he past two years brought an unprecedented boom in M&A activity across the retail sector. Many retailers not only enjoyed record profit margins, many of those that sold their business achieved extraordinary outcomes. 

Now the economic landscape is changing, with the RBA lifting interest rates and the appetite for retail transactions slowing, compared with the highs of the immediate post-Covid period. While activity may be coming back to pre-pandemic levels, there remains a strong market appetite to buy good retailers that have adapted to the new normal and are future-fit, with strong digital DNA and clearly defined brand identities. 

So how do you get your retail business ready for a transaction? Here are 10 areas to focus on to position yourself to become investor-ready today. 

1. Know your target audience

Being able to define your target audience clearly and articulate how your brand is positioned to address this market is critical to any transaction. Buyers and investors will often compare you to other brands in the market, so being able to clearly define your brand’s key elements is very important. 

It’s surprising, but some retailers assume people automatically understand their brand and target audience. When trying to sell your retail business or find an investor, interested parties won’t have the same intricate knowledge of your brand. 

Therefore, before commencing any transaction, retailers should: 

• Be able to succinctly describe and define your brand. This includes your target customer, product range and price points. 
• Have a clear point of differentiation from your competitors and be able to describe this relative to other brands.
• Know and understand your target audience and why they buy your brand. 

2. Be clear about your objectives

Investors or buyers will almost certainly ask you the reason for any transaction. It is important to have a compelling response. You should be clear on: 

• What you are looking for from the transaction. Do you want to sell down, exit, raise equity to fund growth, find a partner to add value? 
• Your preferred timing. Transactions typically take 6-9 months to implement, so work backwards from when you want to complete a transaction. Also, transactions are time-consuming so be conscious of key retail and marketing periods before you embark on a sale. 

3. Financial information and growth strategy

Retailers that have a generic or unrealistic growth story are often marked down during any transaction process. Investors nowadays undertake a large amount of commercial due diligence before they invest and they are good at identifying genuine growth stories, particularly in the retail space. It’s crucial that before embarking on any transaction, retailers: 

• Develop a credible and realistic growth story that is tailored to their own circumstances. This may include new stores, new geographies/overseas expansion, new product categories, and growth for each channel, including digital sales. 
• Have a credible set of financial forecasts (3-5 years) that supports their strategic plan and vice versa. Financial forecasts should preferably include a three-way model, dashboards with key information, key assumptions and outputs. These should allow potential buyers or investors to analyse the business at a channel, brand, geographic or store-by-store level. 
• As part of any historical or forecast financial information provided to potential investors or buyers, make sure the key retail metrics that matter are captured. This will be different for all retailers, whether traditional bricks-and mortar, pureplay online or omnichannel. Be able to provide things such as:
  • Store numbers, including new store openings/metrics
  • New store opening costs, capital expenditure/fitout costs and working capital 
  • Demographic analysis on customers and new store locations 
  • Customer data – retention/churn, basket sizes, loyalty
  • Company growth and ‘four wall’ P&L 
  • Gross margins, at various levels (channel, brand, store)
  • Online metrics (unique visits, average order value, conversion rates) and omnichannel metrics 
  • Inventory performance by category and SKU, stock turns, regular/clearance stock 
  • Head-office costs and infrastructure to support growth
  • ROI for marketing, ROAS 
  • Key overheads by category (e.g. selling expenses, labour) 
  • Profit margins on a group, channel, geographic and brand level. 

4. Management team and resources

Potential investors and buyers will want assurances that you have the right team and resources to deliver on your future strategy. Areas that are often underestimated or overlooked are finance, senior management, marketing, store management and merchandising. As a retailer scales, these are the positions that often require further depth and resources. 

Questions you need to be asking before any transaction are: 

• Do you have the right team to support your 3- to 5-year strategic plan, particularly in key areas that are crucial to the execution of the strategic plan? 
• Do you need to bring in any additional talent or resources to deliver on your plan? 
• How will the founders be involved in the company after the sale? Many buyers will demand the owners’ ongoing involvement (in some capacity) if they are seen to be the ‘secret sauce’ behind a brand, especially in a creative, fashion or design-led retail business. 

5. Security around supply chain

The Covid-19 pandemic and geopolitical tensions have emphasised the importance of retailers shoring up their supply chain. Retailers should ask themselves: 

• Do we have good relationships with our suppliers and manufacturing partners? How can these be improved to provide greater security around the supply chain? 
• Are the forecasts deliverable from a supply-chain perspective – for both pricing and the ability to scale? What price certainty do we have over manufacturing costs that will underpin our margins? 

6. Stock

In light of recent impacts and disruptions to supply chains globally from the war in Ukraine, investors are looking more critically at a retailer’s stock when assessing a potential transaction. 

With the aid of digital tools and analysis in due diligence, investors are diving deeper into the data around stock

Consequently, they have become more sophisticated at identifying any underlying stock issues in retail targets. Some of the key points that retailers need to address: 

• Having ‘clean’ stock (low obsolescence, current season and on-trend) will be critical to any interested parties. Make sure any obsolescence and provisioning is correctly reflected in your balance sheet and P&L before commencing any sale. 
• Stock levels should be adequate for current trading, including in terms of seasonality and fashion trends, and should be able to support growth to deliver on your strategic plan. 
• Retailers should be able to explain to any buyers the volumes, mix and ageing of their stock in the context of current trading and future needs. 
• Being able to show a breakdown of stock by season, basic lines and new products is important. Also, being able to explain stock volumes in the context of stock production cycles and seasonality factors is key. If these issues cannot be adequately explained to an investor, they will err on the side of discounting stock values and a company’s maintainable margins, which has a direct impact on transaction value.

7. Cyber-security and data health

Recent examples of high-profile data breaches have emphasised the importance of cyber-security and highlighted the adverse impacts of any breach. Accordingly, the potential brand damage (or even class actions) to any retailer from a data breach is a real risk that will be front of mind for all investors as they assess a potential transaction. 

As more retailers move online or decide to capture customers’ personal details for marketing and loyalty purposes, this creates more potential risks. 

It’s crucial to ensure retailers have strong data health and security around customer details. Retailers should consider getting an independent health check of their cyber-security to identify any weaknesses prior to commencement of a transaction. 

8. Key agreements in place and compliant 

While preparing for any transaction, all key store leases, employee contracts and supply agreements should be up to date and signed. Interested parties will request copies of these key documents and often we see that these are out of date, unsigned or can’t be located 

on key agreements done well ahead of a sale process, as this can often take time, particularly if you’re dealing with larger landlords or multiple suppliers and employee groups. 

Compliance around employee contracts and industry awards has become a hot issue in the retail sector over the last five years. This has been underscored by several high-profile cases of non-compliance in this area. Investors are very aware of potential employee contract/award compliance issues and are spending a lot more time on this matter in due diligence. Common compliance issues we see include: 

• Incorrect calculation of employee hours and wage payments 
• Incorrect classification of employees
• Underpayment of penalty rates
• Underpayment of employee allowances. 

9. Environmental, Social & Governance (ESG)

Consumers are demanding greater accountability on ESG considerations, particularly from retail and lifestyle brands that in many ways represent a customer’s identity and ideology. Whether it’s climate change, sustainability, pollution of the oceans, inclusiveness, ethical sourcing, gender/ religious/ethnic oppression or other social matters, consumers are voting with their wallets. 

Likewise, corporations, investors, funds and their shareholders are increasingly looking for opportunities to invest in companies with positive ESG characteristics. Investors are now scoring retailers on ESG attributes during due diligence. 

Retailers need to be clear on their brand’s ESG impact, priorities and strategy. This captures the end-to-end impact of your business, from sustainability of sourcing to the final product. As investor and consumer expectations and preferences shift, you need to make sure you are conscious of what your target consumers or potential buyers of your company want (and expect). 

10. Appointing the right advisers

Choose a trusted team with retail or consumer transaction experience. This includes M&A and legal advisers, accountants, and due diligence advisers. Your advisers are the mouthpiece for your brand, so pick ones that know retail and consumer brands well so they can clearly articulate your brand’s unique value proposition. 

Seek advice on your current business structure and your ability to execute any transaction (tax, corporate structure). 

To maximise the potential outcome, your chosen advisers can support preparing your business for sale prior to taking it to market – from structuring it to evaluating potential areas of improvement or risk, to collating the right information for due diligence.

This article was originally published in the 2023 Australian Retail Outlook, powered by KPMG. Download here.