As a retail business owner, you may be ready to sell your establishment and take advantage of its value. Regardless of whether you own a general merchandise shop, an automotive store, or a food and beverage business, one of the first things to do before putting your business on the market is to know its value. Learning how to value a retail business is an invaluable skill.
Buying and selling retail businesses happens often. You need to know its value to get the most competitive price for your business. Unfortunately, retail business valuation is complex and time-consuming, especially since there aren’t specific formulas or methods that’ll tell you exactly how much your business is worth.
Instead of using a single formula to determine the valuation of retail businesses, you can use several methods, formulas, and processes to approximate what your company is worth. With that information, you can market your retail business more effectively to prospective buyers and yield a reasonable price for its ownership. Continue reading to learn about retail business valuation, its methods, and other tips.
Importance of Determining the Value of a Retail Business
Retail business valuation is an appraisal process that estimates a company’s worth. It’s not the same as stating what you think or assume your business is worth according to your beliefs or sentiments. Instead, business valuation uses data from the company and specific metrics to attribute a value gauge to help business owners price their retail establishments to sell them at a competitive price.
You could miss out on a lot of money when selling a retail business you own if you underestimate its value. Prospective buyers who are unaware of a business’s value may assume it’s worth more than it is, leaving them with fewer assets and more work to build up the company’s value should they buy it.
With a business valuation report, you’ll have a useful asset that outlines the inner workings of your retail business. You can use it to optimize your business or get the desired price for it.
Who Can Help With Retail Business Valuations?
One of the key considerations in retail business valuation is who will facilitate the process. If you’re a business owner intending to sell your venture, you should understand its value to ensure you get the most competitive price without leaving money on the table. However, these third-party professionals can help you get the clearest picture of your company’s worth:
- Certified Public Accountant: A CPA could assist with financial record organization and generate additional financial reports going back at least three years for prospective buyers to review.
- Attorney: An attorney with experience in the buying and selling of retail businesses can protect your interests throughout the sale process while guiding you through the legal aspects of each phase.
- Business Broker: You could hire a business broker to facilitate the sale of your business from start to finish. With their expertise, they can provide guidance for the entire process to maximize your business’s value, offer pricing analysis, market valuation, and other essential services.
- Business Appraiser: If your business generates over $1 million in revenue, you could hire a business appraiser to conduct a deep business analysis and determine your enterprise’s value.
Methods for Appraising Retail Businesses
You could employ several processes for retail business valuation. The method you utilize will depend on the type of company you own. Take a closer look at the top three appraisal methods for retail enterprises.
With a market-based valuation, your company’s earning potential in relation to market demand will determine its value approximation. The purpose of this valuation method is to deem a business’s fair market value using the going rate of competing companies and similar enterprises in the same market.
When using a market-based retail business valuation method, you must specify the goods and services your company offers. The method also includes an assessment of the business’s goodwill or the difference between what someone would pay to buy the business and its amount of net assets.
Prospective buyers using this method will investigate the actual and possible market for your goods and services. They will also evaluate your competitors to determine your business’s estimated size and growth within its respective market.
After analyzing your business’s market, the prospective buyer will compare your company’s performance to others in your market. Since market-based methods depend on comparing your retail business to others in the market, it’s not ideal if no other businesses of a comparable size offer similar goods and services.
An income-based retail business valuation process uses its future cash flow and a discount to create its current value. The discount represents the risk level that someone would take if they buy or invest in your retail business. For instance, young companies are high-risk and would need higher discount rates to establish their future cash flow estimates.
These are common terminology for income-based valuation processes:
- EBIT: Earnings before tax and interest
- EBITDA: Business’s earnings before tax and interest with depreciation and loan principal reduction
- After-Tax Profit: Division of profit after taxes using the revenue the company generates
- Pre-Tax Profit: Business’s earnings before taxes, representing a percentage of sales or revenue
With asset-based valuation processes, you’ll put a dollar value on your company’s assets and liabilities using this formula: Assets – Liabilities = Company Value.
To properly value your retail business, you must know who controls the assets, whether the assets are marketable, if your business is income- or asset-based, and any assumptions put on the business’s value. This type of retail business valuation can be difficult because you have to account for tangible and intangible assets and make them as precise as possible.
This option is most suitable for retail establishments with many tangible assets.
Valuation Metrics for Retail Ventures
One of the most common ways retail business owners determine their enterprises’ value is by applying multiples to assess market value ranges. A valuation multiple is a ratio that puts a business’s value against a financial metric like earnings, sales, or cash flow.
These multiples let prospective buyers easily compare values from sold businesses to new retail business sale listings. For instance, 2.54 is the average cash flow multiple for retail businesses, with nearly 70% of these enterprises falling in the one to three range. The average sales revenue multiple is 35% to 50% of the business’s gross annual revenue.
Common Business Appraisal Multiples
Dive deeper into the three common appraisal multiples for retail business valuations.
An SDE multiple compares a business owner’s discretionary earnings with the company’s implied value. It’s the most accurate way to estimate a retail business’s value.
Discretionary earnings or the total owner’s benefit refers to the cash a company generates annually that the owner can use after deducting funds for essential operation expenses. The average SDE multiple range is 2.51x to 3.19x. To produce the retail company’s implied value, you would apply the multiple to the current 12-month revenue generation period using the SDE X Multiple = Business Value calculation.
Let’s say your retail business generates $215,000 in discretionary earnings and transacts at a 2.82x multiple. The calculation and business value estimate would be $215,000 X 2.82x = $606,300.
The EBITDA multiple deals with a retail business’s return on investment. Since it helps normalize differences and show comparisons with similar companies, it’s a popular multiple among business appraisers.
The average EBITDA multiple range is 3.68 to 4.54x. The calculation is EBITDA X Multiple = Business Value.
Consider a business with an EBITDA of $125,000 and a multiple of 4.12x. The business’s estimated value would be $515,000 according to the formula.
The revenue or REV multiple refers to the total revenue the business generates. Business appraisers use this multiple to compare recently sold ventures that are closest to the business they’re valuing. Factors contributing to REV multiples are industry trends, product demands, business location, and competition.
A typical REV multiple range is 0.42x to 0.76x, and its formula is Revenue X Multiple = Business Value. For a business generating 885,000 in revenue with a REV multiple of 0.61x, its worth would be around $539,850.
Factors Impacting Retail Business Valuation
Despite the numerous formulas available to help assess retail business valuations, many factors can influence how multiples work. By understanding the factors that impact how prospective buyers view your retail establishment, you can implement different tactics to improve your business and how people perceive it before putting it up for sale.
Factors That Improve Price Multiple
These are common factors that can boost price multiples:
- Well-organized financials and operation details, including operating procedures and vendor policies
- Experienced employees willing to stay with the company after the sale
- Rent that’s at or below market value with reasonable lease terms
- Great location near anchor stores that draw substantial foot traffic
- Excellent customer retention rate
- Operation management focusing on top-tier growth strategies over daily operations
- Optimized inventory with a good turnover rate
Factors That Reduce Price Multiple
Unfortunately, some practices can drop a price multiple, making it harder for prospective buyers to find your retail business as an attractive, worthwhile purchase. They include:
- Employees who are new and unwilling to stay with the company under new ownership
- Complicated or non-existent operational details such as unreliable vendor relationships, complex bookkeeping, missing documents, and unwritten agreements
- Old inventory with a poor turnover rate
- Operations that focus primarily on day-to-day operations that yield a small impact instead of embracing practices that generate long-term business growth
- Above-market commercial rent or a lease with unfavorable terms
- Low customer retention
- Bad location with insufficient foot trafficking, requiring excessive marketing to gain attention from prospective customers
Additional Factors That Influence a Business Valuation
Below are other considerations for generating a detailed retail business valuation report:
- Does the business fund the purchase of shares through external loans, internal financing, or other options?
- What financial resources are available to buy shares?
- Do shareholders, the company, or a combination of both buy shares?
Other Processes and Tips To Aid the Valuation of Retail Businesses
Ideally, you should have a three-year minimum exit plan to turn your retail business over to a new owner. During that time, you can use these additional retail business valuation tips to understand your enterprise’s worth and yield a good price during its sale.
Evaluate All Financial Statements
Business valuation metrics depend on accurate financial information from your company. As such, you should start organizing and assessing your financial documents, like inventory reports and profit and loss statements, to determine your annual gross profits. Subtract business expenses like marketing and labor from your gross profits to learn your annual net earnings.
Generate an Asset Report
An asset report will outline your retail business’s tangible and intangible assets. Tangible assets include cash registers, inventory, and computer equipment. Your loyal customers and staff are intangible assets.
Conduct Market Research
To know where you stand in your market, you must perform market research on your competitors. Learn how many businesses in your service area are direct competitors. Visiting your competitors’ stores and assessing their online presence is helpful.
Consult a Qualified Retail Valuation Professional
Though you should have your financial statements and business operations in order before selling your retail venture, you should consult a third-party professional to help with retail business valuation. Brokerage firms and valuation experts can conduct vital research and assess your business’s financial standing to make a market analysis report and determine your business’s value.
Get the Professional Retail Business Valuation Help You Need Through Top Hat Business Brokers
Determining the value of a retail business is time-consuming and complicated, thanks to the involvement of many factors, steps, and data. Thankfully, you don’t have to do your retail business valuation alone; our team at Top Hat Business Brokers is here to help.
Our Top Hat Business Brokers crew includes experienced professionals with years of experience helping people buy and sell businesses. We also offer business consulting, business valuation reports, and business appraisal reports as part of our comprehensive services. Call our office in Sacramento, CA today to schedule a consultation.