Archive for June, 2009

Classified under the SIC 5719 code and NAICS 337133, home furnishings stores are a major segment of the retail industry. If you need to value such a business, you have a choice of well-known methods to get the job done.

Perhaps the best known approach to valuing a home furnishings company is by comparison to recent sales of similar businesses. Using the actual business selling prices and financial performance parameters of such businesses, you can come up with valuation multiples to estimate what your business is worth.

Valuation multiples typically used to value home furnishings stores

Here is our list, starting with the most accurate valuation multiple:

  • Business sale price to gross profit.
  • Price to net sales.
  • Price to EBITDA.
  • Price to EBIT.
  • Price to net income.
  • Price to total business assets.

Since all valuation multiples are statistically calculated from a number of comparable business sales, the accuracy of each multiple depends on its spread. A tighter spread means that you can predict your business value with greater accuracy using the multiple.

Example – using a number of valuation multiples to estimate the business value

We will consider a typical privately owned home furnishings company generating $1,000,000 in net sales, $500,000 in gross profits, $75,000 in EBITDA; $50,000 in EBIT; $45,000 in net income and $220,000 in total assets.

We pick a set of reasonable valuation multiples to do our estimation:

  • 0.7 times the gross profit.
  • 0.4 times the business net sales.
  • 5.6 times the EBITDA.
  • 5.8 times the EBIT.
  • 6.2 times the net income.
  • 1.5 times the total assets.

Note that our valuation multiples include an estimated $100,000 in inventory.

Applying the multiples to the business financial performance numbers gives us the following set of business fair market value estimates:

  • Business value based on gross profit: $350,000.
  • Based on net annual sales: $400,000.
  • Based on EBITDA: $420,000.
  • Based on EBIT: $290,000.
  • Based on net income: $279,000.
  • Based on total business assets: $330,000.

Averaging all these estimates gives us the combined business market value of $344,833. As is typical under the market business valuation approach, this value figure covers the business tangible assets and goodwill. The values of business owned real estate, non-operating assets, cash and accounts receivable are extra.

Other business valuation methods for home furnishings retail stores

If you want your business valuation results to be taken seriously, consider using a number of income and asset-based valuation methods as well.  This gives you two more ways to assess what your business is worth – based on its earning capacity, risk and asset base.

For owner-operator managed home furnishings businesses, the Multiple of Discretionary Earnings method is a highly recommended choice. In addition to business discretionary earnings, this method lets you determine your business value based on the assessment of 14 key financial, operational and marketing performance factors.

If your company has a long track record of success in its market place, the value of business goodwill can be a big part of the total business value. Consider using the well-known Treasury Method in your business appraisal – an established way to value a business as a sum of its tangible assets and business goodwill.

Valuing a Business Three Ways

Catering companies are a major segment of the food and drink industry, classified under SIC 5812 and NAICS 72232. Successful catering businesses sell quite often. This is good news if you need to determine the fair market value of your company.

In fact, valuation multiples derived from recent sales of similar firms give you an accurate and highly defensible way to estimate what your business is worth.

For a catering business, the most commonly used valuation multiples are these:

Typically, the value of business inventory is added to the value estimates.

We have listed these valuation multiples in the order of their accuracy. Since the multiples are statistically derived from a number of business sales, a key measure of their accuracy is the value spread. The closer the actual valuation multiples to each other, the more accurately you can predict your own business value.

Indeed, the business price to gross revenue valuation multiple shows a spread that is about 45% tighter than the discretionary cash flow based estimates.

Example – using valuation multiples to estimate the value of a catering business.

Consider a typical catering company that generates $500,000 in annual gross sales, owns $100,000 in fixed assets, carries $10,000 in inventory and throws off $120,000 in discretionary cash flow. To calculate the business value, we pick a set of reasonable valuation multiples as follows:

  • 40% of gross revenues.
  • 2.5 times the value of furniture, fixtures and equipment.
  • 1.8 times the seller’s discretionary cash flow.

This gives us the following business value estimates, including the inventory:

  • Based on business gross revenues: $210,000.
  • Based on FF&E business assets: $260,000.
  • Based on seller’s discretionary cash flow: $226,000.

Taking the average of the above numbers gives the likely business market value of $232,000.

Can your business sell for a higher price?

Each business is unique. In addition, the circumstances of each business sale are different. Hence, it is quite possible that your business can be worth more or less on the market. Some key factors that affect the business market value:

  • Availability of financing, especially seller financing. All-cash deals tend to fetch lower prices than financed business sales.
  • Specific motivations of the business buyer and seller. It is hard to get a fair market value for the business whose owners are compelled to sell.
  • Timing and effectiveness of the business for sale marketing effort. The more qualified buyers are interested in your business, the higher the likely selling price.

Interested in business market value assessment?

Recent sales of similar catering businesses give you the proof you need to determine the value of your company. You can assess the fair market value of your business based on its gross revenues, net sales, net profit, cash flow, EBITDA, and assets.

Getting a business appraisal that is accurate and defensible can make a difference of thousands and even millions of dollars. Whether you are planning on a business sale or purchase, handling a legal dispute or tax matter, a key part of your strategy should be knowing what the business is worth.

Since the stakes are high, it is important to separate facts from fiction when it comes to valuing a business. Here is our short list:

Fiction: There is only one way to value a business.

Fact: There are three ways to value any business.

Indeed, you can determine the value of your business using these three approaches:

  1. By comparison to recent sales of similar businesses.
  2. Based on the business’ earning power and risk assessment.
  3. Based on the company’s assets.

In addition, you have quite a number of business valuation methods to choose from under each approach. Consider using several methods if you intend for your business appraisal to be taken seriously.

Fiction: Business valuation is just a number.

Fact: Business valuation results depend on your assumptions.

It may come as a surprise to some: the business value number you get depends heavily on the set of circumstances that led to the business appraisal. If the plan is to close the business down and sell off its assets at an auction, the business value result is likely to be low.

On the other hand, a business appraisal done in expectation of a strategic business investment and rapid growth in business earnings is almost certainly going to result in a much higher number.

Fiction: Business valuation takes a couple of minutes to do.

Fact: Business valuation takes time and effort.

While the number crunching using business valuation tools can indeed be quick, the accuracy and relevance of your business appraisal depends critically on how thorough you are in your analysis.

Business appraisal is always forward looking. This means that you need to consider the business earnings prospects over the next few years. You also need to figure out what types of risks the business is likely to face. Don’t expect to get this done over a coffee break!

Fiction: Business value is the same no matter who measures it.

Fact: Business valuation results depend on who appraises the company and why.

This goes back to the assumptions point. Since business value is about a game plan that leads to future earnings, your vision of what a business can do may differ from someone else’s. The result is two different business valuation conclusions. Neither is wrong – but both depend on who was doing the appraising!

Tools to value a business

Measure your business worth using time-tested valuation methods. Create professional business appraisal reports. Get tips and advice on how to conduct a business valuation. Assess your business value based on the current market data.

Learn More »

Ask any professional business appraiser and you will hear the same advice:

If you need a business valuation that is both accurate and defensible, use a number of business valuation methods in your analysis.

There is a good reason for this insistence – no business valuation method is best. Each method looks at a different set of business fundamentals. This gives you a different view of what drives your business value.

If you are after a solid business appraisal that passes muster – in the boardroom or the court room – consider using several business valuation methods.

Asset business valuation tends to set the upper bound on your business value

Asset based methods, such as Asset Accumulation or Capitalized Excess Earnings, let you calculate your business worth based on its assets and liabilities.

The results tend to be on the high side, especially for asset-rich businesses such as manufacturing and distribution firms. A couple of reasons for this: some company assets may be currently underutilized. Business owners could rent out excess capacity or floor space and generate additional revenues.

Other business assets may not be currently put to their “highest and best use”. For example, business owners can license some of their technology and generate royalty income in addition to the current product sales.

Doing your business value analysis using asset based methods can help you uncover such value enhancing opportunities in your company.

Need to determine business fair market value? Consider market based appraisal methods.

Market is widely considered the ultimate arbiter of what a business is worth. Recent business sales of similar companies are an excellent way to determine the market value of your business.

In a stable market, business sellers and buyers enjoy roughly equal bargaining power. So the business selling prices tend to settle to an equilibrium – establishing the fair market value for your business.

Valuation multiples derived from such business sale statistics are a great way to come up with the most probable business value number – the reasonable selling price somewhere in the middle of the low and high range of selling prices.

A word of caution – business market value and its theoretical “fair market value” are not the same. Business market value is the expected selling price if you try selling a business under the current market conditions. Fair market value assumes that business buyers and sellers do not enjoy significant advantages over each other and that the market conditions are stable.

For example, in stressed markets some business owners may decide against selling. Others may feel compelled to sell just to get out. Such motivated sellers are unlikely to get a fair market value price for their business. If you observe the business selling prices in this type of market, you are likely to see valuation multiples that are well below their historic averages.

Your business valuation depends on your assumptions – income business valuation

No two businesses are the same, and each business person sees the value of a given business differently. Income based business valuation methods give you the tools to determine what the business is worth to you – based on your unique expectation of business earning prospects and risk.

Business appraisers often refer to the so-called investment standard of value when talking about income business valuations. What this means is that each business person uses a different measuring stick when estimating what a business is worth.

All business valuations are forward looking. Your income forecast may be different from mine. In addition, you may assess the company’s risk based on your specific action plan.

Even if we use the same valuation methods, the results may differ. Business for sale market has a couple of well-known participants that demonstrate two extremes:

The financial business buyers are after immediate, low risk income streams. They tend to be conservative in their earnings and risk assessment. Hence, their income-based business valuations trend lower.

On the other hand, synergistic business acquirors look for unique advantages. They can envision much more positive outcomes and calculate a higher business valuation result.

Business Valuation based on Assets, Income, Market Comps