Translating Your Analyses into an Accurate Valuation

Nail down the right sale price for your pawn business.

In my last two articles, “Mergers and Acquisitions: How to Get the Best Deal,” and, “How to Prepare for the Sale of Your Pawn Business Before Calling a Buyer,” we took a look at the six steps an independent pawn business owner needs to take in order to get the most out of the sale of their business. We also looked at what it takes to build a pro forma.

Today, we’re digging even deeper, and taking a look at the specific items in your pro forma—the comprehensive financial analyses you present to potential buyers—and how pawn shop owners can translate those items into a proper, accurate valuation.

Some people will tell you that valuation is everything. And in a way, it is. If your valuation is off; that is, if it isn’t adequately supported by your pro forma, it is likely that the potential buyer will either walk away or counter with a too-low offer that doesn’t reflect what your business is actually worth. In other words, an inaccurate valuation can easily squelch a deal or cause you to lose out on a lot of money.

Remember, your pro forma should be based on your business’s revenue and expenses and show that you understand the buyer’s operating model. Why? In addition to knowing the particulars of your current business, buyers want to know what they’re going to get out of the purchase of your pawn business once they take over. When your pro forma accurately projects their potential net income for future years using solid financial data, it becomes a powerful selling tool. Presenting potential buyers with an acceptable return on invested capital (ROIC) that is reflected in the sale price will always stack the deck in your favor.

Let’s assume that your pro forma includes your projected revenue and adjusted operating expenses based on trends and expected business model changes. Let’s also assume that your pro forma includes known traits of various buyers’ stores in the market; that is, their yield on loans, gross profit margin, and expense ratio to net revenue, etc.

What else do you need in order to come up with an accurate sale price?

If you’re serious about getting the most out of the sale of your pawn business, your pro forma should also take into consideration any estimated capital expenditures the buyer will bear. These might include new signage, computer systems, graphics, packaging, and possibly, new store fixtures. Unfortunately, these things will put downward pressure on the ROIC, and potentially, the price.

You might be asking why you should include capital expenditures in your pro forma if they’re going to drive down your sale price. The simple answer is that if you can come up with an acceptable estimate for these expenditures, the buyer will be less able to surprise you with numbers for expenditures (that might be significantly inflated) that you haven’t already explored. When a buyer realizes that you understand their company and the pawn industry at a high level, they are less able to drive the sale price down to a point that doesn’t reflect your business’s true value.

If your pro forma is accurate and realistic, your sale price should include projections for an acceptable percentage of the potential buyer’s ROIC for up to 3 to 4 years. For example, it might reflect a 15 to 25 percent annual ROIC by years 3 and 4, following the sale of your business. (An acceptable percentage of ROIC for up to 3 to 4 years post-sale is pretty standard.)

To come up with a proper valuation, you will also need to include the intangibles. Five of the big intangibles that buyers often neglect to include in a pro forma are:

1. Size of the building (or buildings) and parking
Take into consideration the growth the buyer expects to achieve, anticipated storage room and retail space needs, and how parking might accommodate an increase in customers.

2. Proximity to other stores, commonly referred to as “overlap”
Ask yourself: Is my store within one or two miles of one of the buyer’s other stores? If so, is my store in any way superior in size, parking or location? Acknowledge potential problems and play up potential benefits. Potential benefits might include the possibility of combining locations that are close in proximity.

3. Quality staff tenure
Quality staff members and lower than normal turnover can give you leverage. Consider what your staff might be worth to a potential buyer.

4. Barriers to entry
Whether a barrier to entry is a municipal license, zoning restriction, or state statute, it can be a definite advantage to your sale price and desirability. If you have a haymaker of a store and restrictions prevent competitors coming to your area, you have a value-add item. Note any barriers to entry that may work in your favor as a seller.

5. Time versus years in business
A 2-year-old store that has grown to over $200,000 in loan balance is potentially more appealing to a buyer than a 50-year-old store with the same loan balance. Brand value is a funny thing, and is usually evidenced by financials rather than by years on the block.

Once you have a solid valuation, what’s next? When should you contact qualified buyers? How should you handle negotiations? We’ll tackle those questions and more in my next article.

Article originally published in the National Pawnbroker Magazine.

Copyright 2015 by Steve Stallcup, CEO and Founder

How to Prepare for the Sale of Your Pawn Business Before Calling a Buyer

What exactly are the nuts and bolts required for pricing your pawn business?

They’re in the pro forma you’re about to create.

What’s a pro forma?

According to Forbes, “Pro forma first came in vogue in the merger-mad 1980s, as it was used to help investors see what the new combination would have looked like financially had it been a single entity for the previous year or so.” perhaps explains the term better, as “a Latin term meaning ‘for the sake of form.’ In the investing world, it describes a method of calculating financial results in order to emphasize either current or projected figures.”

Why do you need a pro forma?

A pro forma lets prospective buyers know the potential value and risks associated with buying your pawn business. It also puts you in a better position to sell, and helps you find the right buyer at the right time.

How do you create a pro forma for your pawn business?

You make certain that you have accurate financial data. That data might include income statements, balance sheets, and point-of-sale reports from your pawn operating system. You will also want to make sure that you have accurate monthly or quarterly date-runs per store for the previous two to three years.

Your business’s revenue should also be included in your pro forma. If, for some reason, you’re unable to include it in your pro forma, your revenue will still need to be documented at some point, and presented to the buyer. Gathering this data can be arduous, and ascertaining forecasting information can be even more difficult, but both the gathering of your revenue information and forecasting the potential value of your pawn business will be necessary in order to get the most out of the sale of your shop or shops.

Your ultimate goal is to assess your business accurately from a financial perspective in order to determine the right sell price. All too often, sellers attempt to value their pawn business based solely on what their retirement needs are. No one truly knows the correct marketable value until an accurate proforma has been created.

Buyers approach acquisitions as investments. They expect a pro forma, and expect your historical data to be organized. In other words, they expect you to have your ducks in a row. You want your ducks in a row, too; without a pro forma, the chances that you’ll get an offer from a buyer that truly reflects what your business is worth are extremely unlikely.

In your pro forma, you should display your historical performance in an income statement-like format that includes key ratios and percentages, i.e., yield on loans, default rate, gross profit margin and operating expense to net revenue ratio. Forecasted revenues should be for the next two to five years.

Big tip: Use comparative financial data from stores in the area or a similar buyer’s store data.


You can bet your bottom dollar that your prospective buyer will build their own pro forma based on stores similar to yours in order to analyze your business’s target-worthiness. If you provide them with the information yourself—or at least know what they know—you’ll be ahead of the game when it comes to negotiations. With the right pro forma, negotiations can become less like negotiations and more like a straight deal, which is precisely what you want. Comparative data is key. Don’t underestimate its value.

Are your operating expenses “normalized?”

In your pro forma, it’s important that you indicate which expenses are non-recurring, owner-related expenses. You’ll want to point out owner draws, owner vehicles, travel associated with ownership, benefits, etc.

For you, the seller, the most important reasons for developing a pro forma are: 1) to achieve a solid understanding of the future cash flow potential of your business, and 2) to gain the ability to illustrate that understanding to the buyer.

Keep in mind that the buyer is looking for a specific return on invested capital for each acquisition investment. There are additional methods of analyses potential buyers will employ, such as internal rate of return, that will also help them determine if the opportunity to purchase your business is worth their while.

A proper pro forma can be difficult to create, but if you want to get the most out of the sale of your pawn business, you’ve got to create it.

Do the legwork. Do the research. You could save—and gain—a lot of money.

Article originally published in the National Pawnbroker Magazine (found here).

Copyright 2015 by Steve Stallcup, CEO and Founder

Mergers & Acquisitions: How to Get the Best Deal

Know your buyer better than you know yourself.

Pawn business sellers typically engage in one of two scenarios. In one scenario, the seller calls a potential buyer and asks the buyer to put a value on their business (usually as a result of receiving a buyer’s generic flyer in the mail). In the other scenario, the seller responds to a call from a salesperson whose number one goal is to get the seller to put a value on their pawn business before the seller knows its true value.

Both scenarios are problematic because they result in the seller making the same costly mistakes: not marketing their business to all potential buyers at the same time and agreeing on a too-low purchase price.

Why do pawn shop owners make these mistakes?

For one thing, most pawn business professionals simply don’t have easy access to the data they need to come up with a proper valuation. For another, it’s very time-consuming for any business owner to come up with a marketing plan and proper business valuation when day-to-day operations have to take precedence over valuation homework.

Valuation homework includes developing the following six items:

1. Financial pro forma
Your financial pro forma is a financial statement based on your business’s hard financial data, the facts of your operation, and forecasts based on what your business is currently doing and the buyer’s earning potential. To develop a pro forma that you can present to potential buyers, you need to compile historical data on your business as well as comparative data on similar shops and the buyers of similar shops.

Your pro forma should answer these key questions:

  • How efficiently have I been operating my business when I compare it to other pawn businesses in my market and across my state?
  • What are my financial metrics?
  • How do I compare with similar shops in terms of yield on loans and yield on inventory, turn ratio and gross profit margin?
  • What are my default and renewal rates?
  • What is my loan balance size and product stratification?
  • What is my normalized operating expense to net revenue ratio?

Buyers approach acquisitions as investments, so make sure you include their operating metrics in your pro forma to show that you have a solid understanding of their future cash flow potential.

2. Lease analysis
Always negotiate your lease or leases. Many sellers make the mistake of agreeing to the lease the buyer brings them without requesting modifications that would better serve them and help drive up the overall package and property valuation.

3. Demographic studies
Create a demographic analysis of competitors that have customer densities and profiles that are similar to your own. This analysis should reveal how you’re performing relative to your competitors, as well as help you determine market share availability; that is, the saturation of pawn providers in your area and the quality of those providers. Keep in mind that if your business is underperforming and overpriced, strategic buyers may opt to compete with you by placing a de novo store near you rather than buy you out.

4. Non-compete agreements
You should always negotiate non-competition terms. You may think that you don’t need to care too much about the non-compete agreement your buyer presents, but negotiating non-competition terms is important, even if you never intend to open another pawn shop. Why? It’s a point of leverage. You may be able to point to the non-competition terms and get something else that you want, such as a concession on a lease agreement or some other benefit that ultimately adds to your purchase price. Whatever you do, do not tell the buyer that you will never want back into the pawn business.

5. Asking price
Buyers commonly try to use multiples of loan balances, inventory, EBITDA and revenue to establish an offer, but not all stores are equal—nor are all state regulations. Don’t get stuck playing the multiples game. If you do, you will most certainly leave money on the table. Instead, use benchmarks based on thousands of comparable pawn shop transactions to develop hard financial metrics to help determine your asking price. If you’re confident in the reasons behind your asking price when you go into negotiations and can point to hard data that backs up your claims, you’ll be able to do less negotiating and more dictating; in other words, you’ll be able to sit back and let the numbers speak for themselves. Another big plus? The sales cycle will move more quickly than it would if you didn’t present an accurate asking price based on factual data.

6. Final transaction deadline
It is incredibly important to determine your transaction deadline before you market your pawn business. You don’t want the sales process to drag on and on, and you want to be able to make plans for your future that aren’t contingent on buyers’ timelines. Contact all qualified, potential buyers at the same time in order to ensure that your timeline sticks.

By performing the same calculations your buyers are performing, in some cases, you could potentially get twice what you originally hoped to gain out of the sale of your pawn business. Just identifying barriers to entry in your area or municipality alone can help you raise your asking price appropriately by significant margins.

The key to getting the most out of the sale of your pawn business is knowing what your buyer’s revenue potential would be once the buyer takes over your business. Armed with all of this knowledge and preparation, you’ll get what you deserve out of the sale of the business you have worked so hard to build.

Article originally published in the National Pawnbroker Magazine.

Copyright 2015 by Steve Stallcup, CEO and Founder

The Importance of Being Profitable Before and at the Time of Sale

sg3409u83mPawn shop owners often opt to sell their businesses when the business is no longer bringing in the kinds of profits that they want or need. Unfortunately, selling a pawn business when business is down is not optimal for anyone. The seller usually has difficulty selling the business and winds up getting much less than they would have gotten had they sold when times were better, and the buyer, despite having gotten the business for a relatively low price, has to scramble to figure out how to make the business more profitable in order to ensure that their investment actually pays off.

In a March 2013 Huffington Post article, author Jack Garson explained, “The typical purchaser’s formula is ‘buy, build, sell.’ Buyers start with good companies. If your business is profitable, it tells a purchaser that your company has hit upon a formula for making money. And if your profits are growing every year, it means that there’s a good chance those profits will continue to grow. In fact, experienced buyers count on growing these reliable money-makers.”

The major pawn companies are like typical business purchasers when it comes to profitability. They want to know that they are going to be able to make money and grow your pawn business once you’re out of the picture. When the future is uncertain, they’re not only less likely to make a purchase, but less likely to pay what the business is currently worth if they do purchase it.

Are you considering selling your pawn shop or shops? Increasing profits, maintaining a high income, and having a high number of regular, core customers before and at the time of sale will help you achieve your ideal selling scenario.

For more information on how to prepare to sell your pawn shop or shops, click here to review Stallcup Group’s sale preparation checklist.

Shop Talk: No Serial Number, No Deal?

Soon, Richmond, VA pawn shops will not only have to keep the IDs of the owners of items they accept or purchase, but refuse any items without visible serial numbers, according to a recent WWBT-TV NBC 12 report. This doesn’t sound too extreme or unusual, but one has to wonder whether requiring visible serial numbers on all items is really practical. When you can see that someone has tried to mark out a serial number purposely, obviously, that’s a huge tip-off that the customer may not be the actual owner, but penalizing customers when a serial number has just been worn down or diminished over time or by regular wear and tear doesn’t seem like the greatest scenario.

What do you think? Would being limited to only accepting or purchasing items with visible serial numbers hurt your pawn business?

Marketing a Pawn Shop to Multiple Buyers

sg234098lrSelling a pawn shop requires committing to taking on a considerable number of challenging and time-consuming tasks, not the least of which include pricing the pawn shop, marketing it to the right buyers, managing negotiations, and being responsible for the terms outlined in contracts or agreements.

Which task takes the greatest amount of effort to perform depends on the unique attributes and challenges of a particular pawn business, but one thing that’s true for almost all pawn shop owners/sellers across the board is that they don’t anticipate how much effort it takes to properly market a pawn business to potential buyers.

If you’re marketing your business to one or more of the major pawn companies, you’re going to want to show them that your pawn business is scalable; in other words, you’re going to want to prove that your business can grow—not just now, while it’s still yours, but in the future, once the buyer takes over. This can take a lot of time to do, and can be almost impossible to do well if you don’t have firsthand knowledge of the major pawn companies’ inner workings. It’s one thing to make cash flow valuations based on your records; it’s quite another to try and prepare cash flow projections for a monster like EZPAWN or Cash America.

You should also keep in mind that although it’s almost always better to market your pawn business to multiple buyers, dealing with multiple buyers takes a lot of work. It can be all too easy to become so busy responding to buyers’ requests and inquiries that, before you know it, you’re caught up in multiple buying strategies and forking over your selling power left and right. When this happens, numbers start trending downwards. On top of that, the current business suffers. Many pawn shop owners who sell their shops on their own wind up struggling to remain profitable, or even just to keep their businesses manageable, during the marketing and selling/closing processes. Their focus is simply too split to manage both their dealings with multiple buyers and their pawn businesses well.

Pawn shop owners can make things much easier on themselves by enlisting the help of experienced pawn shop exit strategy consultants. While owners may be tempted to think, Why should I pay anything out to a consultant when I am a savvy business owner and capable negotiator, and could keep all the money for myself?, the reality is that exit strategy professionals, in addition to taking the bulk of the tasks associated with marketing pawn shops off of owners’ plates, 9.9 times out of 10, will get owners far more for their pawn businesses than they ever would have gotten on their own.

Shop Talk: Gold’s Seven-Straight Weekly Loss

According to a CNBC video report released today, gold is experiencing a seven-straight weekly loss (the longest losing streak in four years) at a drop of almost five percent.

In contrast, a recent article by Frank Holmes, chief executive officer and chief investment officer of US Global Investors, Inc., promotes having a positive outlook for gold. Holmes explains how “the price of gold moves in near-lockstep to each increase of the Fed’s balance sheet,” and that since the Federal Reserve is printing more and more dollars, the price of gold is likely to move along with it, as it has historically.

Gold’s ability to recover sooner rather than later may be debatable, but one thing is for certain: The precious metal promises to remain a hot topic for a very, very long time.

Click here to read the Holmes article in full.

Selling a Pawn Shop Isn’t Like Selling Just Any Small Business

sg14098sdkJust about every book or article on how to sell a business advises business owners to do things like search the Internet for buyers and market their businesses online. This might be good advice for the majority of small business owners, but it’s not good advice for independent pawn shop owners.

If you’re an independent pawn shop owner and you’re not passing your pawn shop or shops down to the next generation or selling out to a partner, your best (and perhaps only) buyer is probably going to be one of the major pawn companies. If you want to sell your pawn shop for top dollar, the last thing you want to do is look up these companies, give them a call, and ask them what they will pay you for your business. Go this route, and you will practically guarantee that you do not sell your pawn shop for anything near what it’s actually worth.

The major pawn companies have been buying independent pawn shops for years, and have gotten very good at it! They have put tools, resources, and processes in place to help them get the most out of each new acquisition. If you don’t have a team on your side that has its own tools, resources, and processes in place, you can quickly find yourself woefully underprepared for what these buyers present to you and ask of you in an effort to drive down your selling price.

Unfortunately, even if all of your financials are in order and you have a solid understanding of your business’s advantages and disadvantages, it can be very hard to combat the analyses that the major pawn companies are able to perform. You need objective pawn shop exit strategy consultants to compile and analyze all of your pawn business’s unique characteristics, combine the information with relevant pawn market information—while keeping in mind the overall economic climate, and then present all of the data in a way that buyers can’t dismiss. Go this route, and you will practically guarantee that you will sell your pawn shop at the best possible price.

Shop Talk: Delaware 11th State to Require Pawn Shops to Photograph Jewelry?

sg23409dv01On April 29, 2013, reported that Delaware could become the 11th state in the country to require pawn shops and secondhand dealers to take photographs of all of the jewelry they buy. If the proposed bill goes through, pawn shop owners and secondhand dealers will be required to keep photos of all of the jewelry they accept or purchase in their records for one year.

This new legislation could come through on the heels of other legislation that requires the mandatory reporting of lost or stolen firearms in Delaware. Senate Bill 16, according to another article published on May 3, 2013, states that all gun owners (including pawn shop owners), “have one week to notify police; the seven-day clock, however, starts running when the gun owner discovers the weapons are missing.” Per the article, the bill passed by a single vote and now moves to the House.

For pawn shops, there are advantages and disadvantages to both pieces legislation.

On the upside, taking photos in order to help prevent theft and help jewelry owners recover stolen property is good for communities and helps improve the image of pawn shops. On the downside, having to take photos on top of recording and keeping detailed written records of all jewelry transactions could present yet another barrier to successfully completing transactions. Customers would have more time to change their minds; pawn shop owners may decide to forego smaller transactions just because they don’t want to go through all of the red tape.

When it comes to the lost or stolen firearm legislation, in theory, pawn shop owners will be able to find out much sooner that a firearm was stolen if people have fewer days to report lost or stolen firearms. This should logically lead to fewer purchases of stolen firearms, which would be good for everybody. However, one has to question whether the legislation will really make that big a difference. After all, no one can ever really know exactly when a firearm owner actually noticed a piece was missing but the firearm owner.