Questions

How do i handle gift certificates when buying a business?

I'm helping a client purchase a business and there are a lot of gift certificates circulating. We're not sure how to handle this as the seller doesn't even know how much 'value' is circulating in the public.

4answers

Great question, this is something that can be handled with a proper deal structure involving some vendor financing.

I recently did a video about this very topic for one of my YouTube followers. Check it out here: https://youtu.be/hWm4ZQxWlEw

You basically make the vendor's outstanding gift certificates a 'currency' which can be used by the buyer to repay the vendor loan. It's a net-sum game for the seller since he's already received the cash without having to provide the goods or services.

Hope this helps. Feel free to schedule a call anytime you have a question about business transactions.

David


Answered 7 years ago

Consider adding what is called a "Goodwill" this is the proceeds of what is being paid for that is projected outside of traceable assets in the business. Your situation is not typical use for business goodwill but i think it could be easily applied as it certainly adds value to future earnings and acts as branding for your acquired business.
I would recommend coming to a consensus of ratio of sales:gifts then claimed:non-claimed from that gift ratio. Because goodwilll applies to branding and market recognition, assuming the gift certificates have aged, the goodwill value of the gift certs have low value to seller and high value to buyer (as if buying at discount). This benefits the buyer while seller still gets some compensation for sales value added to the business itself.

my most basic approach would be to
TA = Total Asset Value
CC = % of Agreed upon Circulating Certificates
GR = Going Market Rate
GW = Goodwill Estimate
NW = Net Worth = Assets - Liabilities

TA/NW = Assets - (Liabilities+CC)
GW = TA - CC
GR (what you pay to acquire) = TA + GW

my approach only, I am not an accountant, I simply have an MBA and have simply general good understanding of your situation.


Answered 7 years ago

The balance of gift certificates outstanding should be listed as an advance deposit on the balance sheet and treated as a liability until they clear - assuming the current owner recorded them properly. Then, when they clear, the revenue is recognized. Accordingly, as a liability, it would reduce the value of the business as part of owner's equity at the time of valuation and subsequent sale.

In the case where the seller does not know the value, hopefully there were records of money collected in the deposits and noted as such. That could be determined through an audit, assuming there was enough to be concerned with and a journal entry would need to be made as a liability for that amount on the balance sheet.


Answered 7 years ago

Handling gift certificates when buying a business is easy. However, selling gift certificates can help a variety of businesses increase sales no matter the situation or time of year. Whichever route you choose, just add the essential information like what each card is redeemable for and when it can be used. You can also get up and running quickly by selling online gift certificates, which will be covered later in the post. They can cover a set amount of money or a specific type of product or service, like a free lunch or a spa service of the person’s choice. If you are interested in using gift cards for your business, there are services like Square, Gift Up and GiftFly that you can use to get up and running quickly. Additionally, avoid placing gift certificates on display in your store or posting exact pictures of them on your website so people cannot easily copy and edit them. You should also make sure they have a unique design, potentially even using hidden element like a watermark to make them specific to your business.
However, businesses are generally not allowed to refuse to honour a gift card unless the customer violates a term that’s clearly laid out in the terms and conditions of the card, like presenting the card after a clearly marked expiration date. You must also clearly outline any terms and conditions on the card and avoid changing those without the customer’s knowledge. Selling online gift cards may currently be an especially attractive option for businesses in areas with very restricted foot traffic. However, it can also help companies that operate mainly online in general. Then at checkout, have customers share their email address and you can send them a copy of the gift certificate that they can either print or access on their mobile device. You can even automate this part of the process through your sales automation software if you have one.
Add a “Buy Now” button to your website. Then either send gift cards via email to each customer as they purchase. Or get them to send out automatically when that product is purchased. And make sure customers know that they are available. Place display signs and promotional materials where customers will see. For example, does your restaurant offer gift certificates to boost sales during the coronavirus outbreak. Online, feature gift certificates prominently.
Put them on your website and social media profiles. Some customers remain employed. They look for ways to help their favourite businesses stay afloat. Make it easy for them to buy online.
Additionally, post on social media. Offer discounts or promotions to entice customers even more. Use it to increase the amount that each customer is likely to spend. Annie Pilon is a Senior Staff Writer for Small Business Trends, covering entrepreneur profiles, interviews, feature stories, community news and in-depth, expert-based guides.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 2 years ago

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