Part 4 Transcript: Why Your Inventory Does Not Determine Your Home Staging Business Value (How to Sell Your Home Staging Business)

This transcript was auto-generated and may contain errors in spelling or inaccuracies in the spoken words.

Shauna Lynn Simon (00:09.262)

Welcome back to the How to Sell Your Home Staging Business Podcast mini series, a real women, real business podcast mini-series, specifically for home stagers who are starting to think about what it could look like to eventually sell your business and want to build a profitable business now and build a valuable and sellable asset. I am your host, Shauna Lynn Simon. And in the last episode, we talked about your numbers. Hopefully, you have recovered from any stress that that might have caused, because I know.

We're not all numbers people, and it might not have been the most comfortable conversation, but hopefully you got some really valuable insights out of it. Specifically, what we talked about was how to look at your numbers through a buyer's lens. We talked about why revenue is not the same as value, why your net income may not be telling the full story, and why valuation is often connected to what the business actually produces for the owner. Now, if you missed it.

You're going to want to go back to that one and take a listen to that one before you listen to this episode because I promise you it's all connected and this episode will make way more sense to you if you've already listened to that last episode. So if you haven't done that yet, go do that now and I'll see you when you get back. Okay. So today we need to talk about one of the biggest valuation assumptions.

That I see the home staging industry making. And that's all about your inventory. I'm gonna say something that's gonna sound a little rude at first. And if you listen to the last episode, you're already a little prepared for this. So brace yourself on this. Your inventory is not your business. And in fact, your inventory, how much you have, how much you've spent on it, the quality of it, none of that is actually being factored into your business valuation, at least not in the way that you think. I know, take a breath.

Okay, stay with me here. We're gonna do the get through this together. I promise. I'm not saying that your inventory does not matter. I want to be clear about this. Absolutely, it matters for many home stagers. Inventory is one of the biggest investments that you have ever made in your business. You've spent years building it, you've spent real money on it, you've spent late nights shopping trips searching for the perfect items, you've made strategic buying decisions.

Shauna Lynn Simon (02:11.041)

You've made various warehouse runs, emergency replacements, repairs, upgrades, maybe one or two purchases that, you know, seemed like a brilliant idea at the time, and they now live in the back of your warehouse. No judgment. You may have tens of thousands or even hundreds of thousands of dollars tied up in furniture, art, accessories, bedding, greenery, the greenery, right? Am I right? Rugs, lamps, warehouse equipment, bins, shelving, tools, and everything else that makes this business function.

And beyond the money that you spent, there's the emotional weight of it, right? You remember that first big furniture order. Maybe you went to market for the first time and actually placed some big wholesale orders with some big vendors. You remember that piece that saved that super weird room where nothing else seemed to work, but you just had the perfect item in your warehouse. You remember the sofa that somehow just worked in every single house. You remember the artwork that got more compliments than the actual house did.

So it makes sense that owners often look at their inventory and think this has to add a ton of value to my business. Look at what I've curated here. No one has inventory like I do. This has clearly got a massive value. And it can add value to your business. It's just not in the way that you think it does because buyers don't value inventory the same way that owners do. Owners tend to ask, how much did I spend? How much would this item retail for?

We're often thinking in terms of resale value, replacement value, but buyers, what they care about is what does this produce? And that is the major shift. So a buyer is not walking into your warehouse and mentally reimbursing you for every purchase you've ever made. They're trying to understand whether that inventory helps the business to generate revenue. Is it being actively used? Is it rentable? Does it fit the market?

Does it support the services, the main services that you're actually selling? Is it organized enough for someone else to be able to deploy it? And can it help the business keep earning after the current owner leaves? Because in a true business sale, the business is usually valued based on earning power, not based on what you spent on furniture. So this is where a lot of sellers have a tendency to get a bit tripped up. They think, okay, my business is worth this amount based on earnings, and then we're going to add the original cost or resale cost or a wholesale cost of my inventory on top of that.

Shauna Lynn Simon (04:28.406)

And none of that is actually the way that you value your business. It's usually not how it works anyway, because again, as I mentioned in the last episode, buyers have a standard formula that they're following. And you will notice if you followed yesterday's episode, if you didn't listen to it, go back and listen to it before listening to this one because it's going to make sense to you. But you'll notice that at no point did I say, how much money did you spend on inventory? Let's add that in there because it doesn't matter. Your buyer sees the inventory as not being separate from your business model. It is part of how the business produces.

Revenue. So that's what you need to think of this as. Your inventory is a part of the way that you produce the revenue in the business. So let's use this example. If you were buying a restaurant, you would expect that things like the kitchen equipment, the tables and chairs and the dining room, the plates, the utensils, your signature menu items, and all the systems that keep that engine running.

That is all a part of the business. You cannot run the business without them. So you're not expecting that whoever's selling you the business isn't going to include all of those items in the actual sale. It's also like when you buy a house, there's a reason why we generally include anything that's already fixed to things, like the appliances and everything else, because they help that household to function and you want to be able to have it move and ready. Your business needs to be move in ready, and that includes the inventory. But you probably would not value the restaurant by saying,

So let's take the earnings of the restaurant, apply a multiple to it, and then we'll add the original cost of every oven, every chair, every fork and spoon. We're gonna add all that stuff back in because the equipment supports the business. It does not automatically create extra enterprise value because someone once paid for it. So same is true in your staging. Business is not valuable because there's furniture in a warehouse or furniture out of all your rental pro all the properties that are renting items from you currently, all the properties that are listed for sale.

The business is valuable when that furniture is a part of the functioning engine. And this is actually good news because often when a staging business is valued based on their inventory alone, it ends up being far lower than what the business is actually worth. We'll cover this in a little bit as well. So stick with me. The important thing to understand at this stage is that buyers are buying the engine, an engine that turns inventory, systems, relationships, reputation, pricing, team, logistics, and process all of those things into revenue.

Shauna Lynn Simon (06:47.092)

Warehouse full of beautiful pieces without clients, without proper pricing, without systems or operational flow? That's just a warehouse. And it might be a very pretty warehouse, but it's still just a warehouse. So when a buyer looks at inventory, they don't really care how pretty things are. They want to know, does this work? Does this particular item still have life in it? Is it going to photograph well? Does it support the kind of homes that this company is staging? Does it fit with the local market? Is it flexible? Is the inventory organized?

Is it in good enough condition? Can my team find it? Can we move it? Can we use it? Can we keep track of it? Does it support the revenue model that I am buying? They're not concerned about what you actually spent on it. And again, this is good news, okay? Because it means that your inventory does not need to be brand new to have value for starters. Buyers are not expecting a staging business to look like a furniture showroom. Like they understand that staging inventory is working inventory. It gets moved, installed, destaged, gets

Bumped into door frames, no matter how careful we are, it happens. It gets sat on by people who were definitely not supposed to actually be sitting on it, right? It gets used, period. So older inventory is not necessarily automatically a problem. If you have purchased items that are meant to be classic items that can be sustainable through various design trend changes, like those sofas that are just so classic and work in every home.

Then older inventory is not necessarily a problem. Like that five-year-old sofa that still rents constantly, photographs beautifully, and it's a bit of a chameleon because you can make it look however you want it to, depending on the style of the home. That may be more valuable to the business than a brand new chair that just never leaves the warehouse. You know, those chairs you bought because they were super cool looking, but you only use them in one house because they just don't work in any other house. Your buyers want to see that your inventory is productive. Productive inventory supports value. Unproductive inventory.

That's the inventory that's just taken up space, costs you money to store it. It's gonna slow your team down, no longer fits your brand, doesn't photograph well. It's either damaged or dated or awkward or incomplete in some way, or just only works in that one very specific room that may never exist again, like that chair we just talked about. And listen, we all have some of those pieces. Sometimes we keep them because we just spent too much money on them, whether we want to admit it or not, and we just don't want to.

Shauna Lynn Simon (09:03.662)

Cut our losses and sell it for less than what we paid for it. Sometimes we keep them just because we love them once and they hold a little nostalgic value to us. Sometimes we keep them because we think, well, maybe we'll need it. You know, that those just-in-case items that you'll use only if you're out of all other options. But when your inventory gets low, we start scraping the bottom of the barrel. You want to have those items in place still. Sometimes we keep these items because getting rid of inventory kind of feels like admitting that maybe we made a bad decision if we haven't used it enough from a buyer's perspective.

More inventory is not automatically better. More inventory, sure, it can mean more opportunity, but it can also mean more storage costs, more management, more confusion, more labor, more damage, more clutter, and more work to sort through it. So if the inventory is not supporting revenue, it may not be adding value. And in fact, it could be creating a bit of a drag. And that's a pretty important distinction to be making. And so one more thing that I think is important for you to understand here is that if you are selling inventory only.

Your business. So let's say, okay, I'm not going to sell my business. I'm just going to the term is often liquidate just the inventory, but I want to sell it all as one full lot. That's very different than the conversation about selling an operating business because now you're not selling.

Your brand, the reputation that you've built, the relationships you've built, the client list that you have, the digital assets that you have. You're not selling any of that. You're just selling the inventory. So sometimes a staging business does not sell as a business. And this is how an owner decides I'm gonna just sell all the inventory off, I'm gonna close the doors, I'm gonna walk away. Great. But again, your inventory is not valued the way that you think it is. In a bulk inventory-only sale, as you're selling it all off in one lot or a couple of split lots, the price is often going to land anywhere from around 40 to 60%.

Percent of the wholesale value, not the retail value, not what you originally spent on it, but of the wholesale value. And I know this number is really painful to hear. And I'm sorry that I have to be the one to tell you this, but it really makes sense if you look at it from the buyer's side, right? So they're taking on a certain element of risk when they're buying a lot like this. If you've ever been to an auction,

Shauna Lynn Simon (11:06.39)

I used to love going to auctions. They would sometimes sell off, like if they're selling off in a state, they would sell off what they consider like a mystery box. You know, a few of the items in the box, but essentially you're gonna buy this whole box for like $20. And some items are gonna be absolutely great, and other items are gonna be absolutely crap, but you don't have the option of picking which items you want and which ones you don't. You are required to take that entire box. And for 20 bucks, it's probably fine. But when you're talking bigger numbers, this is where that perceived risk comes in from a buyer's perspective because they're taking on risk by buying your inventories a lot. They're taking on

a style risk, a quality risk, a market fit risk, that risk of having to sort through it, that's gonna cost them a lot of time and energy in their own labor and labor of their staff as well. There's gonna be that integration risk of whether or not these items can actually be used and integrated into the services that they're going to be offering. Because again, they're only buying your inventory. They're not buying your services and processes. So they've got a whole different business model that they're trying to fit this into now. They may not actually want every piece. They may need to repair, replace, clean, store, move,

photograph and catalog or rework whatever they're buying from you. And they're not choosing each item one by one for their brand or business model. They're taking it all as a lot. They're taking the whole collection, including the pieces that may not fit their taste or their clients or their market or their warehouse. And this is why selling the items individually, if you do want to just sell inventory and liquidate it, selling the items individually usually is going to bring in more money. But of course it takes a lot more time and effort to do that. So selling inventory alone

Is usually faster than trying to sell a business. You can liquidate your warehouse in a month tops, but it's often going to bring in a lot less. Whereas selling a business, we generally say you want a runway of six to 12 months from when you list it to when you expect to actually close the business. So someone who comes to me and says, I'm hoping to have my business sold and be walking away in the next two to three months, not a realistic timeline. Not only if you haven't done any of the work for it, but also even just in a buyer confidence, usually there's a certain due diligence period that is more than that amount.

time. So and we'll get into the actual deal flow in a later episode. But just understand this for right now that selling inventory, again, if you're selling inventory alone, it's usually faster than selling a business, but often is going to bring in less for you. And selling a true operating business, that's where the highest value is because the inventory is not being sold as just a pile of furniture. It's being sold instead as a part of an operating engine, that engine that already turns those pieces into revenue.

Shauna Lynn Simon (13:29.656)

So instead of here's a warehouse full of furniture and artwork and greenery, et cetera, it's here's a business that knows how to use this inventory in order to make money. So sure, it takes a bit of work to package your home staging business for sale. But if you are operating a sellable business, then it's making you money. And when it comes time to sell, it's just a matter of finalizing the inclusions and exclusions list and getting the word out.

So that's why I'm always promoting to operate a sellable business now. Don't wait until you're ready to sell. If you're operating from a sellable standpoint now, imagine looking at things through this buyer's lens, how much more efficient your business will be, how much more profitable your business will be, and how much more valuable it's going to be. So let's talk about then how an inventory may be handled in a sale. So at a very high level, once the business itself is valued based on earnings. So we we went through this at the last in the last episode, your SDE.

And what that equals. So that's your net income plus your owner's compensation plus all of your add backs. And then we multiply that by a multiple based on the systems and processes, et cetera, that you have in place. And we come up with that valuation. Your inventory is usually handled in one of a few ways, but most often it's just a part of the deal. The buyer's saying, I'm buying a business that produces revenue as well as the tools used to produce that revenue and those come with it. So it's not an added.

on at the end of the valuation that you're not adding anything on for inventory. Now, sometimes inventory may be negotiated separately. So this might happen if a buyer is a bit more asset focused when the business itself is not overly transferable or not overly valuable, or when the seller is essentially selling inventory and assets rather than a fully operating business. So as in you're selling the name, but you're not selling the systems, the team or anything like that that comes with it.

So sometimes the valuation might be a little bit different, a little bit more asset based. And occasionally, not often, this is very rare, but occasionally some inventory just may be excluded. So maybe the buyer just doesn't want everything and they come in and pick and choose some things and they want you to bring down the price that they're offering you based on you keeping some of those inventory items. And then you can sell those off separately on Facebook Marketplace or whatever makes the most sense for you. Maybe there are certain pieces that just don't match their intended model. Maybe you as the seller.

Shauna Lynn Simon (15:42.744)

Specifically want to keep or separate certain items and sell them separately because maybe they have a super high ticket value. You think you can get more for them then. Maybe they're an item that like you don't really see someone using in staging, but you bought as a bit of a whoopsie, but you can probably sell it secondhand and get a bit more money for it that way. Again, these are some rare cases. there might just be some inventory that just simply doesn't support the business going forward. Again, these are kind of rare places, but these are the exceptions that you can work through. But generally the inventory is sold with the business as a part of that valuation.

That inventory is already wrapped up in there. So the point is that inventory matters, but it needs to be understood in context because when a business is clear and transferable and income-producing, inventory simply supports that deal. When the business feels unclear, very fragile, overly dependent on the owner, inventory tends to start looking a little bit more like stuff that has to be priced on its own.

Because the value of the business itself just isn't there. So this is why I want stages to stop thinking about inventory only in terms of cost and start thinking about inventory in terms of performance. And this should be happening every time you're purchasing a piece of inventory as well. What is it going to produce? How often is it going to be used? Which pieces do you currently have that are supporting your most profitable services? What's missing? What's dragging the business down? If you could be ruthless in how you're evaluating your inventory,

You're going to be amazed at how much more profitable you're going to be if you get rid of those to make space for items that are actually going to work for your inventory. Think about what a buyer would actually be excited to be inheriting. What would make a buyer think, like, this is going to be an amazing piece I'm going to use in so many houses, versus like what would make them think, what the heck am I going to do with this? Those are much better questions. So now the inventory is the obvious asset in a staging business, but it's not the only asset as well, right? So we've been talking specifically about the inventory as an asset.

But this is also another place where sellers can often miss some of the value that they have because they're so focused on the warehouse that they might overlook what we call some invisible assets that make the business work. So these are things like your brand, your website, your SEO, your Google reviews, your client database, the agent relationships, your builder and investor relationships, your vendor relationships, your pricing templates and formula, the whole proposal process or intake process.

Shauna Lynn Simon (17:57.922)

The consultation structure that you have, the team that you have in place, your social proof, your email list, your systems, your reputation, all of this, your ability to generate leads without having to start from scratch every single month. Those assets may not be as easy to photograph as a warehouse full of furniture, but they can be incredibly important. In fact, they are incredibly important. The whole point of someone purchasing a home staging business is often to not be starting from zero, whether that's someone who is expanding the current territory.

Someone who's who's just entering the industry doesn't matter. The point is that they are buying something that's already operating. They're buying the engine that is already operating. And that engine includes both tangible and intangible assets. So inventory, that's tangible. You can see it, you can touch it, you can count it, you can move it. You probably moved it more times than you care to count.

You can trip over it, of course. The intangible assets though are sometimes a lot harder to see, but they're often what help that inventory to actually produce revenue. If you can't get clients in the door, that inventory is not going out the door, right? So a sofa that's sitting in a warehouse, that's just a sofa. A sofa inside a business with strong agent relationships, good pricing, clear logistics, trained movers, great photos, consistent lead flow, and a reputation for helping homes to sell. That sofa is part of an income-producing machine.

And that is a big difference. So if you're thinking about eventually selling your business, I just want you to start looking at your inventory through this buyer's lens, not with the I have to replace everything immediately. No, no, please don't do that. Please do not go and buy a truckload of new furniture because of this episode. I just want you to be strategic. So that's not the point, but I want you to be strategic about this going forward. I want you to understand what it is that you actually have, how it supports the revenue.

And where it may need to be cleaned up or organized, tracked, repaired, reduced, or repositioned. So start with some questions like what inventory are we using all the time? Which inventory, on the other hand, just rarely leaves the warehouse? What pieces support our most profitable services? What inventory is damaged, dated, or inconsistent with the brand? Is our inventory organized enough for someone else to understand it? Could a buyer walk into our warehouse and make sense of what is actually there, what they're going to be getting?

Shauna Lynn Simon (20:05.762)

Which also brings me to my next point. Do we have a way to track what we own, where it is, and how well it's performing? Because I'll admit, when I first started my staging business, I just used a spreadsheet and that was able to tell me what I had out at any given time and what I had in stock. But I didn't have that historical data of how well is this item performing? How many times did I use this in the last month, six months, year? If you don't have an inventory system, if you don't think you need an inventory system, I want you to think again.

A system, an inventory system, helps to make the business so much more transferable in the future. It's much easier to run with a team now so that you don't have to be the only one who just knows, well, I just know all what all my items are. It's gonna make it easier to run now, but also allows you to make better informed decisions going forward about what inventory stays and what goes. Trust me, it was a painful thing.

To look at my inventory, view the reports, and see that there were items that were just sitting in the warehouse and hadn't been rented for nine, 10, 12 months. And either those items need to be better recognized and brought to the forefront. So people are actually selecting them, but there's usually a reason why they're not selecting them. And that is that they're just not valuable enough. And instead, they're taking up space. So your takeaway for today is this inventory, yep, it matters. But inventory is not the business. Inventory supports value when it helps the business to produce revenue in a very clear, organized

And transferable way. Does not automatically create value just because you spent money on it. And the more that you understand that distinction now, the better decisions you can make before you get into any buyer conversations and even before you purchase your next round of inventory purchases. Because if you think that inventory equals value, you may overestimate what your business is actually worth. You may end up over investing in it in a way that doesn't actually get you the return in the end. So if you understand how that inventory instead supports your earning power.

You can really position the business more clearly and you can make better informed decisions going forward. Not only is that what a buyer needs, that clarity, but that clarity is going to help you to run a more profitable business now. If you want help to start thinking through what makes your home staging business more sell ready, I've actually got a great ebook that is free for limited time if you use a promo code for it. So it's called Is Your Home Staging Business Sellable? Seven Ways to Increase Your Profit Now and Your Sale Price Later. Go ahead and grab it at slsacademy.com/sellready

Shauna Lynn Simon (22:23.928)

slsacademy.com/sellready And you are going to use the promo code SELL100, in order to get it for absolutely free. It'll help you to start looking at your business through a sell ready lens, even if you're not planning to sell anytime soon. Now, if this episode has you realizing that you may not be totally clear on what assets your business actually has, what inventory supports value, what a buyer would care most about.

This is one of the areas that we go deeper into in the sell your staging business boot camp. So inside the boot camp, we're going to look at both your tangible and your intangible assets. We'll help you to create your inclusions and exclusions list for preparing a business for sale. And you can create that at any time. It'll help you to understand how your inventory is being viewed in a sale, what's going to support value, what can create that drag, help you to make better decisions going forward and how to start positioning what you have built in a way that a buyer can understand.

If you're interested in joining us in the next live boot camp, it's an eight-week intensive boot camp where you get live access to me as well as other home staging business owners who are selling their business. Everything is kept 100% confidential. We signed non-disclosure agreements so that we can share openly and freely and work to prepare a more profitable business now and a sellable business down the road. So whether you're looking to sell,

The next six to twelve months, or in a couple of years, or even five years plus, or even if selling is not even on your radar right now, this is what you need. So check out the boot camp. Simply go to slsacademy.com/sellyourbiz. Check out the show notes. We've got the link in there, of course, for you. Now in the next episode, we're gonna be talking about systems, operations, and transferability, as in like

How do we make things from your head go to somebody else? And I promise this is not going to be some lecture about how you need to create a 400 page SOP manual because the question is not whether or not your business can run without a human, it's whether or not it can run without everything just living inside of your head. So go grab the free ebook at slsacademy.com/sellready with promo code SELL100.

Shauna Lynn Simon (24:37.806)

If you want to join us in the boot camp, there are a limited number of spots in the next boot camp. So go and check it out at slsacademy.com/sellyourbiz. And until next time, I'll see you in the next episode. Looking forward to having you there. And until next time, happy staging.