Financial planners often bring valuable prior professional experience to their practices. Take my colleague Morton Gorden, for instance. He has a wealth of information based on his experience in retail merchandising. He is the descendant of an enterprising Jewish immigrant from Russia named Harry Gorden, who settled in Coffeeville, Mississippi, and opened a successful general store in 1912.
Harry's son Aaron -- Morton's father -- later joined the venture and the store burgeoned into a furniture and appliance business.
In 1957, at the tender age of 10, Morton was unleashed onto the sales floor on Saturdays. He took over the business from his father in 1979. As the nature of retailing irrevocably changed, Morton closed the Coffeeville business for good in 1989. It was a bittersweet transition, but after 77 years of operation, "H. Gorden's" became a memory.
Through the years, the now 50-something Gorden has helped a number of friends, family members, and clients to close businesses. Gorden, who also serves as an arbiter for the Better Business Bureau, contends that many of these "going out of business" (GOOB) sales offer legitimate values to the public. But, he warns, abuses are commonplace. In Tennessee, the law requires that once a business starts a GOOB sale, the business must terminate within 90 days. (Some local municipalities allow 120 days with a special permit.) Further, the business operators may not purchase new merchandise once the sale has started. But creative operators sometimes place orders in advance for merchandise that is scheduled to arrive during the sale.
Consignment arrangements for merchandise not owned directly by the business are also employed. Such agreements provide the business with a risk-free opportunity to make additional profit because any unsold inventory may be returned to the consignor.
Because retailers often don't know all the aspects of putting on a GOOB sale, external promoters are typically hired to plan and operate the event. These promoters may be hired as contract employees, who are entitled to a percentage of event sales, or paid a flat amount.
Or the promoter may purchase the entire inventory of a business at a negotiated price in advance. From that point on the original business owner is out of the picture. Often with this type of arrangement other inventory is brought in for the sales event to enhance the bottom line. In either case, the promoter uses the good name of the business to lure customers who believe they can profit from someone else's misfortune.
Gorden stresses that these sales can be very lucrative for the businesses. The best-case scenario is one that yields both reasonable mark-ups for the business and better-than-average values for the consumers. He cites four types of common abuses.
Original prices are often repriced upward just before the sale. A $299 piece of jewelry is marked at $399, with a sale price of $279. The intent is to misrepresent the discount the customer is actually receiving.
Closeout merchandise that bears a higher original mark-up is brought in specifically for the sale. Retailers can often buy discontinued merchandise at up to a 50 percent discount. This tactic is considered ethical so long as the closeout merchandise falls within the range and quality the business typically retails.
The combination of strong customer response and healthy mark-ups can entice some businesses to continue their sale longer than the statutory limits. A recent example of an illegal GOOB sale practice involved Upton's Department Store in Memphis being cited by the state for conducting its GOOB sale for 145 days. A $15,000 fine (plus various costs and penalties) was imposed under a settlement agreement with the state.
Misleading advertising is used to get people in the store. "Entire Stock Up To 50% Off" is an example of advertising that attempts to make the public believe that virtually all the prices have been cut in half. In reality, there could be very few half-off items available, with most sale items bearing lesser discounts. Although not illegal, it's certainly ethically questionable.
Just remember: Not all going out of business sales are created equal. Let the buyer beware.
Bill Steinberg is a Certified Financial Planner and Mediator with Kelman-Lazarov, Inc. He can be reached at firstname.lastname@example.org.