How to Value a Convenience Store
Convenience stores are businesses that sell food, beverage, and tobacco products in convenient locations. In recent years, the convenience store industry has experienced healthy revenue and profit growth. Moving forward, we can expect these metrics to continue growing at a steady rate. If you are looking to buy, grow, or sell a convenience store, now may be an ideal time to do so. However, small businesses face intense competition in this industry. IBIS World notes that over 80% of the convenience store industry is dominated by large players like 7-Eleven and Wawa. There are many factors to consider to make your convenience store stand out. One of the first steps is learning how to value a convenience store.
When learning how to value a convenience store, it is best to receive a business valuation. Peak Business Valuation is here to help! At Peak, we regularly help individuals who are buying or selling a convenience store. We are happy to provide you with a business valuation for a convenience store. As part of a business valuation, you will learn the fair market value of a convenience store. With this understanding, you can take the next steps in increasing the value of a convenience store. Schedule a free consultation with Peak Business Valuation below!
How to Value a Convenience Store
At Peak Business Valuation, analysts often use the market approach and/or the income approach to value a convenience store. The method the business appraiser uses is determined by various factors. Our business appraisers receive thorough training. As such, they will use their knowledge and expertise to determine the best method for your convenience store. In many cases, this involves using a combination of valuation approaches.
Valuing a Convenience Store Using the Market Approach
The market approach is common when valuing a small business. The best way to understand the market approach is to think about how a real estate appraiser values a property. Real estate appraisers compare similar properties that have recently sold on the market. This helps them accurately determine a fair market value of the property. When a business appraiser uses the market approach, they compare similar businesses that recently sold. For private companies, valuation analysts use private transaction databases to gather relevant information.
Multiples for a Convenience Store
When using the market approach, it is important to determine applicable multiples for a convenience store. To do so, business appraisers at Peak Business Valuation use the applicable NAICS or SIC code. Below, we discuss the basic market multiples for a convenience store.
REVENUE or SALES Multiple for a Convenience Store
- When using the revenue multiple, valuation analysts apply a multiple to the convenience store’s revenue to estimate its total value.
EBITDA Multiple for a Convenience Store
- The EBITDA multiple indicates the return on investment convenience stores can expect to make.
SDE (Seller’s Discretionary Earnings) Multiple for a Convenience Store
- The SDE multiple assesses a convenience store’s cash flow by multiplying its seller’s discretionary earnings by the multiple. This is a common method to determine the fair market value of a convenience store.
Often, valuation experts choose each method and multiple depending on the business transaction and reason for the business appraisal. To learn more, see Valuation Multiples for a Convenience Store.
Valuing a Convenience Store Using the Income Approach
Another common method to value a convenience store is the income approach. The income approach assesses any risks associated with buying or selling a convenience store. Below, we discuss a few common risks in the convenience store industry.
- Location: The location of a convenience store is a major risk factor. It is imperative for convenience stores to be located in visible, high-traffic, and accessible areas.
- Stock Control: It is important for convenience stores to have good stock control. This has a significant impact on the profitability of a convenience store.
- Competition: Small convenience stores face extreme competition from large players. As such, it is crucial to differentiate your convenience store from competitors.
- Financial Strength: To succeed in the convenience store industry, effective financial planning is essential. This involves reducing expenses to maximize profits. When valuing a convenience store, a business appraiser will analyze the financial statements.
Methods to Value a Convenience Store Using the Income Approach
Under the income approach, there are two common valuation methods use when knowing how to value a convenience store. The first approach is the capitalization of cash flow method, and the second is the discounted cash flow method. The following paragraphs detail these valuation methods.
Capitalization of Cash Flow Method
- Peak Business Valuation commonly uses the capitalization of cash flow method to value a convenience store. The capitalization of cash flow method is best for convenience stores with long and stable histories. Here, the valuation expert determines an appropriate amount of economic income for one period of time. This period is then divided by a proper capitalization rate. The capitalization rate represents a reasonable rate of return that a buyer can expect. In addition, this method analyzes the risks that may prevent the buyer from meeting expected earnings.
Discounted Cash Flow Method
- The discounted cash flow method uses 3-5 years of projections to determine the value of future cash flows. The business appraiser then discounts the future cash flow using a discount rate rather than a capitalization rate. This method is most suitable for convenience stores with strong financial histories as well as those with reliable forecasts. The discounted cash flow method is less reliable because it is limited to future cash flow estimates which can be inaccurate. However, the business appraiser will use their expertise to determine which method is best when valuing a convenience store.
Summary
There are various valuation approaches business appraisers may consider when deciding how to value a business. When valuing a convenience store, they will use the market approach and/or the income approach. These methods are instrumental in determining the fair market value of a convenience store. Knowing the value of a convenience store is crucial whether you are buying, growing, or selling a convenience store. By understanding the value of a convenience store, you can begin to build a successful convenience store. The first step is to receive a business valuation for a convenience store.
Peak Business Valuation is a professional business appraiser. At Peak, we work with many convenience stores throughout the nation and can provide you with a business valuation for a convenience store. We can also answer any questions you may have about how to value a convenience store. Schedule a free consultation with Peak Business Valuation today!
For more information, read Valuing a Convenience Store, Value Drivers for a Convenience Store, and Valuation Multiples for a Convenience Store.
