How to Value a Retail Trade Business
In recent years, the retail trade industry has generated over $8 trillion dollars with growing profit margins. According to IBIS World, this upward trend will continue for the next several years. As such, there is a high revenue and profit growth opportunity for those looking to buy, grow, or sell a retail trade business. However, this industry is highly saturated with intense competition. In order to succeed, it is important to learn how to value a retail trade business. Doing so allows you to differentiate from competitors and maximize the value of a retail trade business.
Valuing a retail trade business can be a complex process. As such, it is best to receive a business valuation for a retail trade business. Typically, there are two approaches a business appraiser uses to value a retail trade business. In this article, we discuss valuing a retail trade business. Peak Business Valuation, business appraiser, values retail trade business businesses across the nation. We are happy to answer any questions you may have about valuing a retail trade business! Start today by scheduling a free consultation with Peak Business Valuation!
How to Value a Retail Trade Business
During a business valuation with Peak Business Valuation, an appraiser often uses the market approach and/or the income approach. Business appraisers at Peak receive extensive training. As such, they will determine which methods are best for valuing a retail trade business. The business appraiser may use various valuation methods depending on the purpose of the business appraisal.
Valuing a Retail Trade Business Using the Market Approach
The first approach an expert may use to value a retail trade business is the market approach. Valuing a retail trade business with the market approach is similar to how a real estate appraiser values a house. The real estate appraiser compares the property to similar properties that were recently sold. Doing so helps the real estate appraiser determine a fair market value for the property.
When a valuation expert uses the market approach to value a retail trade business, they compare the retail trade business to similar businesses that recently sold on the market. If the retail trade is a private business, the business appraiser uses private transaction databases. As part of the valuation process, the appraiser assesses the financial statements, key value drivers, and risks. This helps the business appraiser determine appropriate multiples for the retail trade business. By taking these steps, the business appraiser can accurately determine the value of a retail trade business. In the following paragraph, we describe the multiples a business appraiser uses.
Multiples for a Retail Trade Business
To determine the appropriate multiples for a retail trade business, Peak Business Valuation uses the NAICS code or the SIC code that is applicable. Business appraisers use multiples to value a retail trade business under the market approach method. Below we discuss the basic multiples for a retail trade business.
REVENUE or SALES Multiple For a Retail Trade Business
- When using a revenue or sales multiple, the valuation expert applies a multiple to the business’s revenue to estimate its total value.
EBITDA Multiple for a Retail Trade Business
- Retail trade businesses can measure the expected return on investment by using an EBITDA multiple.
SDE (Seller’s Discretionary Earnings) Multiple for Retail Trade Business
- The SDE multiple is a popular method that assesses a company’s cash flow. By multiplying a retail trade’s SDE by the multiple, a business appraiser can determine its fair market value.
The multiple or multiples used by the business appraiser depends on various factors. For more specific information, receive a business valuation with Peak! If you have any questions about how to value a retail trade business, schedule a free consultation today with Peak Business Valuation, business appraiser.
Valuing a Retail Trade Business Using the Income Approach
The income approach is another common method to value a retail trade business. This method is best for an established and profitable business. This method assesses the risks of the retail trade business. Below, we list several common risks associated with buying, growing, or selling a retail trade business.
- Competition Risk: The retail trade industry is extremely competitive. When valuing a retail trade, the business appraiser considers what makes your business stand out from competitors.
- Location: The location of a retail trade business plays a crucial role in its success. With a good location, retail trade businesses can increase sales revenue.
- Economic and Industry Future Outlook: Growth in the retail trade industry is affected by the state of the economy. The business appraiser may consider the future outlook for the economy and the retail trade industry.
- Supplier Relationships: The most successful retail trade businesses have strong supplier relationships. As part of a business valuation, an expert may consider your supplier relationships.
Methods to Value a Retail Trade Business Using the Income Approach
There are two common methods under the income approach used to value a retail trade business. See the following paragraphs to learn about how to value a retail trade business using the capitalization of cash flow and discounted cash flow methods.
Capitalization of Cash Flow Method
- This method is often used when the retail trade business has a long history. As part of the capitalization of cash flow method, the appraiser estimates an appropriate measure of economic income for one period. This period is then divided by an appropriate cap rate. The capitalization rate represents a reasonable rate of return an investor can expect. It also assesses any risks that may stand in the way of achieving your earnings. See above risks.
Discounted Cash Flow Method
- The discounted cash flow method is used to determine the value of future cash flows. To do so, the valuation expert uses 3-5 years of projections. Then, the valuation analyst discounts the future cash flows to present value using a discount rate. Keep in mind the discounted cash flow method is best for businesses with strong financial histories. Companies that have built reliable forecasts may also benefit from using this method. However, this valuation method is less reliable since it is limited to future cash flow estimates which can be arbitrary.
Summary
During a business valuation for a retail trade business, an appraiser may use the market approach and/or the income approach. These methods help determine the fair market value of a retail trade business. With this information, you can take the next steps in maximizing the value of a retail trade business.
When learning how to value a retail trade business, it is best to receive a business appraisal. Peak Business Valuation is happy to help! We can provide you with a business valuation for a retail trade business. In addition, we are happy to answer questions about valuing a retail trade business. Schedule a free consultation with Peak Business Valuation, business appraiser, today!
See also Valuing a Retail Trade Business, Value Drivers for Retail Trade, and Valuation Multiples for a Retail Trade Business.
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