How to Value a Grocery Store or Supermarket
The grocery and supermarket industry has retained steady demand for several years. An industry report on IBIS World notes that there are over 63,000 grocery stores and supermarkets throughout the country. Together, these businesses generate over $800 billion dollars per year. Moving forward, demand for grocery stores and supermarkets will likely increase. This is a result of increasing disposable income, growing health trends, and a rising population. As such, buying, expanding, or selling a grocery store or supermarket can be lucrative. However, operation costs in this industry can be high and competition is intense. To succeed, it is vital to understand how to value a grocery store or supermarket. This may help you take steps to maximize the value of a grocery store or supermarket.
To learn how to value a grocery store or supermarket, receive a business appraisal. During a business appraisal, a valuation analyst helps you identify the strengths and weaknesses of your grocery store or supermarket. It will also determine the fair market value of a grocery store. This is helpful whether you are buying, expanding, or selling a grocery store or supermarket. Peak Business Valuation, business appraiser, works with grocery stores and supermarkets on a regular basis. We are happy to provide you with a business appraisal for a grocery store or supermarket. In addition, Peak can answer any questions you may have about the value of a grocery store or supermarket. Schedule a free consultation with Peak Business Valuation today.
How to Value a Grocery Store or Supermarket
When valuing a grocery store or supermarket, Peak Business Valuation uses the market approach and/or the income approach. Business appraisers determine the best approach for valuing a grocery store or supermarket depending on various factors. Often, the valuation process involves using a combination of valuation methods.
Valuing a Grocery Store or Supermarket Using the Market Approach
The market approach is a common valuation method when valuing a grocery store or supermarket. To understand how this approach works, consider how a real estate appraiser values a property. Real estate appraisers compare similar properties that recently sold on the open market. This helps them estimate an accurate value of the property they are appraising. When using the market approach, business appraisers consider similar businesses that recently sold. If the grocery store or supermarket is private, the expert refers to private transaction databases. The business appraiser then analyzes financials and key value drivers to determine the value of a supermarket or grocery store.
Multiples for a Grocery Store or Supermarket
The market approach utilizes valuation multiples for a grocery store or supermarket. To determine the applicable valuation multiples, business appraisers apply the proper NAICS or SIC code. The following sections describe the basics of valuation multiples for a grocery store or supermarket.
REVENUE or SALES Multiples for a Grocery Store or Supermarket
- When using revenue or sales multiples, valuation analysts apply a multiple to the business’s revenue to estimate its value.
EBITDA Multiples for Grocery Stores or Supermarkets
- EBITDA multiples measure the return on investment (ROI) that a grocery store or supermarket can expect.
SDE (Seller’s Discretionary Earnings) Multiple for a Grocery Store or Supermarket
- SDE multiples are common when determining the value of a grocery store or supermarket. This multiple assesses a business’s cash flow by multiplying its SDE by the multiple.
To learn more about how to value a grocery store, read Valuation Multiples for Grocery Stores/Supermarkets.
Valuing a Grocery Store or Supermarket Using the Income Approach
The income approach is another popular method for valuing a grocery store or supermarket. This valuation method assesses the risks of the grocery store or supermarket. Below, we list a few common risks associated with buying or selling a grocery store or supermarket.
- Location: The location of a grocery store or supermarket has a significant effect on its value. It is crucial for grocery stores or supermarkets to locate near key markets.
- Workforce: Many grocery stores and supermarkets operate for long hours. As such, it is important to have a strong and flexible workforce.
- Inventory Control: Grocery stores and supermarkets provide a wide variety of edible and non edible products. As such, it is crucial for grocery stores and supermarkets to have effective inventory control.
- Competition: Competition in the grocery and supermarket industry is largely based on pricing. To succeed, it is important to be aware of competitor pricing.
Methods to Value a Grocery Store or Supermarket Using the Income Approach
When using the income approach, there are two common methods valuation experts may use. They are the capitalization of cash flow method and the discounted cash flow method. See the following paragraphs to learn more.
Capitalization of Cash Flow Method
- Often, business appraisers use the capitalization of cash flow method to value a grocery store or supermarket. This method is best for businesses that have long and stable histories. The capitalization of cash flow method estimates an appropriate measure of economic income for a certain period of time. This time period is then divided by a capitalization rate. The cap rate represents a reasonable rate of return an investor can expect. In addition, it assesses the risks that an investor may be exposed to when buying or selling a grocery store or supermarket.
Discounted Cash Flow Method
- The discounted cash flow method is best for grocery stores and supermarkets with strong financial histories or reliable forecasts. The discounted cash flow method uses 3-5 years of projections to determine the value of future cash flows. Then, the valuation expert discounts the future cash flows using a discount rate rather than a capitalization rate. This process allows them to determine the value of a grocery store or supermarket. Please note that this method is less reliable since it relies on future cash flows which can be inaccurate.
Summary
When determining the value of a grocery store or supermarket, business appraisers may use the market approach and/or the income approach. To know which approach is suitable for your grocery store or supermarket, receive a business appraisal. During a business appraisal, business appraisers help you understand how to value a grocery store or supermarket. This is beneficial whether you are buying, expanding, or selling a grocery store or supermarket.
Peak Business Valuation, business appraiser, works with many grocery stores and supermarkets throughout the country. We are happy to help you! Peak can use the market approach and/or the income approach during a business appraisal for a grocery store or supermarket. We can also answer any questions you may have about valuing a grocery store or supermarket. Get started today by scheduling a free consultation with Peak Business Valuation below!
See also Valuing a Grocery Store or Supermarket, Valuation Multiples for Grocery Stores/Supermarkets, and Value Drivers for a Grocery Store.
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