How to Value a Dry Cleaning Business
The dry cleaning industry has struggled over the past several years. This is due to various factors such as growing competition and a shift in work attire expectations. As a result, the dry cleaning industry has seen a decline in revenue and profit margins. However, IBIS World predicts a slight recovery in the coming years. This is good news if you are looking to buy, grow, or sell a dry cleaning business. To succeed in the dry cleaning industry, it is beneficial to understand how to value a dry cleaning business.
The best way to learn how to value a dry cleaning business is to receive a business appraisal. When valuing a dry cleaning business, a business appraiser looks at the risks and opportunities for a dry cleaning business. In addition, they will help you understand the fair market value of a dry cleaning business. This information can help you take the next steps in maximizing the value of a dry cleaning business.
Peak Business Valuation is a professional business appraiser. At Peak, we work with dry cleaning businesses on a regular basis. We are happy to provide you with a business appraisal for a dry cleaning business you are buying or selling! Additionally, Peak can discuss any inquiries on how to value a dry cleaning business. Start now by scheduling a free consultation with Peak Business Valuation, business appraiser.
How to Value a Dry Cleaning Business
There are several valuation methods a business appraiser may consider when determining how to value a dry cleaning business. At Peak Business Valuation, our experts typically rely on the market approach and/or the income approach. However, the business appraiser will determine which method is best as part of the valuation process. This can include using a combination of valuation approaches.
Valuing a Dry Cleaning Business Using the Market Approach
The market approach is popular for calculating the value of a dry cleaning business. This method is similar to the real estate appraisal process. Real estate appraisers assess value by looking at similar properties that recently sold in the area. When using the market approach, a business appraiser compares similar businesses that recently sold on the market. If the dry cleaning business is private, the analyst gathers information from private transaction databases.
Multiples for a Dry Cleaning Business
When using the market approach, business appraisers use valuation multiples. Valuation multiples are ratios that reflect the value of a business based on financial metrics. These metrics often include cash flow, revenue, or earnings. To find the proper valuation multiples for a dry cleaning business, valuation experts use the appropriate NAICS or SIC code. Below, we discuss the basics of valuation multiples for a dry cleaning business.
SDE (Seller’s Discretionary Earnings) Multiple for a Dry Cleaning Business
- The SDE multiple is common in business valuation. This multiple assesses the value of a dry cleaning business in relation to its seller’s discretionary earnings.
EBITDA Multiple for a Dry Cleaning Business
- EBITDA multiples measure a dry cleaning business’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a dry cleaning business can expect to generate.
REVENUE or SALES Multiple for a Dry Cleaning Business
- The REVENUE or SALES multiple measures a dry cleaning business’s value based on the total amount of revenue it generates. This multiple is less common when valuing a dry cleaning business.
To learn more about how to value a dry cleaning business using multiples, see Valuation Multiples for Dry Cleaning.
Valuing a Dry Cleaning Business Using the Income Approach
Another popular valuation method for dry cleaning businesses is the income approach. This valuation method assesses the cash flow potential of a dry cleaning business. In addition, the income approach analyzes the risks associated with the business. Below, we highlight a few common risks that may prevent dry cleaning businesses from meeting expected earnings.
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- Competition: The dry cleaning industry is extremely competitive. To succeed, operators must find ways to differentiate from other dry cleaners.
- Products and Equipment: Dry cleaning businesses use a variety of dry cleaning products and equipment. Operators need to use high-quality products and equipment to build a positive reputation.
- Financial Performance: Many dry cleaning businesses struggle to increase revenue and profit. As such, dry cleaning businesses must have strong financial planning and budgeting.
- Economic Conditions: Economic conditions have a significant impact on the dry cleaning industry. It is vital for dry cleaning businesses to prepare for economic downturns as many struggled in the past.
Methods to Value a Dry Cleaning Business Using the Income Approach
There are several variations of the income approach. Two popular income approaches are the capitalization of cash flow method and the discounted cash flow method. Each method assesses the future cash flow potential of a dry cleaning business. Below, we discuss how to value a dry cleaning business using the capitalization of cash flow method and the discounted cash flow method.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is typically used when valuing dry cleaning businesses with long and stable histories. When using this valuation approach, business appraisers determine an appropriate amount of cash flow for a certain period. The valuation expert then applies a capitalization rate to the cash flows. This capitalization rate represents an appropriate rate of return an investor can expect from the dry cleaning business. The capitalization rate also assesses the risks an investor may encounter.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for dry cleaning businesses with strong financial histories and/or reliable forecasts. This method involves projecting future cash flows over 3-5 years. Then, the business appraiser applies a discount rate to the cash flows rather than a capitalization rate. This process values a dry cleaning business by taking the time value of money into consideration. However, the discounted cash flow method is less common since it relies on future cash flow methods which can be arbitrary.
Summary
There are several valuation approaches to consider when valuing a dry cleaning business. Each valuation method provides a different perspective on the value of a dry cleaning business. To understand which valuation approach is best for your dry cleaning business, receive a business appraisal. As part of a business appraisal, you will learn the fair market value of a dry cleaning business. In addition, the valuation expert can help you understand the strengths and weaknesses of a dry cleaning business you are buying or selling.
Peak Business Valuation, business appraiser, works with many dry cleaning businesses throughout the country. We are happy to provide you with a business valuation for a dry cleaning business. Peak can also discuss any questions you may have on how to value a dry cleaning business. Schedule a free consultation with Peak Business Valuation today to get started!
For more information see Valuing a Dry Cleaning Business, Valuation Multiples for Dry Cleaning, and Value Drivers for a Dry Cleaning Business.
