If you are considering buying or selling a retail business, it is important that you be able to properly valuate the business. Being able to properly valuate the business will give you an idea of what is a fair market price for the business and will influence the price to buy or sell the business. There are a variety of different methods for evaluating businesses. Generally, asset-based valuation is the most appropriate method for evaluating a retail business, because retail businesses are characterised by their asset-intensiveness. Performing an asset-based valuation is a simple process if you follow a few basic steps.
Calculate the fair market value of the business' fixed assets and equipment. Fixed assets may include the store (if it is owned, not leased) and any other permanent assets. It does not include inventory. Equipment in a retail business is generally quite limited, but would include items such as cash registers and computers. The fair market value is the price that these items would fetch on the open market in their present condition. Add the total for all the fixed assets and equipment and write down the figure.
Calculate the value of all leasehold improvements. Leasehold improvements are all of the improvements that have been made to convert an empty store into a retail business. This can include interior renovations, electrical work and decorating, among other things. Write down the total value of all leasehold improvements.
Add up the value of all inventory including raw materials, work in process and finished goods. This will give you the total value of all the retail inventory. For a retail business, this can be a significant portion of the business' value.Write down this value.
Add up the value of fixed assets and equipment, leaseholder improvements and inventory. Write down this figure. This figure is the total value of the company's assets.
Subtract all of the business's liabilities from its assets. Liabilities may include unpaid accounts payable, wages payable, loans and any other forms of debt that the business owns. Write down the resulting figure. This figure is the assessed value of the business.
When evaluating assets, it is advisable to seek the help of an industry expert who can assess the market value of assets.
Remember that a valuation is only a tool to help estimate the value of a business. Other factors, such as the difficulty of opening a similar business, the strategic position of the business, the business' brand value and customer base can all contribute to the final selling price of a business.
Tips and warnings
- When evaluating assets, it is advisable to seek the help of an industry expert who can assess the market value of assets.
- Remember that a valuation is only a tool to help estimate the value of a business. Other factors, such as the difficulty of opening a similar business, the strategic position of the business, the business' brand value and customer base can all contribute to the final selling price of a business.