How To Value a Retail Business: 11 Key Tips

You put your all into growing your retail business. It’s only natural that you might wonder how much it’s worth at any point in your journey. You might wish to sell, lure investors, or simply understand your current position in the marketplace.

Whatever the reason, arming yourself with this knowledge will work in your favor. We’ve put together a primer on what you need to know to approach retail business valuation smartly to align with your long-term goals.

What is a business valuation?

Business valuation is how you come to determine your enterprise’s fair market value. This value most often takes into account a number of factors, including assets and potential future earnings. This number tells you what a prospective buyer might be willing to compensate a business owner, all things considered.

Why is a business valuation important?

Embarking on a business valuation journey can lead to many positive outcomes. It’s important to think beyond the context of selling, though that’s one scenario that often comes to mind when you mention these methods. Other reasons to invest your time and energy into this process include:

Estate Planning

You might be thinking about leaving the business to an heir after you retire or pass away. Completing business succession planning long before your last day or death can make it straightforward when the time comes to transfer ownership to your relative or another party. Getting your ducks in a row will help all parties involved make a smooth transition.

Strategic Planning

Sometimes retail business owners conduct a valuation when they intend to own it for the foreseeable future. Getting an idea of your current value can inform the next steps in your business’ growth strategy so you can act in good faith. For example, this discovery process can help you better meet the needs of your market with fair pricing, marketing strategies, and product mix.

Consider the hypothetical example of a local bakery. The owner started with one location but quickly built a loyal following due to its commitment to quality, consistency, and customer service. Expansion seemed within reach. They set up shop in a nearby town to expand their reach. The popularity of online food delivery platforms meant they could make their pastries and cakes available for online purchase. All of these moves helped them unlock the next stage of growth and reinforced their reputation.

Benchmarking

Data can be a powerful tool in helping you get on the path to a leaner operation. Looking at other businesses’ finances—even from a 30,000-foot view—can help you determine where to invest your time and resources to get ahead of the competition.

The Basics of Business Valuation

Valuing a business can look different for each industry, business, and business owner. However, you might find the most success by combining concepts from several business valuation methods. With that in mind, you should keep a watchful eye on these important markers:

Financial Performance

Financial statements capture key performance indicators and show where you’ve been, where you stand, and where you’re headed. In reviewing them you can get a real-time view of progress and potential.

Market Conditions

No business operates in a vacuum. The reality is that it exists in a broader context and external factors can and do contribute to its success or failure. For example, industry trends, the broader economy, and even how well your competition is doing can impact the valuation.

Intangible Assets

You likely have industry and business-specific knowledge that can’t be distilled into a manual. These assets are still business assets, even if they’re not tangible assets. This is an advantage that can be challenging to quantify, though experts have ways to do so. Similarly, a flawless reputation and a book of business with loyal clientele can help your cause.

Location and Physical Assets

Every brick-and-mortar retail business has a storefront. Your physical location and capital investment will inform the valuation. A business in a bustling neighborhood made up of residents with expendable income will be favored over one in a dying district lacking economic opportunity and poor cash flow. Similarly, forward-thinking retail business owners know they need to allocate funds for equipment upgrades for efficiency and profitability’s sake.

Methods for Valuing Retail Businesses

You have a few choices for retail business valuation. Here’s a look at the basics, how to perform the calculations, and what you need to know about each.

Market-Based Methods

These methods use data pertaining to the sale of comparable companies based on their present value at the time of sale.

Income-Based Methods

These methods are prospective in that they’re concerned with future earning potential.

EBIT (Earnings Before Interest and Taxes)

You can use this method to capture operating profitability before adjusting for financing and tax liabilities.

Calculation:

EBIT = Revenue − COGS − Operating Expenses

Or:

EBIT = Net Income + Interest + Taxes

Where:

COGS = Cost of goods sold

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

This one follows a similar approach to EBIT, however non-cash factors like depreciation and amortization don’t enter the equation. EBITDA can be the best choice for companies that have sizable investments like real estate and equipment.

Calculation:

EBITDA

=

Net Income

+

Interest

+

Taxes

+

Depreciation

+

Amortization

EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization

Pre-Tax Profit (Profit Before Tax)

This metric shows a company’s profitability before factoring in income taxes.

Calculation:

Profit Before Tax = Revenue – Expenses (Exclusive of the Tax Expense)

After-Tax Profit (Net Income)

You can use this one to calculate profit after all obligations have been met.

Calculation:

After-Tax Income = Gross Income – Taxes

Asset-Based Methods

Experts rely on these methods to arrive at a range based on the fair market value of its assets.

Market Capitalization

This calculation only applies to publicly traded companies and represents the total market value of all outstanding shares.

Calculation:

Market Cap

=

Share Price

×

Number of Outstanding Shares

Market Cap=Share Price×Number of Outstanding Shares

Times Revenue Method

This method values an entity based on its annual revenue. You can come to a number by multiplying the total revenue by a specific predetermined multiple.

Calculation:

Business Value = Revenue x Multiple

Earnings Multiplier

This calculation emphasizes earnings as opposed to revenue. You multiply the company’s earnings (often net income or EBITDA) by a specific multiplier based on the recent sales of similar companies.

Calculation:

Business Value = Earnings x Multiplier

Discounted Cash Flow (DCF)

Experts leverage this method to approximate an entity’s future cash flows, risk included. DCF is more involved than other methods and often the domain of professional business appraisers.

Calculation:

DCF = CF1 ÷ (1 + r)2 + CF2 ÷ (1 + r)2 + CF3 (1 + r)2 + CFn (1 + r)2

where:

CF1 = The cash flow for year one

CF2 = The cash flow for year two

CF3 = The cash flow for year three

CFn = The cash flow for additional years

Book Value

This method presents the net value of a company’s assets minus liabilities. It’s important to understand that book value on a balance sheet might not indicate the true market value of tangibles like real estate or inventory.

Calculation:

Book Value

=

Total Assets

−

Total Liabilities

Book Value=Total Assets−Total Liabilities

Liquidation Value

This one reflects a specific scenario. It captures the business value if its assets are liquidated separately. This method is especially relevant to organizations facing a shutdown.

It might take some time and energy to determine the best valuation method for your situation. You should consult with a financial expert, like a tax professional or attorney, for more in-depth guidance. Often, using a combination of methods best serves your interests. Going about it the right way from the outset will save you from undue frustration and help you get the highest asking price when you work with an appraiser and sell your business.

Calculation:

Liquidation Value

=

Sale of Assets

−

Liabilities

Liquidation Value=Sale of Assets−Liabilities

Get Started With Podium’s Valuation Calculator

Whatever your reason for going down the road of retail business valuation, it pays off to be proactive. You can do your part to maintain your retail business’ value by taking one or more of these actions:

Prepare, Prepare, Prepare

Highly effective small business owners have systems in place that help them stay organized. Do your best to maintain detailed records so that when the time comes you have a lot of the hard work behind you.

Retain Quality People

A roster of great staff can shape business value. Professional, friendly, and hardworking people make a good first impression and can make or break the retail experience. A retail business with a strong team will be more attractive than one struggling to keep good people.

Modernize Your Operation

Purchasing new equipment or technology is an investment in the future of your retail establishment. It also tells potential buyers that you’re serious about growth and optimistic about its potential. Both can work to your advantage in a selling setting.

Podium’s Business Calculator can help you come to a more accurate number when setting out to determine your retail business’ value. It’s a tool that can help you greatly in the context of your retail business valuation.

How does it work?

Podium’s Business Calculator uses inputs like financial statements, industry benchmarks, and market trends to capture your retail business’ health and come up with a reasonable valuation.

What does it take into account?

A business’ value (and its valuation) is dynamic. That said, Podium’s valuation uses revenue, profit margins, cash flows, and industry-specific parameters to generate a clear number if you want to sell your business. You won’t have to wonder where you stand at any point in time because you have the advantage of this calculator.

How reliable is it?

You can trust Podium’s Business Valuation Calculator because it’s powered by advanced algorithms and the most current market data. However, this tool has its limits and should be used as a starting point.

It’s best to consult a financial expert if you’re looking to make a strategic move soon. A professional business appraiser has the knowledge and experience to produce an accurate and reliable valuation. They know which method will work to your advantage and help you avoid common pitfalls in the negotiation process.

Also, be advised that this number captures a single point in time. It can change based on the factors we described above. Be sure to repeat the calculation when it makes sense for you and your situation. A business broker would likely agree that you should aim to recalculate your business’s present value on an annual basis.

Wherever your valuation journey takes you, we wish you all the luck.