The reading level for this article is Expert
Just as important as a study of the market as a whole is a study of the position in that market of the company under consideration and how well it has performed under existing conditions.
Location
When a brand new business is being opened, the prospective owner has some choice about location. In buying a going concern, this is seldom possible. The seller is not likely to sell the assets of the firm with the understanding that the buyer will find other premises. Neither is it likely that the buyer will acquire the assets and then seek other quarters in which to operate. Location, then, remains as it is at the time of the buy-sell transaction. The buyer should give careful thought to the location of the business he is considering, particularly in relation to the market of which it is a part.
Questions in the Analysis of Location
1. Is there any possibility that the status of this location will change in the foreseeable future?
Urban renewal programs, for example, have a direct effect on business locations as well as on residential buildings. The buyer should look carefully into the possibility that the area will become a target for urban development that would require him to vacate the premises. The same investigation should be made in connection with other forms of development that might cause land condemnation or change of statushighways, flood-control projects, military uses, rezoning, and the like.
2. What specific factors should be examined in determining the desirability of the location?
The following outline suggests points that should be considered in evaluating the location of a retail store. It can be adapted for use with other types of businesses.
Checklist for Locating a Store
City or Town
1. Economic considerations:
Industry: Farming, Manufacturing, Trading,
Trend: Highly satisfactory, Growing, Stationary, Declining
Permanency: Old and well established, Old and reviving, New and promising, Recent and uncertain
Diversification: Many and varied industries, Many of the same type, Few but varied,
Dependent on one industry
Stability: Constant, Satisfactory, Average, Subject to wide fluctuations,
Seasonally: Little or no seasonal change, Mild seasonal change, Periodic – every few years, Highly seasonal in nature
Future: Very promising, Satisfactory, Uncertain, Poor outlook
2. Population:
Income distribution: Mostly wealthy, Well distributed, Mostly middle income, Poor
Trend: Growing, Large and stable, Small and stable, Declining
Living status: Own homes, Pay substantial rent, Pay moderate rent, Pay low rent
3. Competition:
Number of competing stores: Few, Average, Many, Too many
Type of management: Not progressive, Average, Above average, Alert and progressive
Presence of chains: No chains, Few chains, Average number, Many well established,
Type of competing stores: Unattractive, Average, Old and well established, New and modern
4. The town as a place to live:
Character of the city: Are homes neat and clean, or run down and shabby? Are lawns, parks, streets, and so on neat, modern, and generally attractive?
Are adequate facilities available? Banking, Transportation, Professional services, Utilities, Schools
Amusement centers, Medical and dental services
Is the climate satisfactory for the type of business you are considering?
The Site
1. Competition:
Number of independent stores of the same kind as yours: Same block, Same side of the street, Across the street
Number of chain stores: In the same block, Same side of the street, Across the street
Kind of stores next door
Number of vacancies: Same side of the street, Across the street, Next door
Dollar sales of your nearest competitor
2. Traffic flow:
Gender of pedestrians
Age of pedestrians
Destination of pedestrians
Number of passersby
Automobile traffic count
Peak hours of traffic flow
3. Transportation:
Transfer points
Highway
Kind ( bus, streetcar, auto, railroad )
4. Parking facilities:
Large and convenient
Large enough but not convenient
Convenient but too small
Completely inadequate
5. Side of street
6. Plant
Frontage and depth in feet
Shape of building
Condition
Heat type, air conditioning
Light
Display space
Front and back entrances
Display windows
7. Corner location – if not, what is it?
8. Unfavorable characteristics
Fire hazards
Cemetery
Hospital
Industry
Relief office
Undertaker
Vacant lot – without parking possibilities
Garages
Playground
Smoke, dust, odors
Poor sidewalks and pavement
Unsightly neighborhood buildings
9. Professional people in block
Medical doctors and dentists
Lawyers
Veterinarians
10. History of the site
Sales Effort
The discussion here concerns the nature of the company’s sales effort and measurement of its cost against the resulting sales. For practical purposes, selling effort can be classified as indirect and direct. Indirect sales effort includes all forms of non-personal customer-oriented advertising and promotion. Direct sales effort is the performance of persons directly engaged in selling the merchandise or services offered.
Questions in the Analysis of Sales Effort
1. How much was spent for advertising during the past year? How much per year for the past 10 years?
These figures should be reduced to percent of change so that the results over time can be studied.
2. What advertising media were used and what percent or estimated percent of the total advertising expenditures went to each medium?
Newspapers?
Trade papers?
Magazines – kinds of magazines?
Broadcast media – radio, television?
Other forms of advertising?
The question is whether the media being used are a reasonable choice considering the amount that can be spent.
3. What changes have been made in the use of advertising media? Is the company relying more on one form of advertising than in the past? If so, why the change?
No one advertising medium is best for all types of businesses. There is sometimes a tendency, however, to switch media too often, without giving any medium enough time to show its real value.
4. How does the cycle of advertising vary in relation to seasonal sales fluctuations? As sales increase, do advertising costs increase in about the same proportion? What is the pattern?
Dollar advertising expenditures usually rise as sales volume rises but not as fast percentage-wise. When sales drop, there is a tendency to spend either too much or too little in relation to normal seasonal changes, depending on the urgency felt by the advertiser.
5. If advertising allowances are available from vendors or sources of supply, is the company taking advantage of them? What kinds are available?
Advertising allowances, if properly used, make it possible to do more advertising with less money. An alert advertiser will take advantage of all advertising allowances he feels to be reasonable and useful to his business.
6. Is the company taking advantage of other available promotional services such as newspaper mats and so on?
Many suppliers offer advertising services that help improve the quality of the advertising, reduce the cost, or perhaps both. The company’s use of all advertising and promotional helps should be analyzed.
7. What percent of sales was spent on advertising last year? For the past 10 years? Is this increasing? Decreasing?
It is important to know not only changes in the pattern of advertising expenditures, but the relation between these changes and changes in sales volume.
8. How do the advertising and promotion costs of this business compare with typical or average figures for this kind of business? Higher? Lower? About the same?
Figures are available from trade sources and other reporting agencies that will give a standard of comparison.
9. Are other forms of promotion being used effectively? Window display? Interior layout and display?
For many kinds of businesses, other promotion methods may be as important as media advertising, or even more so. All possibilities should be studied as to their importance in the business under consideration.
10. Is the company capitalizing on all special promotion events suitable to the business?
This point covers a wide range of activity. Examples might be maximizing sales effort at the seasonal peak or peaks of the business, using premiums, participating with sources of supply in special promotions, and so on.
11. What percent of sales has gone into selling-payroll costs for the past 10 years? What has been the trend? Are selling costs increasing, decreasing, remaining about the same?
Changes in selling costs should be studied singly, in comparison to changes in sales volume, and in comparison to standards or averages for businesses of the same kind.
12. What is the quality of the selling effort of this company as shown by such factors as training, sales attitude, methods of compensation, and the like?
Selling-payroll costs as a measure of sales effort do not reveal the forces at work behind this effort and affecting its quality. Motivation of sales personnel through training, method and amount of compensation, and sales management should also be considered.
Past Sales
The history of sales growth within the company and in relation to similar businesses is considered the principal measure of company progress. The buyer or seller should note three types of variations that influence sales and how each may affect the buy-sell transaction.
Seasonal fluctuations
All businesses are affected to some extent by seasonal variations in the demand for goods or services, These variations may be the result of numerous factors – buyer motivation, weather, specific events. Their nature, causes, and extent should be identified as fully as possible. Some are reasonably predictable; others are not.
The prospective buyer of a business should think in terms of completing the purchase just before the maximum seasonal peak of the company. This will give him the greatest possible short-term gain and return on investment. Buying a business immediately after the maximum seasonal peak puts an additional burden on short-term working capital.
The seller is likely to take the opposite view. He is most likely to want to sell immediately after the seasonal peak of the company, thus realizing the best possible profit. (It is assumed here that time in relation to sales peaks and valleys would have no appreciable effect on the market or replacement value of assets other than merchandise.)
Cyclical fluctuations
Cyclical fluctuations are changes that occur over a longer period of time but tend to appear somewhat regularly. Periods of depression and prosperity will obviously affect the future of a business. The major difficulty is to determine what effect such fluctuations will have on the businesses being bought or sold.
Long-range trends.
Long-range patterns of change in an industry or a given business fall within this classification. The interplay of forces creating such trends is extremely complex, but the buyer in particular should be alert for changing patterns in his industry or market that are likely to affect the future of the business.
Questions in the Analysis of Sales
1. What has been the year-to-year change in dollar sales
The length of time to use is largely a matter of judgment. If the figures are later to be used to make projections, a 10-year period or more is not unreasonable if the company has been in business that long. Converting the dollar figures to yearly percent of change and plotting them on a graph makes them easier to interpret.
2. Using a given year in the past as a base, what has been the cumulative rate of change up to the present?
Again, plotting the figures on a graph helps to visualize the changes.
3. What has been the percent of change in sales, year-to-year and cumulative, for this kind of business on a national or other basis?
The years should be comparable to those used in questions 1 and 2 so that the pattern of change for the company can be compared with that for like businesses.
4. How much of the increase or decrease in sales can be attributed to increasing or decreasing prices and how much to real sales?
The fact that sales have shown an increase may lead to a false conclusion that the company has shown good growth. In some types of businesses, merchandise costs have increased rapidly. An average increase of 2 percent per year in sales over 5 years changes in significance when it is known that prices have increased 8 percent during the same period. Consumer and wholesale price indexes should be checked, as well as other factors that may indicate rising prices.
5. Have prices in this company increased more rapidly, less rapidly, or at about the same rate as those in this kind of business generally?
It is important to know how the business compares in this respect with similar firms. If it is out of line, what is the reason?
6. Over a period of years, what has been the change in the level of sales for this business as compared to all businesses of this type? Are sales-
Increasing percentage-wise more than normal?
Increasing at about the same rate?
Increasing less than normal?
Showing no increase at all?
Decreasing less than normal if like businesses are decreasing? =
Decreasing at about the same rate?
Decreasing more t han normally?
7. What is causing the increase or decrease in sales (a) for this company and ( b ) for similar businesses?
This point may prove to be the one that basically determines the decision to buy or sell the business.
8. Has the rate of change in sales been increasing?
Are sales increasing more rapidly now than, say, a year or two ago? Are sales increasing less rapidly now? If sales are decreasing, has the rate of decrease increased or lessened?
9. At the time of the study, where does the business stand seasonally?
Is this normally the low point for sales in this kind of business? Is it the high point? Somewhere in between? Is seasonal variation so minor as to have little or no significance? Are seasonal variations predictable? Seasonal variations may have a strong bearing on when the buyer is willing to purchase, when the seller is willing to sell, and the price.
10. What percentage of the year10. What percentage of the years business is done each month? What is the monthly average over the past several years?
Monthly sales averages help to determine immediate working capital requirements and to plan sales for the months ahead. They are especially important when the sales of a given month as a percent of the year’s total do not vary greatly from year to year. If there has been considerable variation, the reasons for it should be identified if possible.
11. Do there appear to be any changes in the seasonal pattern of sales? If so, what appears to be causing these changes?
Changes in consumer buying habits, the pressure of increased competition, governmental regulations, and the like create changes over time that may affect the short-term sales cycle of the business.
12. If a change in the seasonal pattern is occurring, does it tend to increase total sales or merely shift the volume from one month to another?
A comparison of several years’ sales may show that the overall effect is not a proportionate gain in total business but a readjustment of sales from month to month throughout the year.
13. If cyclical changes have any effect on this kind of business, what is the nature of the. fluctuations? How often do they occur? With what intensity?
14. Have sales of this business in the past tended to show the effect of these cyclical fluctuations? To what extent? Intensity?
Knowing the effect of cyclical changes on the business may give some idea of what can be expected from the standpoint of intermediate-range planning and forecasting.
15. If the business is influenced by cyclical fluctuations, at what stage is the cycle at the time of the study?
Cyclical fluctuations may be the result of broad-scale economic circumstances, but the intermediate effect on a given business may not be in proportion to normal economic indicators.
16. What is the ratio of operating expenses to sales in the most recent operating statement?
A comparison of these costs with ratios or averages of similar businesses should give an indication of the operating efficiency.
l7. Which has been the year-to-year and average ratio of operating expenses to sales for past years?
Have operating expenses tended to increase, decrease, or remain about the same in relation to sales?
Has the relative change in operating expenses been about equal to, greater than, or less than the relative change in sales?
On a cumulative basis, what has been the change in the pattern of operating expenses over the past years?
18. Are selling costs (sales, salaries, advertising, delivery) increasing, decreasing, or remaining the same in relation to sales?
If selling costs are increasing faster than sales, each dollar spent on selling effort is bringing in a smaller return. This information may suggest possible ways of increasing the efficiency of the company’s sales effort,
19. What is the ratio of net sales to gross sales and what has been the trend of this ratio over the past years?
An increase in the difference between net and gross sales may indicate weaknesses within the company in policy, sales effectiveness, merchandising, quality control, or a combination of two or more of these factors.
20. What are the reasons for customer returns and allowances and what action is being taken to reduce them, if reduction is possible?
Care should be taken in analyzing the sales of a company to see that gross sales are not taken as net sales, particularly if lenient returns and allowances have been a part of the sales program.
21. What has been the pattern in the value of the average transaction over the past years?
Sales may be stationary, but the number of transactions may increase or decrease, thus changing the value of the average sale. Or sales may be changing but disproportionately to transactions. The ideal to be sought is an increase both in the value of the transactions and in their number.
22. How do transactions in this business compare in average value and number with those of similar businesses throughout the industry or market area?
This will give a standard comparison to show how well the company has been able to realize an average sale in terms of what it would be normal to expect.
23. What are the current sales per square foot of floor space for the business? What has been the trend in sales per square foot for the past several years? How does this compare to known averages or ratios for other businesses of this type?
The purpose of this analysis is to estimate how efficiently space is being used for sales purposes. It may be figured on the basis of total gross footage, including area used for other than selling purposes, or it may be limited to the space devoted primarily to selling and merchandising.
