One way to grow your tobacco retail business is through acquisitions. One business taking ownership of another established business probably conjures up negative thoughts for some, but in reality, acquisitions are not all bad. In many cases, they’re good.
Businesses are acquired for different reasons. Some business owners are looking for an exit plan. The economy or a life circumstances may make it appealing to sell a retail store and make some money from its closing. For those looking to buy a business, growth is typically the goal. With each acquisition, a retailer is able to expand their store’s footprint. The acquired stores come with assets, new employees and also new opportunities in new markets. For Smoker Friendly International, acquisitions have been vital to the organization’s growth strategy for years.
In August 2022, Tobacco Superstore was acquired by Smoker Friendly International. The owner and CEO of Tobacco Superstore, Joe Marelle, reached out to Smoker Friendly International’s CEO, Terry Gallagher Jr., about selling his company to him. While it can take a while for some business owners to come to a decision of whether or not to sell, it took Marelle just 15 months to complete the deal. It’s business deals like this that have helped Smoker Friendly International become the largest tobacco store retailer currently operating in the U.S.
In the interview that follows, Terry Gallagher Jr. and Dan Gallagher, Smoker Friendly International’s chief operating officer, offer tips for those retailers who are looking to sell their businesses and the entrepreneurs interested in growing theirs through an acquisition.
Tobacco Business: What does Smoker Friendly International look for in terms of a possible acquisition?
Terry Gallagher Jr.: If the chain is not within the current footprint of our corporate stores, there has to be enough scale to warrant “boots on the ground” or local supervision. We won’t typically consider a single store or a few stores that fall outside of our current geography.
Obviously, if there is scale, we have an interest, as demonstrated by our purchases in Florida, Missouri, North Carolina and Louisiana in past years—and the recent acquisition of Tobacco Superstores based in Arkansas with stores also in Tennessee, Mississippi, Missouri and Kentucky as well as Collett Enterprise’s Smoker Friendly stores in Indiana and Kentucky that were acquired in 2022. We look for chains that are well operated and profitable and accretive to our business. These chains have team members that are experienced and understand the business. They become valuable members of our Smoker Friendly team and strengthen and add to the depth of our management team.
Dan Gallagher: We also look at their size in a geographic area, strong sales trends, profitable stores and strong people in the organization.
What are the easiest and hardest parts about an acquisition?
Dan: Making the deal is the easiest part. Preparing for the acquisition, integrating systems, getting personnel comfortable with Smoker Friendly and post-acquisition operations are the hardest parts.
Terry: The easiest part on the front end is identifying targets we’d like to pursue. The harder part is getting from there to the deal!
Are there any red flags that you look out for during the acquisition process?
Terry: We go through a very deep dive during the due diligence process. Depending on the size of the acquisition, we will perform all due diligence internally and verify that the business is accurately representing its operations and financials before moving forward with a transaction. If it’s a more sizable entity, then we will perform our typical internal work but also have an outside firm come in and complete a quality of earnings analysis on the subject company. This 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.
We will 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.