly justifies the price tag.
Alternative Strategies: Weaving a Better Deal
How should we approach this? Firstly, reassess the valuation. Based on market multiples, this business should be priced closer to $450K-$500K. One strategy could be negotiating an asset-based loan focusing on inventory, though lenders would likely value it based on net liquidation rather than retail. Alternatively, if the owner is stuck thinking about the inventory values as an anchor for a higher price, consider a consignment agreement, allowing the seller to retain ownership of inventory while you pay as it's sold.
Conclusion: Stitching Up the Right Decision
In conclusion, the financial risk of acquiring this sewing business doesn't just doesn’t square with the potential returns. The price is inflated, the risks high, and the return low relative to even basic employment options. For investors and acquisition entrepreneurs, the takeaway is clear: always scrutinize beyond the surface value to see if the deal even makes basic economic sense before digging in much deeper.
Hope you enjoyed and let me know what you think.
-Matt
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