The Business Well, it's not really a record-store chain. (Jeez -- remember records?) It's actually a funky four-store seller of recorded music in a medium-size university town. (The seller recently signed the lease for his fifth location.) Revenues come mostly from sales of new compact discs and cassettes (42% and 36%, respectively, a fairly typical breakdown). The stores also sell used CDs and cassettes, which account for about 11% of sales. The rest of the revenues come from videos, T-shirts, and other accessories. The seller wants to relocate closer to his family.

Financial Summary (in thousands) 1991 1992 1993*
Gross revenues $2,407 $2,942 $3,650

Recast earnings before interest, taxes, depreciation, and owner compensation $147 $312 $400


Price $1,500,000

Outlook CDs have revitalized the music industry. Total units shipped (CDs, tapes, and records combined) have increased by 55% since 1983, the year CDs were introduced, and the dollar value of those shipments has increased by 137%. But for small music-store chains, there's bad news, too: national chains are buying up or displacing smaller players, and music stores are losing market share to record clubs and other retailers, such as warehouse clubs and discount chains.

This company is the largest music retailer in its local market and delivers gross margins of 34% on CDs and 37% on cassettes. Its net margin is 11%, which insiders admit (not without envy) is pretty healthy for the industry. And with more than 100,000 nearby college students (the age group that buys the most music), there's no shortage of customers.

Price Rationale The rule of thumb for chains like this one, assuming the inventory is reasonably up-to-date and salable, is 25% to 50% of sales, plus the dollar value of the inventory. Given the chain's $813,000 in current inventory, its price should fall somewhere between $1,725,500 and $2,638,000. Or you could think about it this way: the $400,000 in projected 1993 earnings represents a 27% first-year return on the buyer's investment, which is pretty good. Either way, the price looks reasonable. In fact, it might even be a bit low.

Pros A strong, growing (in both sales and stores) company, adjacent to its ideal target customer -- and available cheap.

Cons If the market is this good, will it be long before national competitors arrive? (If they don't come, there's a reason.) And what if this "information superhighway" we keep hearing about (wherein consumers will purportedly be able to create their own CDs at home) finally arrives and makes record stores obsolete? Sure, laugh. But when was the last time you went to a blacksmith? -- Christopher Caggiano

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Inc. has no stake in the sale of the business featured. The magazine cannot confirm the accuracy of financial or other information offered by the seller. Inquiries should be directed to Geneva Business Services, in Irvine, Calif., 800-854-4643. n