Buying a Business mentor Tom West reponds to the following question from an inc.com user: How do you value a sporting goods store, with the majority of revenue generated from team sales -- uniforms and equipment -- to baseball and football parks, and schools in the area. There is some retail traffic, but this is not the focus of this store. The owner is looking to sell the business with no real estate involved. Is a mulitiple of earnings or a factor of total revenues the usual valuation method for such a business?
Tom West's response: Generally speaking, retail sporting goods stores sell for about 30% of annual sales plus the wholesale value of the inventory. As with all rules of thumb there are many variables, so the 30% figure is just a "ballpark." Here is some additional information to consider:
In a sporting goods store, the inventory should turn a minimum of three times a year. Most of the items available in a sporting goods store have a mark-up of 35% to 45%, other items may be a bit lower -- around 25% to 30%. In the particular store you are looking at the mark-up may be a bit lower since a majority of the sales are to parks and schools. The rent should be about 5%, obviously, the lower the better. In this particular store, the location may not be as important as a regular sporting goods store, so the rent is an important factor. No sense paying a high rent when location doesn't appear to create the bulk of the revenues.
The fact that the majority of the sales come from parks and schools is the proverbial good news/bad news. If the store has contracts with these groups that's a plus. If it doesn't, does the owner have a personal relationship with the groups that create that business? In other words, how secure is that business for the future. Is it made up of just a few large accounts or many small ones? Why do these groups do business with this particular store? Would you buy this store if it could easily lose this business?
If the school and park business is secure it is a nice plus. Make sure it is profitable, however. You can't make a successful business from pure volume. How price oriented is this business? Can you increase the walk-in business? Are sales going up or down?
These are all questions and concerns that help determine the price the business should sell for and that you should get answered.
Another way to look at the business is with a multiple of the Cash Flow. In order to do this, you will need to review the tax return. Add back to the actual profit of the business, such discretionary items as depreciation, owner's perks, one-time expenses such as a computer system, etc., and any other non-essential business expenses. Add the owner's salary to all of this and that is what is termed the Seller's Discretionary Cash (SDC). Most small retail businesses sell for about 1.5 to 2.0 times the SDC plus the wholesale value of the inventory. The actual figure lies somewhere in between and is determined by the answers to many of the questions that we posed. The more positives the higher the multiple, etc.
Keep in mind all of the normal variables. Will the seller assist in financing the sale and carry back a portion of the balance on monthly terms? Will the owner stay and work with you until you're comfortable in the business? What is the trend of the business? How long has it been in business? Ultimately, the price of the business will be determined by an open and honest negotiation. Although it will be an added expense, it might be worthwhile to hire a consultant or business intermediary to represent you and assist you in determining if the business is all you think it is -- and can be. Hopefully, this information will give you a starting point.
Additionally, it might pay to contact the National Sporting Goods Association. They have a lot of valuable research that might be helpful. They can be contacted at 847-296-6742 or www.nsga.org.