Valuing a small business is an inexact science -- rules of thumb give you only a general idea of what a retail store is worth. It's also an art. Real estate sources recommend ways of evaluating retail property that give dissimilar results and you must pick and choose among methods to arrive at a reasonable estimate.
Determine the annual EBITDA -- the store's earnings after expenses, but before deductions for interest, taxes, depreciation and amortization. While other factors may affect a store's value, a selling price based on a multiple of EBITDA is a good place to begin. Selling Stores, a realtor specializing in selling small businesses, determines an appropriate sales price by multiplying EBITDA by a factor ranging from 1.8 to 3.8, depending upon the type of store. This realtor finds that stores with relatively high mark-ups, such as liquor stores, are worth higher multiples of earnings than stores with low mark-ups or high labor costs, such as delis and beauty salons.
Find comparable sales in your area. The EBITDA evaluation is too crude an instrument to be sufficiently reliable on its own. The Simple Stores EBITDA evaluation, for example, produces values half those of another EBITDA store-value calculator provided by CNN. Each has prices that range widely, with high-end valuations approximately twice those of low-end valuations. A store that at the high end of the CNN valuation might be worth $1 million would be worth only $250,000 at the low end of the Selling Stores evaluation. An appraiser with business appraisal experience in the store's area can help you improve your EBITDA estimate by finding recent sales prices of similar businesses.
Adjust the EBITDA upward or downward in the light of the appraiser's comparables. Because every business has unique strengths and weaknesses, the appraiser's evaluation isn't 100 percent accurate any more than the EBITDA -- but an average of the two evaluations may come closer than either one independently.
Determine the trend. If sales are trending strongly upward over the past 24 months, that's good and suggests a higher evaluation; if sales are trending downward, that's a danger sign that suggests a lower price. Compare sales records with inventory records; they should be moving together. If the store's book-keeping is spotty and incomplete, that suggests that the owner can't afford adequate accounting services, or that his representations of sales and inventory may be deceptive or simply that the store isn't very well managed. A store with a clean accounting record, on the other hand, makes it easier to get an accurate idea of how well the store is doing.
When pricing the store's assets, distinguish between inventory and fixtures, which can't be easily sold and are only valuable if the store itself is profitable.
- When pricing the store's assets, distinguish between inventory and fixtures, which can't be easily sold and are only valuable if the store itself is profitable.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.