Business valuation of pet stores
Do you need to value a retail pet store? Here are some industry statistics to consider first:
Pet stores are classified under the retail industry SIC code 5999 and NAICS 453910. Pet retail establishments make up a large portion of the miscellaneous retail industry. In the US there are just under 169,000 such operations.
This retail sector creates a total of $58.8B in annual revenues, and employs some 732,900 people. However, a typical pet store is small business: producing an average of $400,000 in sales per year with 4 staff.
In fact, 97.7% of pet retail businesses have 24 or fewer employees. Together these small, local businesses generate about 68.7% of the industry total annual revenues.
Well-established, successful pet retail businesses develop loyal customer following. The result is highly stable earnings year after year. And such cash cow operations are attractive acquisition targets.
Hence, an excellent way to estimate the fair market value of your pet retail store is to study the recent sales of similar businesses.
Pet store valuation using multiples
You can choose a number of valuation multiples for your business valuation. The multiples are ratios that relate the selling prices to some measure of sold companies’ financial performance. Here are the typical valuation multiples used in pet store appraisals:
- Price to net annual sales
- Busines sale price to gross profit
- Price to net income
- Selling price to EBIT and EBITDA
- Price to seller’s discretionary earnings
- Business price to total practice assets
- Price to owners’ equity
Consider using several of such valuation multiples for increase the accuracy of your business valuation.
Each multiple gives you a business value estimate that may differ depending on how your pet store compares to its industry peers. The result can be a range of values, from low to high. Alternatively, you can calculate an average of all the business value estimates together.
Example: pet store valuation using multiples
To illustrate, let’s take a typical privately owned pet supplies store with the following financial details:
- Annual net sales: $400,000
- Gross profit: $180,250
- Net income: $30,000
- EBITDA: $32,750
- Discretionary earnings (SDE): $85,000
- Inventory: $55,000
- Furniture, fixtures and equipment assets valued at: $40,000
We next select a set of reasonable valuation multiples and apply them to the financial figures above. The practice value results are then:
|Multiple||Multiple value||Business value|
|Price to net sales||0.33||$132,000|
|Business price to gross profit||0.88||$158,620|
|Price to net income||3.67||$110,100|
|Sale price to EBITDA||4.79||$156,873|
|Price to discretionary earnings||2.10||$178,500|
|Price to FF&E assets||3.84||$208,600|
|Average Business Value||$157,449|
Note the result spread. This depends on how our example pet store compares to its peers across the financial performance parameters.
Other pet store valuation methods
As with other types of businesses, a properly done business valuation should include several business valuation methods.
Established pet store businesses can build up significant business goodwill. The Capitalized Excess Earnings valuation method is a good choice when valuing such companies.
Direct capitalization methods, especially the Multiple of Discretionary Earnings valuation method are an excellent choice for valuation of privately owned pet stores. This method offers you a very systematic yet intuitive way to calculate the business value based on its earnings and a set of key financial and operational performance factors.