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.
- Sale price to EBITDA.
- Price to EBIT.
- Business 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.