As of Thursday, August 24, 2023
Fashion never stands still—in fact, nothing in the world does. And the best-designed garments sitting in a warehouse are like flowers blooming where they can’t be seen, their life cycle fading in the dark.
In the wake of challenging and uncertain times, which look to be the new normal, the California Apparel News reached out to Marco Valverde, partner in Moss Adams, to discuss the most pressing issues facing apparel companies right now, which include the tangled web of unsold inventory, enterprise solutions, direct-to-consumer sales tax and what to do if you’re ready to sell your business.
CAN: Let’s start with everyone’s favorite subject: taxes. Is there ever any good tax news?
MV: Yes, if you’re ahead of things. In the last few years the growth of the direct-to-consumer sector has brought a lot of challenges where apparel companies don’t know what their sales-tax footprint is. When you sell online, the customer can be in any of the 50 states, and each one has a different tax nexus. A lot of companies don’t start collecting state sales tax until much later in the game, and if they don’t collect it from the customer then they’re on the hook for it later down the road—and we’ve seen it to the tune of a few million dollars.
CAN: But shouldn’t their e-commerce platform be taking sales tax based on the state the order comes from?
MV: Yes, but even in 2023 it’s not always accurate. In a related tax issue, since the pandemic many employees are working remotely, and you don’t just owe state income tax based on where you operate but also where your employees work. We recommend companies do what we call a nexus study to find out sales-and-income-tax exposure, which is a lot easier to do before your company gets too big.
CAN: What else should companies look out for when it comes to the growth of the DTC sector?
MV: To run an efficient company you need a platform where everyone can talk to each other, and a lot of the enterprise solutions we see are outdated. Mostly what we see is that the point-of-sale software is not aligned with the inventory-management or accounting systems. We recommend you have them all talking to each other so you can make decisions in real time.
CAN: We’re seeing a slowdown in acquisitions. What should owners who are considering selling their company be most aware of at the present moment?
MV: During the pandemic, people were not traveling so they were staying at home and shopping online. A lot of companies took the opportunity to sell their business, but that’s slowed down in 2023 with the economic uncertainty. So if you want to sell, we recommend producing a quality-of-earnings report, which answers the enterprise value of the company, which will make you more likely to have a successful transaction.
CAN: It’s sounding like the best protocol is following the old advice that an ounce of prevention is worth a pound of cure.
MV: Yes, all these points interconnect with each other. A company may want to be acquired but hasn’t addressed the sales-tax issue, which can be a heavy negotiating issue between a buyer and a seller. I was involved with a transaction where there was a sales-tax obligation close to $3 million. The company ended up selling, but an amount had to stay in escrow for seven years, until the expiration of the review period.
CAN: With uncertainty now the norm, what’s your most up-to-the-minute advice on keeping one’s head above water?
MV: I would say in the apparel space to remember that inventory is not like wine and doesn’t get better with age. So make sure your numbers are adequate to run your business, and do not overextend or overbuy. Think of it as money sitting in your warehouse if it’s there for a long period of time.
CAN: Companies are certainly aware of this, but is there a false step they often make?
MV: It comes down to reviewing their supply-chain and sourcing strategies. If you’re sourcing from overseas with a 12-week turnaround, you need to have a really good system internally to manage what that’s going to look like. The better information you have, the better decisions you can make. Data are so available now, but you need to have them to make use of them.