14 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 is a much more comprehensive exercise than a CPA firm performing a traditional audit, and it rinses out anything that may be a red flag to us. In general, we are looking for very accurate and up-to-date financials, great inventory control, accurate lease files, correct licensing— business, tobacco, liquor, etc.—current tax and historical tax records, any outstanding employment or workman’s compensation issues, and any legal issues that may be lurking. Wewill visit stores and look at the retail operation in general: cleanliness, merchandising, product offering (inventory), branding, flooring, ceilings, lighting, age and shape of counters, fixturing and displays. This helps us determine what we face store by store in the integration process and what kind of deferred maintenance an operator may have. If a retailer has not made any significant capital expenditures in upkeep and modernization over time and we know we will have to, then that will affect the valuation of the company. A retailer either “pays now or pays later” when it comes to necessary capital expenditure. Dan: We also look at negative sales trends and unhappy employees. What is typically the reason a business owner is interested in selling their business and allowing it to be acquired? Dan: The target company has been in business for many years—usually over 20 years—and does not have a transition or exit plan that involves family or employees and wants to sell to exit. Terry: Within the tobacco store channel, the owner is typically interested in selling for the reasons Dan mentions. They have worked many years to build a good and profitable business, and they are ready to retire. Many of the owners do not have the next generation willing or interested in taking over or buying the business. Most operators within our channel do not have that solid exit strategy. This is the primary reason we built our platform for acquisition at Smoker Friendly and have executed the roll-up strategy that we crafted and have now implemented. Almost all owners in our trade class started their businesses in the mid- to late 1990s or early 2000s. Between the years they’ve worked at their businesses and the strengthening headwinds we all face from regulations and legislative and societal forces, we can put forward a very compelling case to exit and sell to Smoker Friendly. What sort of questions do you have for a business owner who is considering selling their business to your company? Dan: We have an initial list of questions used to evaluate a business that includes getting detailed information in the following areas: financials, specific product sales, personnel/HR, facilities, IT/POS platform, manufacturer contracts, suppliers, operations and legal. Terry: I think we usually shock the owner when they receive the initial email with the request for information we require just to begin the due diligence process. If an owner is contemplating selling, they should take the time to prepare internally so that they really have their ducks in a row. They should also be prepared for a timeline to closing that is likely longer than they may expect—it isn’t like selling a car or a home. We have a significant process that we go through from the time we begin the conversation up to closing. Even for larger and possibly more sophisticated retailers it can feel overwhelming providing the detail we require to complete a transaction. The level of information required with a public partner providing financing is significant. In general, what do you hope to accomplish with an acquisition? Dan: Increase store count in both current markets and new markets, increase profitability for the company, grow our team and create more opportunity for our workforce. Terry: We expect to get an immediate return on investment with each acquisition. During due diligence we create several different pro formas that show the level of how accretive the stores will be to our existing business based on valuation and other factors. This strategy is not one like organically opening stores or buying stores that are reclamation projects. We expect and we know we will get an immediate return when we get them integrated into Smoker Friendly based on all the work on the front end. What is the process like integrating each new store that’s been acquired into the Smoker Friendly network? Dan: A huge part of the integration is pre-closing and preparing our systems, our staff and the staff of the company we are acquiring. A big pre-close effort goes into IT integration, price book and vendor setup, lease assignments and HR. Terry: We are in the stores prior to closing. Operations, HR and IT are in the field meeting with store managers and other personnel and reviewing what is coming up and how the process will work and preparing for what will happen after closing. We really use those initial meetings to introduce our culture and start that process. We generally transfer all the stores into our system on the day of closing. We have internal auditors, and we will count and reconcile all inventory with the owner. We spend a significant amount of time and money after closing on training. We use field management and existing top store managers from other regions to train the new team members at their stores and ensure we start them off on the right foot. Dan Gallagher, chief operating officer at Smoker Friendly International
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