Blog Post Title One
Are You Undervaluing or Overvaluing Your Retail Business?
When we were preparing to sell our family-owned hardware store, one of our biggest challenges was understanding its true worth. Opinions within the family varied widely. Some believed the business was worth very little and thought we should simply liquidate everything. Others viewed the store as invaluable, something no amount of money could truly compensate for.
But what was our store really worth?
Know Your Numbers
To determine the value of our business, we started with the fundamentals:
Inventory Audit: We meticulously updated our inventory records, ensuring we knew exactly what was on the shelves and the value of each item. Pricing was also reviewed and adjusted to reflect current market conditions.
Fixture Assessment: From shelving to office furniture, computers, and equipment, we took stock of everything. Thankfully, we were provided a detailed checklist to help us capture all relevant items.
Financial Review: We worked closely with our accountant to review current financials and create projections for future performance.
Armed with this information, we consulted a valuation professional who took our data and provided an accurate estimate of our business’s value.
There are different types of valuation services. Some offer more detailed and comprehensive reports than others. Whichever option you choose, don’t skip this step. Having a formal valuation made all the difference when negotiating with our buyer. It gave us the confidence to justify our asking price and ultimately secure it.
Understand Goodwill
In our valuation process, we encountered something called goodwill, a concept we were initially unfamiliar with. Goodwill represents the intangible value of your business; the future earnings potential buyers are willing to pay for.
For us, goodwill was influenced by a number of factors:
We were the only hardware store in town.
A newly constructed frontage road made our store more accessible, enhancing its desirability.
We were in a growing community.
Number of years in business and a good reputation in our community also played a role.
These factors added value beyond the physical assets and inventory, increasing the overall worth of the business. Goodwill is an important consideration when determining your business’s true value.
Factoring in Real Estate
Real estate plays a significant role in business valuation. Consider these questions:
Do you rent or own the property?
If you own, will you sell the property along with the business or retain it and lease it to the buyer?
In our case, owning the building gave us flexibility. We could sell the property with the business, boosting the overall value, or keep it and generate long-term rental income. We were able to lease the property to our buyers.
For buyers who may not have the resources to purchase both the business and the property or simply just want to purchase the business, leasing the property can be an attractive option.
Get a Realistic View
Whether you think your business is worth nothing or think it’s worth millions, it is critical to do your due diligence. By understanding your numbers, recognizing goodwill, and considering real estate, you can arrive at a realistic valuation that positions you for a more successful exit.
Ready to Take the Next Step?
If you’re considering exiting your business in the next 2–3 years, we’d love to help. Schedule a free 30-minute consultation to discuss your options and start planning for a profitable future.