Valuation · Retail

How to value a retail store?

Wolfgang Strigel Partner at Vancouver Expert Coaches

March 12th, 2015

A friend of mine wants to sell her retail store and asked me for advice. I know pretty well how to value a high tech company but I don't know much about retail. So this is different from most discussions but maybe there is somebody out there to give me ideas.
The store was in business for 20 years. I have figures for gross sales, COGS, operation expenses and net income. There is also a significant inventory. I used DCF as one way to derive an estimate but would like a few more approaches to generate a reasonable range.
Can anybody help?

Vijay MD Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)

March 12th, 2015

A lot of small business is 2-3X EBITDA with some adjustments for whether its owner/ operator or financial investment only and a lot of adjustments for location, market, growth trajectory, "fun/ passion play", perks/ writeoffs, and financing.

Real world answer is generally that it's either small enough of a price for a normal SMB owner to buy or big enough for a financial or strategic entity to buy.  Anything in the middle can take a while to sell due to a smaller pool of viable buyers.  

Darryl D. Value Creation Specialist

March 12th, 2015

Vijay's reply is pretty accurate. There are many ways to value companies, but much fewer when it does less than 5mm in revenue a year. A multiple (2-3x) is applied to the Owner's Benefit value which is Net Income adding back Depreciation and Interest as well as all owner related expenses that will be eliminated under a new owner. There are minor variations on this approach, but this is a pretty generic start. There are discounts and premiums added for business specific details.

As with any purchase, the company is only worth someone is willing to pay for it. So finding a strategic buyer is your best bet followed by a financial buyer, and lastly all other types of buyers.

There are valuation tools out there (www.peakexits.com) and business listing sites (www.bizbuysell.com) that you will be able to source some comparable asking prices in your specific region.

Eric Wold

March 12th, 2015

As a rule, Vijay is right on. But this varies a lot by industry and the risk inherent in the type of inventory being carried. Strongly recommend a traditional business broker for a retail establishment. 
For what it's worth, I have been through the process of selling five companies. (Furniture, gazebo manufacturing, marketing 2x, and software)

Wolfgang Strigel Partner at Vancouver Expert Coaches

March 15th, 2015

Many thanks to Vijay, Darryl and Eric. This was valuable feedback since this is a somewhat uncharted territory for me. Vijay's was particularly succinct and on the mark and Darryl and Eric added a few useful hints.
Thanks guys.