Hardware store valuation
Hardware stores, classified under SIC 5251 and NAICS 44413, make up a sizable part of the retail industry. In the US alone there are over 27,000 hardware stores in operation employing just over 173,000 staff. Moreover, this retail industry segment generates more than $17 billion in annual gross sales.
Hardware retail business is small business
Yet an average hardware store is typical small business. It employs a staff of 6 and produces around $700,000 in annual gross revenues.
These privately owned hardware retail companies are a critical part of the industry: over 95% of hardware stores employ fewer than 25 staff and generate more than $10 billion in annual sales. That is more than 60% of the industry total!
Hardware retail business valuation – market approach
Hardware stores sell often. If you need to determine the value of a business in this industry, consider using the market-based valuation methods. You can develop a very good idea of what a business is worth by comparison to recent sales of similar private companies.
Valuation multiples derived from hardware store sales give you the tools to value your own business.
For small hardware stores, the typical valuation multiples include these:
- Business sale price to gross revenues or net sales.
- Sale price to seller’s discretionary cash flow.
- Business sale price to furniture, fixtures and equipment (FF&E) assets.
By convention, the value of business inventory is added to the estimate you get with the above valuation multiples.
Examples – valuing a hardware store using multiples
Let’s consider a typical privately owned hardware retail operation with the following current financials:
- Annual gross sales: $700,000.
- Seller’s discretionary cash flow: $55,000.
- FF&E assets valued at: $70,000.
- Inventory of $225,000.
We pick a reasonable set of valuation multiples for 2009:
- 0.1 times the gross sales.
- 1.4 times the seller’s discretionary cash flow
- 1.5 times the FF&E assets.
Here are the valuation results for this sample business:
- Business value based on gross revenues: $295,000.
- Value based on discretionary cash flow: $302,000.
- Value based on FF&E assets: $330,000.
Note that, by convention, the inventory is added to the multiple result. The average business value is then $309,000.
Hardware store valuation – effect of the economy
Much like the rest of the retail industry, hardware stores are not immune to the economic ups and downs. The business valuation results above give you a reasonable number in the current economic environment.
If we look back in the 2006 – 2007 timeframe, the business valuations were much different. In fact, our example business would be worth around $375,000 at the end of 2007. That’s a difference of some 18%!
Reasons for decline in valuations
This business value change reflects how business people currently see the earnings prospects of small hardware retailers and assess business risk. Business sales require access to large sums of acquisition capital. At the moment that capital is hard to come by.
In addition, business buyers are very careful in assessing the earnings outlook for a business they consider to buy. Having to service a large bank loan or seller’s note against unstable business earnings is not a good recipe for success.
Earnout agreements may be a good option to close a sale – and spread the risk between the business buyer and seller. You set aside a portion of the business selling price that will be paid out to the seller if the business achieves its financial objectives in the future.
For example, 50% of the contract purchase price may be held back for a year. The business seller gets this money if the revenue targets, above a baseline minimum, are reached then.
pat paterson says:
I must admit I do not understand your example above: gross sales of $700,000 X 0.1 = $70,000.
Cash flow of $55,000 X 1.4 = $77,000. It’s quite obvious I’m not doing something right?
Pat, you missed the addition of inventory to the multiplication result.
The total business values in the example you are looking at are: $700,000 x 0.1 = $70,000 plus the inventory value of $225,000; which equals $295,000.
The same applies to the cash flow multiple – $225,000 added to the $77,000 gives the total business value of $302,000.