Why Seasonality Matters When Buying a Business
When you’re looking at businesses to purchase, it’s crucial that you keep seasonality in mind, especially in the world of retail, and here’s why.
What Is It?
First of all, it’s important to understand what seasonality is. Seasonality is a predictable pattern in the levels of business activity that recur in a calendar year — and it’s more common than you might think. In fact, it’s very rare that businesses have steady sales each month of the year. Ups and downs are the norm.
The perfect example of seasonality? Christmas. Every year, a majority of retailers see huge spikes in their sales during the months of October through December. Likewise, there is normally a dip in sales right after the holidays, like the leaner months of February and March. Other businesses see spikes, and dips, in other months depending on their industry (i.e. snowmobile repair, accounting firms, tourism, etc.).
Why It Matters
Every potential business owner needs to understand seasonality before analyzing a company’s sales and financial data. During the course of a year, working capital can fluctuate a great deal. Smart businesses owners know how to work around the peaks and valleys, and will keep some working capital on reserve for slower months when cash flow generally slows down.
In a perfect world, you would simply take over the business during one of the busy times, but it doesn’t always work out like that. Besides, taking over a business during its peak probably isn’t the best way to learn the business. That could prove disastrous if you’re not prepared for it.
In the most highly seasonal businesses, it is possible to negotiate around seasonality by having the seller leave enough working capital to help get you past the slower months in the first year. That’s always a viable option you could explore in your negotiations.
Know What to Do
Before making any purchase, have a clear understanding of how the business performs percentage-wise month-by-month. Know that you’ll have to fight the temptation to spend when money is rolling in and that you should put some money away to get through the off-peak periods. That’s really the magic formula of how to deal with seasonality.
As long as you know ahead of time what you’re getting into, you can confidently face those peaks and valleys head on.