Ive heard a few diff ways of evaluating an existing retail business. Do you:
2 yrs net sales + assets
4 yrs net sales
5 yrs net sales.
Own or rent comes in to on top of just the bldg equity.
Thanks
D
Most banks seem to care about the last 2 years. It’s tricky today though as many small businesses have either tanked or have an unsteady last several years (aka since 2008/9). I’m not quite sure what your last item is asking.
edit: plus liquid assets
Like is a business considered more valuable if you own the business on top of the equity you have in the building. Like no worry of ever being evicted
In for fundamentals & accounting info.
Not really. Separate “businesses”. The retail business would never own the building it operates from for multiple reasons, primarily liability. Even when evaluating/valuing a business, rental expense would be imputed.
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I’m not a huge fan of any of the listed valuation multipliers. Too many variables. If you’re serious about buying, I would sign a non-dislosure agreement with the seller and get past 5 years financials and YTD for 2013 and start there. Any experienced accountant/firm will be able to help you run a rough valuation/projection for buying as well as help you ask the questions that need to be asked and scrub their records to make sure they’re not bullshit.
I’m also interested in this for my own reasons.
Say a business is making 500K per year. The current owner is 100K slary plus a 400K bonus at the end of the year. Previous year was 100K salary and 300K bonus. Lets average this as +450K per year. What would the business be valued at?
Value + assests + propertry if there is any.
There’s not nearly enough information to even ballpark any of these examples. I know that’s a shitty answer but there are just too many variables.
What is this $500k business with 100 salary 400 bonus and no expenses? I want to hear more
Agreed.
I’ve been in accounting/finance for 10+ years now. There are too many variables to use a simple calculation, first off what type of retail is this? Sales volume matters but if its clothing/similar you will see higher volumes of low value stock vs. a jewelry/high-end retailer will have much lower sales volumes, but higher margins. You also have to look at the intangibles assets of the business and determine what those are worth (i.e. branding, customer relationships, etc.) Owning the building doesn’t play too much of a role but more the location of where it is, prime location? If not, owning may hurt them as they can’t as easily move with just renting.
And just know that past successes/high sales volumes are no guarantee of future profits.
Don’t forget market analysis, brand reputation, sales/cost trends, existing contracts, etc.
Buying an existing company is very complex and every situation needs to be looked at differently.
Don’t we have enough Tim Horton’s around here yet?
“Tow chickens in every pot, and a Tim Hortons in every driveway!”
I know a guy who owns 8 Tim Hortons, I could ak him. 
Just to clear the air, im not buying a business lol
What I see on the industrial side is 3-5 years EBITA (Earnings Before Interest, Taxes and Amortization expenses) plus assets.
I wouldn’t say I would AK anyone online, now the drones are headed for your neck o’ the woods. 
8? Is it the gent that owns the horse rescue?
I’m saying its a small business. They make 500K per year so what the owner does is pays himself a 100K salary then bonuses any addition profit to himself. So this ~500K is after all expenses taxes blah blah. There are a few standing contracts that would come with the business that generate much of the profits. These contacts are good for the next 5 years.
The business will come with the building its in, but under a completely different business for liability reasons.
Lets ignore any stock or assists that come with the business and assuming there is say $300K in goods.
For many small businesses, a rough multiple of 3-1/2 to 4 times gross annual earnings may come close to their market worth, according to Michael Dougherty, a business broker with VIP-Lodge McKee Realtors in Naples, Fla. That means that if your store made $100,000 last year, it might go to market at between $350,000 and $400,000.
But not necessarily.
“If somebody is making an investment, they’re usually looking at a multiple of earnings based on a passive investment,” says Dougherty. “If the owner manages the store, the new owner would be looking to hire a manager at $35,000 a year, so that $100,000 suddenly becomes $65,000. So the business is worth 3-1/2 to 4 times that value.”
According to Robb, the multiple can, and should, adjust from business to business.
“The multiple of earnings varies according to many aspects, including the company’s history, the industry, market, management, potential, proprietary products, niche, growth rate and size,” he explains. “The multiple also depends on the buyer’s desired rate of return. For example, a 5 multiple represents a 20 percent ROI while a 4 multiple represents a 25 percent ROI.” In other words, it would take the buyers five years to recoup a 5-multiple investment, four years for a 4-multiple investment, and so on.
So according to this, assuming you’ll manage the business or hire someone at 100K, averaging 375K in profits you could expect the business to be worth 1.3-1.5 million?
Dammit, beat me to it. I had brain fade and could not remember that acronym.
two things to consider…
- what is fair market value of the business based on at least 3 years of financials and other relevant info…
- what impact can you have on the businesses performance (can you increase it, can it increase your existing related businesses)
3-5 multipliers are pretty common. as an example, Boyd is offering 3x earnings to most independent body shops across North America right now… not a lot are biting though 
one of the problems when buying a small business is that the operator seeks wealth maximization as opposed to keeping the value of the business highest. i’ve been involved in a number of potential transactions where the owners are over-burdening the books to finance their desired lifestyle only to be super-surprised when they go to sell and the business is worthless on paper. they have to spend a couple years repairing their income statement and balance sheets to attract a buyer.
you can still buy the over-burdened businesses but it will take stronger due diligence and hopefully you’ll get a better (lower) multiple if you properly adjust the add-backs but in these cases you’re usually facing an emotionally driven asking price instead of a market-driven asking price.
post up full details and a couple of us can go at it here on a valuation… that would be fun actually
i spent all day today in meetings on a large acquisition so this is all top of mind.