How to Value a Clothing Store
The clothing retail industry faces fierce competition from online clothing stores. In addition, many clothing stores struggle to increase profits due to competitive pricing. Despite these conditions, this industry has experienced slight growth in recent years. IBIS World notes that there are over 38,000 clothing stores in the United States. Together, these stores generated over $6.2 billion dollars in profit. Moving forward, the clothing retail industry will benefit from increasing disposable income. This will likely lead to an increase in discretionary clothing purchases. As such, there is a lucrative opportunity for those looking to buy, grow, or sell a clothing store. Whether you are buying, expanding, or selling, it is vital to know how to value a clothing store.
By understanding how to value a clothing store, you can set your store apart from competitors. However, the valuation process can be complex. As such, it is important to receive a business valuation. During a business valuation, business appraisers use various valuation approaches to determine the value of a clothing store. This article discusses two valuation approaches that experts often use when valuing a clothing store.
However, this is only a guide. To learn which valuation methods are best for a clothing store you are buying or selling, receive a business valuation. Peak Business Valuation is a professional business appraiser. We work with clothing stores on a regular basis. Peak is happy to provide you with a business valuation for a clothing store. Any questions about how to value a clothing store are also welcome! Schedule a free consultation with Peak Business Valuation today!
How to Value a Clothing Store
Peak Business Valuation, business appraiser, often uses the market approach and/or the income approach to value a clothing store. There are various factors that determine which approach an appraiser uses. At Peak Business Valuation, our appraisers receive extensive training. They will use their knowledge and expertise to determine which method is best for your clothing store business valuation. In some cases, this may involve using a combination of valuation approaches.
Valuing a Clothing Store Using the Market Approach
The market approach is a common valuation method for valuing small businesses. This approach is similar to the approach real estate appraisers use to value a house. The real estate appraiser compares the home to similar properties that recently sold on the open market. This helps them determine a fair market value for the property. When using the market approach, the valuation expert compares your clothing store to similar stores that recently sold. If the clothing store is private, the expert relies on private transaction databases to gather accurate information.
The business appraiser then assesses risks, value drivers, and financial statements. This process helps the expert determine which valuation approaches and multiples are suitable for your clothing store. Finally, the business appraiser can determine the fair market value of a clothing store you are buying or selling. Below, we highlight common multiples that valuation experts use to value a clothing store.
Multiples for a Clothing Store
The market approach uses valuation multiples to estimate the fair market of a clothing store. Business appraisers use the proper NAICS or SIC code to determine which multiples are applicable to your clothing store. Below are basic multiples that are often used to determine the value of a clothing store.
REVENUE or SALES Multiple for a Clothing Store
- This multiple measures the total amount of revenue a clothing store generates. Business appraisers apply the multiple to the clothing store’s revenue to determine its fair market value.
EBITDA Multiple for a Clothing Store
- The EBITDA multiple helps clothing stores determine the expected return on investment (ROI).
SDE (Seller’s Discretionary Earnings) Multiple for a Clothing Store
- Business appraisers apply an SDE multiple to a clothing store’s seller’s discretionary earnings. This helps them estimate the fair market value of a clothing store.
Valuing a Clothing Store Using the Income Approach
In addition, valuation experts often use the income approach when valuing a clothing store. When using the income approach, the appraiser evaluates the risks associated with buying or selling a clothing store. Below, we list a few common risks to understand when you are looking at how to value a clothing store.
- Location: It is crucial for clothing stores to have a strategic location. The most successful clothing stores locate near key markets.
- Competition: The clothing retail industry is extremely competitive. As such, clothing stores need to differentiate from competitors to succeed.
- Supplier Relationships: It is important for clothing stores to have good supplier relationships. This can help reduce expenses and increase profitability.
- Pricing: The most successful clothing stores offer quality products for a competitive price. Strategic pricing is key to maximizing the value of a clothing store.
Methods to Value a Clothing Store Using the Income Approach
Under the income approach, there are two methods business appraisers often use to value a clothing store. First, is the capitalization of cash flow method. The second approach is the discounted cash flow method. In the following paragraphs, we discuss how each method helps an expert value a clothing store.
Capitalization of Cash Flow Method
- This method is most suitable for clothing stores with a long and stable history. When using the capitalization of cash flow method, valuation experts determine the economic income generated within a certain period of time. They then divide the income by an appropriate capitalization rate. The cap rate represents an accurate return that an investor can expect. The capitalization of cash flow method also considers risks associated with clothing stores. Some of these risks are mentioned above.
Discounted Cash Flow Method
- The discounted cash flow method is best for clothing stores with strong financial histories. It may also benefit clothing stores with reliable forecasts. When using the discounted cash flow method, experts project cash flows over a period of 3-5 years. Then, they discount these projected cash flows to their current value using a discount rate. This helps them determine the fair market value of a clothing store you are buying or selling. The discounted cash flow method is less common compared to other methods because it relies on future cash flow estimates which can vary.
Summary
Business appraisers may use the market approach and/or the income approach when valuing a clothing store. With these methods, they can help you understand the fair market value of a clothing store you are buying or selling. This can help you take the next steps in building a successful clothing store. To learn how to value a clothing store, obtain a business appraisal.
Peak Business Valuation, business appraiser, is here to assist! We are passionate about helping small businesses succeed. Peak works with many clothing stores throughout the nation. We can help you with a business valuation for a clothing store. In addition, we can answer any questions you have on the value of a clothing store. Schedule a free consultation with Peak to get started!
See also Valuing a Clothing Store, Value Drivers for a Clothing Store, and Valuation Multiples for a Clothing Store.
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