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Marketing mastery: Do you want fries with that order?

October 28/November 4, 2019: Volume 35, Issue 9

By Jim Augustus Armstrong

 

You’ve spent time, energy and money attracting a prospect and getting the opportunity to measure and give them a quote. Doesn’t it make sense to maximize your profits with each “at bat?”

I’ve been working with flooring dealers since 2007, and I’ve found that very few do any- thing more than simply measure the areas the customer wants replaced, then give them a quote. This is a gigantic missed opportunity. Statistically, the likelihood of selling to a new prospect is 5%-20%, while the likelihood of selling to an existing customer is 60%-70% (marketing metrics). So, if you’re in front of a customer who is already going spend money with you, why not politely give her the opportunity to spend even more money? McDonald’s does this millions of times every day with their phrase, “Do you want fries with that order?”

To most effectively upsell you must first gain your customer’s trust. This begins with your marketing and is continued with your sales system. A great way to begin the process of building trust and creating differentiation in your marketing is to use testimonials. This includes online reviews as well as written and video testimonials—both online and offline.

Continue the trust-building process with your sales system. Sit down with your customer, ask questions and write down the answers. Educate her on your guarantees and warranties. Use testimonials during your sales process. Dress professionally. When visiting the customer’s home, call a few minutes before arriving, wear shoe covers and (with their permission) give their dog a treat.

When appropriate, get permission to measure and inspect all the areas of her home, even the areas she is not replacing. Let them know you want to give them recommendations on get- ting the longest life out of their flooring, even the areas you’re not replacing.

As you go from room to room, you’re looking for two kinds of upsell opportunities: No. 1 things which you sell, and No. 2 things your referral partners sell. For example, let’s say you’re installing hardwood throughout the high-traffic areas of Mrs. Consumer’s home and carpeting in her bedrooms. During your initial consultation you found out the new floors are part of a larger remodeling project which will include a bath remodel, window treatments and painting.

Along with the quote for hardwood and carpeting, you could include quotes for: upgraded carpet pad; area rugs for the living and dining areas; window treatments; a new vacuum; wood floor cleaning kit, etc.

When offering additional products, say something like, “Mrs. Consumer, here is your quote for the hardwood and carpeting we discussed. You’ll see I’ve also included quotes for X, Y, and Z. Which of these would you like to add to your order?”

You can also refer her to the bath remodeling and painting contractors with whom you have a referral relationship.

Let’s say your average ticket is $3,000. If you look for ways to add 30% in upsell suggestions, and half of your customers buy the upsell, you’ll increase your total revenue by 15% without spending another dime in advertising.

 

Jim is the founder and president of Flooring Success Systems, a company that provides floor dealers with marketing services and coaching to help them attract quality customers, close more sales, get higher margins, and work the hours they choose. For information visit FlooringSuccessSystems.com.

 

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Installments: A greener approach to luxury living

October 28/November 4, 2019: Volume 35, Issue 9

By Arthur Mintie

 

As the world becomes more focused on smart home technology, the tile and flooring industry has made leaps forward to make products that adapt to a new way of living. New products focus on their ability to contribute to green, sustainable living that benefits the greater good, especially as we continue to face global issues like climate change. Going green is no longer a bonus, but an expectation that must be met by construction professionals.

Electric radiant floor heating is a high-end design feature that is growing in popularity in both new homes and renovations that focus on clean, comfortable living and come with many benefits such as consistent, energy-efficient warmth. Through a series of wires, electric radiant floor heating systems produce heat through thermal radiation, which is absorbed by surrounding objects that in turn help warm the entire room.

With the systems that are produced today, customers can significantly lower their home or business’ kilowatt usage and reduce energy costs. Some companies even claim to have achieved a 15% decrease via thermal diffusion technology methods that eliminate cold spots with even heat generation. Increasingly, the wires used to transfer the heat are also being designed to achieve the utmost in customization, which not only allows for variability in design output but also directly impacts heat output.

Particularly for those with allergies, the way heat is conducted through electric radiant floor heating systems can also help improve air quality as it does not require air to be blown around, mitigating dust.

Once a system is in place, it must be covered with a finished flooring material. Tile is one of the best materials to choose because of its ability to conduct heat. To continue on the greenest path possible, one may also want to consider wood as it is a sustainable and renewable flooring option. Many wood types are compatible with electric radiant floor heating, such as American cherry, teak or bamboo, but installers should contact the manufacturer of their desired floor heating system to ensure compatibility. It’s best to avoid carpet because the thick padding typically installed will act as an insulator, making it more difficult for the heat to conduct through the floor.

To control the heating systems there are typically two options. Customers can either select a regular thermostat or opt for a Wi-Fi-enabled system that further promotes green living. With the user able to control the floor’s heat via a smartphone, these systems can learn routines and apply the most efficient settings to reduce heating usage. The addition of a radiant floor heating system work in the user’s favor to save money both short term and in the long run of the floor’s life cycle. While there is an initial investment, the payoff and benefit of the floors are worth it.

Ultimately, the greenness of the floor heating system depends on how power is generated. Electricity can come from fossil fuels or it can be produced from renewable sources like sun or wind power. Either method produces the electricity to power the system, but the latter is the better choice for the environment.

 

Arthur Mintie, senior director of technical services, Laticrete International, is responsible for overseeing the operations of the company’s technical services department, which provides technical assistance to specifiers and designers.

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Lisbiz strategies: Learn to strike while the iron is still hot

October 28/November 4, 2019: Volume 35, Issue 9

By Lisbeth Calandrino

 

In the world of retail, salespeople and owners live and die by leads. These leads may come through sophisticated electronic marketing systems, or they may come to a flooring store by more traditional means such as word of mouth. In either case, the objective is to jump on them before they get stale.

I understand that managing and following up on leads can be difficult at times. You meant to call them, but you were too busy. Now, you’re afraid to follow up because you think the lead is too old. When you finally do reach out to the customer she tells you she has already bought from your competitor.

Why didn’t you set time aside to make the call? You’re not the only one who hates calling people you don’t know, and the longer you wait the more difficult it becomes. You need to contact potential customers as quickly as possible. Remember, they have already expressed an interest in what you’re selling. If they haven’t visited your website and connected, it’s your job to get them there.

Are you a flooring manufacturer who supplies consumer or commercial leads to retailers? Purchasing leads is a big investment for your company, but if no one is keeping track how will you know what has become of them? This is where a targeted, touch-point email marketing program can help keep potential customers interested in coming to your flooring store.

A touch-point email marketing program is specifically designed to deliver a particular message to your potential customer and is personalized to her shopping needs. According to Campaign Marketing, email is highly ranked in the marketing kingdom with a 380% ROI and $38 for every $1 spent. An email campaign is about building relationships, not just selling. Each email should have a message that is important to the customer.

Even if you haven’t met her, useful advice on your products will begin to build your relationship. It doesn’t mean sending one note to the customer and disappearing. You must be consistent and have a series of timed touch points.

It is also not the holiday card you send out to relatives to see if they’re still alive. This is an electronic magnet. Instead of putting it on the customer’s refrigerator, it will stay on her mind through digital marketing.

There’s no reason why you can’t put together a three- to five-week email campaign starting with a friendly “hello,” introducing yourself and offering an invitation to come in and pick up a gift. You can also direct her to useful information on your website, such as design tips or color ideas.

The key is to build a relationship so the potential customer feels like she knows you and wants to meet you. This is also why you need to market using your personal picture. It has been proven trust increases by more than 75% if the customer sees your picture before she meets you. Real estate agents routinely include their photos in marketing promos.

Remember, these potential customers have been referred to your store, so you’re just reaching out and providing something of value before they meet you.

There are a host of customer relationship management tools out there to help you track prospects from initial contact to close. Don’t make a big mistake by ignoring them.

 

Lisbeth Calandrino has been promoting retail strategies for the last 20 years. To have her speak at your business or to schedule a consultation, contact her at lcalandrino@nycap.rr.com.

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Lessons learned: A little extra time

October 28/November 4, 2019: Volume 35, Issue 9

By Tom Jennings

 

When asked to compare the difference in performance characteristics between a top-producing sales professional and an average performer, I always respond that a common trait the professionals exhibit is they are willing to invest an extra few minutes per day toward their goal of being successful. By this I mean the minutes they are willing to prepare prior to their sales shift beginning.

Does this following scenario sounds vaguely familiar? One minute before he “has to be at work,” Sorry Salesman comes gliding through the front door with his breakfast sack in one hand and his ever-present cell phone clinched in the other. He appears as if he has been out of bed for about 10 minutes. His hair is still damp, his tie is draped over his shoulder and his shirt tail is untucked. His rationale is he doesn’t need to be dressed up yet. He’ll have time to finish getting ready when he gets to work. He proceeds to drape his coat on the back of his chair, drop his car keys on the desktop and announce, “I’m here!” like he has accomplished something.

While this may seem exaggerated to some, I have witnessed similar behavior far too many times. The sad reality is that those who are only willing to give such marginal efforts are allowed to get by with such non-productive performance. Even if Sorry Salesman is not concerned about his nonchalant behavior, management should be. As a manager, you will always get the minimum behavior that you are willing to accept.

Can you imagine a pro golfer stepping to the first tee with no warm-up session on the driving range? How about the bus unloading a football team in uniform at kickoff time? No mental warm-ups. No physical warm-ups. Just toss the coin and kickoff. You can’t imagine a great singer not going through the scales before a concert. A talented musician would not perform without ensuring that his or her instrument was in tune. Why would we strive to be any less professional in our chosen field?

Spend a few minutes each morning walking your showroom to make sure everything is in order. Are there new items displayed? If so, do you fully understand them? Are all prices clearly marked? Are all of the lights on and in working order? Is the music playing at a pleasant volume? Are the design tables clean and ready for the first customer in the door? Are your demonstration supplies restocked and freshened? Do you have sufficient collateral materials ready for distribution? Have you checked and returned any messages that may have been received since you last worked?

While these may seem like trivial details, professionals realize they are not. Any unnecessary time spent fumbling and stumbling in a customer’s presence reduces her perception of your professionalism and concern. As this perception declines so, too, does your chance of making this sale.

Spend a couple of minutes in front of a mirror. Recheck the appearance of your clothing. Touch up your grooming. Make sure your breath is fresh. Check your attitude. Give yourself a little pep talk. Visualize what is important to you and what your plan is to achieve it. Vow not to let outside problems affect your performance today.

If you want to be successful at sales, the first person that you need to sell is yourself. Create a mindset and working atmosphere that is conducive to your success. Invest a few minutes each day being prepared to succeed. Your customers—and your wallet—will be rewarded.

 

Tom Jennings is vice president of professional development for the World Floor Covering Association (WFCA). Jennings, a former retailer and sales training guru, has served in various capacities within the WFCA.

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Al’s column: How to get your team psyched

October 28/November 4, 2019: Volume 35, Issue 9

By Lou Morano

 

Everyone in every organization has a job description, whether written out or not, that includes their regular duties and tasks. (This includes owners such as myself.) If we are operating efficiently, everyone should be pretty much busy with little downtime.

Then we have additional projects that need to get completed. These projects are usually isolated tasks—some are recurring; many are not. Here are some examples: Your showroom may need to get new updated flooring; a new system is needed in your installation department to better handle communication with service calls; creating a better sample checkout system, etc.

As owners, we ask our people to take ownership in a project but they usually don’t get around to doing it. They will give reasons such as, “I will get to it,” “I have been super busy,” “I’ll get on it as soon as I can.”

Well, how would you like to have your people not only take ownership but contribute ideas on what projects should be addressed and have all the projects completed on an agreed date?

Here’s how it can be done: First, you make a list of the projects you would like completed. Then, tell your key people you are going to meet every quarter, and set a date for the first meeting. Explain to them that you would like input from them on what projects/tasks they think your organization needs—whether it is in their department or another department—and bring those ideas to the meeting.

When you all meet, put all the ideas (including yours) at the bottom of an Excel spreadsheet. Then, you explain the goal, which is to assign ownership of the tasks that can get completed within 90 days. Discuss who should get ownership of each task/project. Some people may only have one project assigned to them while others will have several. Next, discuss which projects are a priority. Then, discuss with each person each task/project and a date they feel they can commit to for completion.

Note: It is very important to give plenty of time and even add time liberally so they do not feel pressured. However, the completion date must be within 90 days. It is equally important not to give the team too many projects; you want to set them up for success, not failure. Do this together with your team and address each person individually.

At the end of the meeting, you should have several projects on the Excel spreadsheet with the project name, expected completion date and who is taking ownership of the project at the top of the sheet. You most likely will have projects at the bottom of the list that were not able to make it on the list. Distribute that Excel spreadsheet so everyone knows who is doing what and when their project is expected to be completed.

You will then meet in 90 days to go over all projects that were to be completed. Once you have gone through those projects, you can add some more projects/tasks to the bottom of the list, prioritize and repeat the process. In the unlikely event that one of the expected completed projects was not completed, you have a discussion as to why it did not get completed and get the commitment from the person responsible that it will be done in the next 90 days. When your people understand this process is ongoing and that you are committed to it, you most likely will see almost every project completed by the promised expected completion date and without you bugging them all the time.

Imagine that.

 

Lou Morano started selling carpet for a major retailer at the age of 19 in 1981. In 1985 he and his father incorporated Capitol Carpet, Inc., and opened their first full-service retail store in 1986. Today Morano operates five retail stores, including a commercial division, under the name Capitol Carpet & Tile and Window Fashions.

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Installments: Elevating your skills in flash-coving vinyl

October 14/21, 2019: Volume 35/Issue 8

By Mike Pigeon

 

As with all trades and trade skills, there are different levels of expertise and capabilities that everyone can achieve. When it comes to resilient flooring installations that require an integral cove, this is where it usually separates the good, the bad and the ugly. (Especially when you add in the seamless floor factor and every seam needs to be welded, both vertical and horizontal.)

As we all know, on the commercial side of the trade health care and medical facilities are booming. It really does not seem to matter what part of the country I’m in, the resilient flooring and flash-cove or self-coving sector is in great demand. However, no matter where I go there seems to be a shortage of installers at this skill level.

When it comes to heat-welded floor installations, whether experienced or not, there are a few sides to the story. Some will tell you they only do it periodically and it’s not worth the investment for training and tools to be fully invested. Some will tell you they invested in the training and tools and wish they had more installations to make it worth it. Others will tell you they turned their complete focus toward this sector and have never looked back. This is usually depending on the marketplace and location and the type of work that is booming in that area. The one common thing they will all tell you is this is a specialty part of the floor covering trade that takes a special hand, eye and skill that not everyone will be able to embrace.

First, education. There is training out there if you can get your hands on it. If you are working out of a union shop, there are the apprenticeships that have very thorough training programs and also require in-field time with journeymen. If you’re in the non-union sector, it is usually a case of getting pulled in under the wing of someone willing to share their skills. This is a very long and slow process as the best way to learn is hands-on training.

Second, required tools. When it comes to heat-welded seamless flooring in combination with flash-coving material, different tools are needed. There will be a small investment with these tools when it comes to cove cap cutters, scribes, gouging tools and also welding tips and skiving tools.

Last is mindset. The self-coving or flash-coving sector of the trade will separate the average from the above average, not only in terms of training but also in mindset. When a well-tuned, highly efficient installer on a flash-cove job is putting down large amounts of yardage and lineal footage of coved material, it is because he has spent the blood, sweat and tears to master the mindset required. No matter what, when you commit to this skill, you’re all in or all out. That includes taking into consideration that most bids want to pay for a Ford Pinto but get a Lamborghini-quality job. When you are paid hourly, speed does not matter as much, but when you are a self-employed contractor, speed improves profits.

When all is said and done and you are at the quality level that is the hardest to achieve, you will always be in demand. The work rarely diminishes, and you will be a highly requested installer.

Bottom line: make the commitment, find the marketplace and take your skills to the next level. You will never be out of demand.

 

Mike Pigeon is a technical installation specialist for Roppe Holding Co. He has 20 years experience an installer and an additional 10 years as a commercial project manager. Pigeon, who is a certified installation manager (CIM), currently serves on the CIM steering committee.

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Marketing Mastery: Great marketing cures a lot of ills

October 14/21, 2019: Volume 35/Issue 8

By Jim Augustus Armstrong

 

(Second of two parts)


In part one of this series (FCNews, Sept. 16/23), I made the point that, hopefully, industry-wide solutions to the installer shortage are coming, but that might take a while. In the short term you’ve got to solve it for yourself, which generally means either hiring installers away from other retailers, or recruiting and training them yourself. Either way, if you don’t have enough customers and your margins are low, you’ll have trouble affording it.

That’s where good marketing comes in. Let’s look at some practical strategies you can implement to attract plenty of quality customers and command margins of 40%-50% or more.

Build a strong foundation. The first thing you need to have in place is a strong selling system. Studies show that on average three out of 10 walk-ins wind up buying. If you’re investing time, energy and money to get customers to walk in—but your sales process is so weak that 70% of them don’t buy—you’re simply throwing your money away. So, before you even begin investing in marketing you need to put a strong selling system in place. Your selling system should equip your team to take control of the sales process, create differentiation, position them as trusted advisors, command high margins and close more sales.

Implement a referral-generating system. Referrals are less price-resistant, easier to close and more fun to work with than cold prospects who simply saw an advertisement. We all know this, yet most dealers don’t have a system in place to generate ongoing referrals. Your referral system should do two things: First, train your team on how to ask for and get immediate referrals from your completed installations. Second, your system should generate ongoing referrals from customers between purchases. You do this by creating a culture of referrals.

Dance with the one who brought you. Your business exists because of the patronage of your past customers. Stop ignoring them. Communicate with them at least monthly. I’m going to keep hammering this until the industry gets the message.

Wow ’em from the get-go. Everyone goes online looking for flooring, and everyone reads reviews. That’s why it’s important to make sure you’ve got dozens of 4- and 5-star reviews, with new ones being added each month.

Profit from other people’s herds.Over the years you’ve been in business you’ve rounded up a herd of past customers who provide you with repeat and referred business. Other businesses have too. Build referral relationships with these businesses. Top prospects include realtors, remodelers and designers.

The strategies I’ve presented have something in common: they all help increase your repeat and referred business, close more sales and position your store as the obvious choice. When you shift from being, say, 30% repeat/referral-driven, to being 70% repeat/referral-driven, your closed sales will automatically increase and it will be far easier to command high margins. And this will help you solve the installation crisis for your own business more effectively and less expensively than many other kinds of advertising.

Jim Augustus Armstrong is the founder and president of Flooring Success Systems, a company that provides floor dealers with marketing services and coaching to help them attract quality customers, close more sales, get higher margins and work the hours they choose. Visit FlooringSuccessSystems.com for more information.

 

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Lisbiz Strategies: How to stand apart from the pack

October 14/21, 2019: Volume 35/Issue 8

By Lisbeth Calandrino

 

Do you ever wonder how stores that are so much alike can stay in business? (I’m talking about home centers in particular.) Think about it; they have the same problems you have: distinguishing themselves from the competition. Not only are they the same size, but they carry very similar products as their competitors.

I bring this up because businesses are always struggling with developing a competitive advantage. How does it work? Do they get better deals on their products, do they sell substandard materials? It’s doubtful they get real deals on their products. If they’re buying tons, I’m sure they get price breaks. My hunch is they buy different products. If they sold substandard materials, they would be out of business. From my experience, I believe they know their customers.

Building a competitive advantage starts with distinguishing your perfect customer. It doesn’t start with you saying, “I have to sell more than them, or they’re taking my customers.” The Dollar Store gets every customer who wants to save money; it has nothing to do with not having enough money. They don’t advertise “Come in because you’re poor.” It’s a “price-only” offer. If you want to save money, you go to the Dollar Store. Sometimes you find an item that’s a name brand, and you feel like you’ve really won.

If the cheapest price is what your customer is after, you can’t stop them from looking and comparing. The question is, why would you want the customer seeking the lowest price? The lowest price customer won't keep you in business.

Here are some ways to determine your “best” customer and how to keep them close:

Determine your perfect customer. Look through your invoices of sold customers and pull out the ones who have purchased big-ticket items. Have they bought similar products? How did they pay for their large purchases? Check their invoices and see if there are other similar factors. Compare everything from what they bought to where they live. Put together your pro- file of the perfect customer.

Don’t be reactive, be proactive. If you’re going to compete, you will have to do something different. Note: This is not the same as doing things “differently.” Let’s say your competitor offers a one-year warranty on their installation. Your competitive strategy is to offer a five-year warranty. That’s doing the “thing differently.” If you were to say you were doing an inspection after the first year to make sure the flooring is performing properly and repairing any problems or make a recommendation, then you're different.

Train your employees to be the best, not better. Being the best would mean doing something entirely different. Welcoming your customers into your store with a cup of coffee, provide elegant furniture for them to sit on, having your television on and connecting to your website to show products and links to your suppliers. How about bringing up video testimonials and Facebook comments from happy customers. (Don't forget snacks for the dog.)

Manage the customer experience by delivering more than customer service. Customer service is basically determining a customer’s problem and then solving it. This is the basis of everyone’s business; if you can’t do this, you’ll be out of business.

Keep your customers close. Hosting events in your store, involving customers in your charity events and holding in-house focus groups will bring you closer to your customers. Find new ways to spend time with them.

 

Lisbeth Calandrino has been promoting retail strategies for the last 20 years. To have her speak at your business or to schedule a consultation, contact her at lcalandrino@nycap.rr.com.

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Lessons learned: In flooring, it really does pay to be green

October 14/21, 2019: Volume 35/Issue 8

By Tom Jennings

 

“I have never been hurt by anything that I didn’t say.” – Calvin Coolidge

While this saying may have proven to be beneficial in the world of politics, I think it is proving to be detrimental to today’s flooring dealer. The success and survival of a retail store depends on a thorough and ongoing awareness of the community it serves. Fine tuning the business and responding to changes in consumer interests and buying habits are more important than ever today. Today’s customer wants to know what products are made of, how they are manufactured and in what ways they will affect their families’ environment.

In spite of this shift in buying habits, I find that most flooring retailers are still conducting “business as usual.” There’s never a shortage of price-driven promotions, in spite of the fact that price alone has never been a proven differentiator over the long haul in this business. It might be effective on items that are bought frequently, but this logic does not apply to purchases made on the average of once per decade. When you focus on price alone, margins become so thin that most dealers find it nearly impossible to promote their businesses in a sustainable manner over time.

That begs the question: Why do so many stores continue to head down this path? I believe that it is due to the fact that they haven’t chosen a specific segment of the market to focus on. As the famous Hall of Fame baseball player Rogers Hornsby once said, “The best way to get on base is to hit it where they ain’t.” I feel a great opportunity exists today for a focused flooring dealer to actively and professionally present the “green story.” Virtually every product we sell has made major strides in recent years toward improving their content in ways that are kinder to our environment. While this topic is very well promoted among the commercial and design community, I see almost no one championing the cause at the retail level. Why the secrecy?

To focus on these products would not require a massive shift in your product offerings; these products exist today. What will be required is a shift in the way these products are presented to the customer. Ask yourself, while many of today’s carpet yarns can be recycled, when was the last time you suggested this feature to a customer? Cork and natural hardwood flooring are sustainable products that are featured in many design publications. Do you know their stories well enough to present in a compelling manner? The majority of carpet cushion is made from recycled or reclaimed materials. Do you tout this as a plus? Many stores currently bale and recycle their carpet cushion. If you do so, are your customers made aware of it? When was the last time you advised your customer you were keeping her best interest in mind?

None of these suggestions would cost significant funds to implement. What will be required is an ongoing commitment by every member of your staff to embrace the concept. It has been proven in virtually every industry that many customers will pay more for environmentally conscious products they believe in. Our industry has no shortage of such products. What is in short supply are great stores staffed with knowledgeable people to properly present them. Why not create your store in this image? Not only will you be doing our environment a favor, but you can also stand out in a crowded marketplace by taking a road less traveled.

 

Tom Jennings is vice president of professional development for the World Floor Covering Association (WFCA). Jennings, a former retailer and sales training guru, has served in various capacities within the WFCA.

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Al’s Column: Weighing the impact of the ‘Wayfair’ case

October 14/21, 2019: Volume 35/Issue 8

By Roman Basi

 

The recent Supreme Court decision (South Dakota v. Wayfair, Inc.) has dramatically impacted online retailers and increased possible successor liability risks in terms of merger and acquisition transactions.

Prior to the Wayfair ruling, the “physical presence” standard set out in Bellas Hess and Quill controlled online retailers’ necessity to pay South Dakota sales tax. The physical presence rule allowed out-of-state retailers who sell their products or services online to avoid the state’s sales and use taxes due to a lack of a brick-and-mortar business in the state. However, under the South Dakota Statute affirmed by the Supreme Court, online retailers are now required to pay South Dakota sales tax if their business has a “substantial nexus" with the state. This is reached when the retailer has sold more than $100,000 in in-state sales or completed 200-plus transactions in the state on an annual basis.

Following the Wayfair decision, over half of the states have developed and are implementing very similar requirements for out-of-state retailers. The Supreme Court found the physical presence standard not only incentivized the avoidance of state sales tax, but cost states an average of $8 billion-$33 billion per year in taxes. The physical presence standard is being phased out due to modern technological advances providing online retailers with the ability to reach virtually any U.S. consumer, and avoidance of states’ sales tax has become a multibillion-dollar issue.

It’s important to understand the sales and use tax liabilities in the context of buying or selling a business involved in online retail. This increasing development of case law has led to more exceptions to the rule of buyer non-liability. The ABA published a memorandum in January 2018 on successor liabilities in an asset transaction that has greatly increased its relevance in light of the Wayfair decision. In the memorandum, there are four exceptions of successor liabilities mentioned: (1) the buyer (successor) assumes the seller's liabilities expressly or impliedly; (2) the transaction in substance constitutes a merger or consolidation of the buyer and seller (de facto merger); (3) the buyer is "a mere continuation" of the seller; and (4) the intent of the transaction is to defraud seller's creditors. The most common of the four exceptions is the de facto merger. This exception is particularly influential if the transaction involves a continuity of management, general business operation and equity ownership, assumption of seller’s ordinary course business liabilities, physical location and seller’s dissolution following the sale.

The question becomes: how do the successor liability standards affect the buyer of a business that has online retail sales? If an online retailer does not follow the varying state-by-state requirements, it could result in a failure of sales and use tax payments or payments of the incorrect amount. This may result in unforeseen liabilities when a creditor comes seeking repayment. The best way to avoid any potential successor liability issues is with vigilant due diligence and strategic pre-transactional planning focused on the above-mentioned risk factors.

A strong M&A team will greatly help limit any potential stress during a transaction that may result in a buyer withdrawing their interest due to successor liability. Due diligence focusing on specific state requirements regarding payment of sales taxes and the elimination of state tax liabilities prior to closing is key.

 

Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing business owners. For more information, please visit taxplanning.com.