How do I spot shrinkage when buying a retail store?

Start with the arithmetic that ties the business together. Opening stock plus purchases minus sales should leave roughly what is on the shelves. Ask for periodic stock counts and the adjustments made afterward, and ask what the owner wrote off and why. A pattern of regular, unexplained write-downs, or a count that no one has done for a long time, should prompt more questions.

Then look at how the store is run. Notice the layout, the lighting, the back door and who has keys. Ask what controls exist: cameras, receiving checks, till reconciliations, and who can void a sale. Ask whether any employee has been let go for theft and what the seller did about it. A store that does not watch its stock may also not watch its records.

Do a count with the seller before closing, and compare it to the books. Sample some high-value items and some fast sellers, and check expiry or damage. Ask your accountant to review the statements for margin trends that do not match the product mix. If you find gaps, take them up with the seller before the deal firms up, and write any stock adjustment into the agreement.

Key takeaways

• Reconcile opening stock, purchases and sales against a count of what is on the shelves.
• Ask about controls, voids, keys and past losses, and watch the floor yourself.
• Do a joint count before closing and write any adjustment into the agreement.