How to Value a Bakery
Bakeries produce flour-based food such as bread, cakes, pies, pastries, etc… In recent years, the bakery industry has seen steady revenue growth, generating over $17 billion dollars. According to IBIS World, the industry will experience further growth as consumer spending rises. This is ideal if you are looking to buy, grow, or sell a bakery. However, it is important to note that the bakery industry is very fragmented and competitive. Operators can combat this by learning how to value a bakery.
The best way to learn how to value a bakery is to obtain a business valuation. During a business valuation, a business appraiser determines the fair market value of a bakery. In addition, valuation experts can discuss the risks and opportunities of a bakery you are buying or selling.
Peak Business Valuation is a professional business appraiser. As such, we value bakeries on a regular basis. We are happy to provide you with a business valuation for a bakery. Additionally, Peak can discuss any inquiries you may have on how to value a bakery. Schedule a free consultation with Peak today by clicking the following link!
How to Value a Bakery
There are several valuation methods for valuing a bakery. Often, business appraisers rely on the market approach and/or the income approach. Both approaches are effective, however, each provides a different perspective on the value of a bakery. As such, a valuation expert will determine the best approach during a business valuation for a bakery. This may include using a combination of valuation methods.
Valuing a Bakery Using the Market Approach
The market approach is very common when valuing a bakery. This approach is similar to the real estate valuation process. When valuing a house, real estate appraisers assess similar properties that recently sold in the area. This helps them understand a fair market value for a house. When valuing a bakery with the market approach, a business appraiser looks at similar businesses that recently sold on the market. If the bakery is private, experts refer to private transaction databases to gather relevant information.
Multiples for a Bakery
When using the market approach to value a bakery, valuation analysts work with valuation multiples. These are financial ratios that measure the value of a bakery in relation to various financial metrics. Some common metrics are earnings, cash flow, and sales. To determine the valuation multiples for a bakery, business appraisers apply the proper NAICS or SIC code. We discuss basic valuation multiples for a bakery below.
SDE (Seller’s Discretionary Earnings) Multiples for a Bakery
- The SDE multiple measures the value of a bakery based on its seller’s discretionary earnings. This is a common valuation multiple for valuing a bakery.
EBITDA Multiples for a Bakery
- EBITDA multiples reflect a bakery’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a bakery can expect.
REVENUE or SALES Multiples for a Bakery
- REVENUE or SALES multiples measure a bakery’s value in relation to the total amount of sales it generates.
To learn more on how to value a bakery using the market approach, see Valuation Multiples for a Bakery.
Valuing a Bakery Using the Income Approach
Another common business valuation approach is the income approach. This valuation method assesses the income potential of a bakery. Additionally, the income approach considers the risks associated with buying, expanding, or selling a bakery. We highlight a few common risks below.
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- Competition: The bakery industry is fragmented and competitive. To succeed, a bakery needs to differentiate from competitors.
- Financial Performance: It can be difficult to increase revenue and profitability at a bakery. As such, operators should assess financials and budgets.
- Strong Management: It is vital for a bakery to have a strong management team. This helps maximize efficiency and reduce risks.
- Location: The location of a bakery plays a crucial role in its success. It is best for bakeries to locate near key markets such as high-income areas.
Methods to Value a Bakery Using the Income Approach
There are various ways to use the income approach to value a bakery. The most common income methods are the capitalization of cash flow method and the discounted cash flow method. Both of these approaches consider a bakery’s earning potential. Below, we discuss how to value a bakery using the capitalization of cash flow method and/or the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is best if your bakery has a long and stable history. When using this income approach, business appraisers determine a reasonable amount of earnings for one period. Then, the earnings are divided by a capitalization rate which indicates the rate of return investors can expect. The capitalization of cash flow method also assesses the risks of a bakery. We discuss some common risks for bakeries above.
Discounted Cash Flow Method
The discounted cash flow method is best for bakeries with strong financial histories and/or predictable forecasts. With this income approach, valuation analysts project future cash flows over a 3-5-year period. Then, instead of using a cap rate, valuation experts apply a discount rate to the earnings. This process measures the value of a bakery by taking the time value of money into account. Keep in mind, the discounted cash flow method is less common since it is limited to future earning estimates which can be subjective.
Summary
Whether you are looking to buy, grow, or sell a bakery, it is helpful to understand how to value a bakery. There are several common methods for valuing a bakery. To learn which approach is best for your bakery, obtain a business valuation. During a business valuation, you will learn the fair market value of a bakery as well as the associated risks and opportunities. This information is important if you want to maximize the value of a bakery.
Peak Business Valuation, business appraiser, is happy to help! We value bakeries on a regular basis. As such, we are happy to provide you with a business valuation for a bakery. Additionally, Peak can answer any questions you may have on valuing a bakery. We also perform bakery equipment appraisals. Schedule a free consultation with Peak today by clicking the link below!
For more information see Valuing a Bakery, Valuation Multiples for a Bakery, and Value Drivers for a Bakery.
