Hardware Retailing The Industry's Source for Insights and Information
By Gary Pittsford
Partner & Chief Valuation Officer (ret.) and Consultant
Creative Planning Business Services
In August, the North American Hardware and Paint Association (NHPA) recognized its 2024 Young Retailer of the Year honorees at the Independent Home Improvement Conference. In light of that celebration, I thought this would be a good time to cover a few important financial topics for all young retailers, whether they be the next generation buying out their parents or a young employee who wants to own a retail hardware operation.
In the Cost of Doing Business Study from the NHPA, you can see that for a typical hardware store with about $3 million in sales, the return on net worth is about 22%. For a high profit hardware store with about $4 million in sales, the return on net worth is about 46%. These are excellent returns for any business owner. Most asset managers on Wall Street do not average 20% a year on the investments that they manage. They would kill to make 20% per year for their clients.
The retail hardware industry is old and well-established. Stores tend to do well when the economy is great and when the economy is bad. If you are buying an existing store then you have the immediate advantage of having an existing inventory, lots of equipment, well-trained employees and a loyal customer base.
Over time, most young retailers will grow the company by adding more retail space to their existing building or possibly buying another hardware store and adding more stores in the future. Over the last 10 to 15 years the number of store owners that have added multiple locations has grown rapidly. Well-trained store managers, better computers and better software makes this growth a little easier.
As you grow your business, strive to make smart financial decisions. You need at least three people on your business advisory team to help you. These three advisors should include an excellent accounting firm that’s large enough to provide great accounting advice every year as the tax laws continue to change.
Second, you need an excellent corporate attorney who works with family-held businesses and helps those owners with buying and selling decisions every month. And third would be a fee-only business financial advisor who can help you make financial decisions with the profits you make every year and work with the attorney and accountant on protecting your business and your family. To find these well-trained business advisors you may have to go to a larger firm located in a larger city.
In the past, at various conventions over the last 50 years, I have talked about the four buckets of financial security. Young retailers should try to accumulate assets in four different buckets to help protect and diversify their net worth as they grow their company over the next 30 or 40 years.
Bucket No. 1: The possible purchase of the real estate and the building where your retail store is located. I have learned over the years that at least 50% of storeowners own the real estate and the building where their company is located, and the company pays rent to them over the years rather than paying it to someone else. Real estate is also an excellent way to diversify and protect your net worth.
Bucket No. 2: Establish some type of tax-deductible qualified retirement plan. It may be an IRA or a 401(k) plan, but try to put money every year into an investment account that is deductible on your taxes and grows for the future.
Bucket No. 3: Develop some personal assets outside the company. For example, put cash into an investment account or buy an apartment building or farmland or a passive investment that you’re interested in.
Bucket No. 4: Continue to grow your business by having excellent gross margins and holding down your expenses. For most of you, when it’s time to retire, your two largest assets will be the value of your business and the value of the real estate that you own.
Besides the financial rewards of running your own retail hardware operation, most of you will also benefit from helping your community, your charities, your employees and your family.
For most young individuals with that driving entrepreneurial spirit owning and growing your own company is always a better choice than going to work for some big corporation and being an employee in one of many departments.
Best of luck to all of you in the future.
Meet Gary
Gary Pittsford has helped hundreds of family business owners with valuations, exit planning, estate documents, retirement income security and net worth protection. Gary served as president and CEO of Castle Wealth Advisors, which was acquired in 2021 by Creative Planning to form a new division providing services for corporations, LLCs, family limited partnerships and others across a range of industries. Creative Planning Business Services offers expanded services for business owners. Gary retired from Creative Planning in December 2023 and now functions as a consultant, continuing to work with business owners nationwide.
Connect with Gary
Email: gary@castleconsultingco.com
LinkedIn: Gary Pittsford
