Retail Business Valuation

Retail (at least the bricks and mortar style of retail business) - like the proverbial duck - a smooth glamorous business on the outside with furious activity hidden in the back room.

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They are experiencing a perfect storm right now:

• High store rents

• High labour costs

• Increased online competition 

• Low inflation (and so price increases are difficult to implement)

• Low wages growth and reducing discretionary expenditure

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Industry revenue has been declining for some time in real terms, and low discretionary income means many people are buying the necessities and not the nice to haves.

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Many of the smaller retailers do not make enough profits to pay a market wage AND make a commercial profit.  

 

So what does this mean for retail business valuations?

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Revenue growth is incredibly low - and unlikely to increase in traditional sectors for some time.  The EBITDA margins we have seen on some businesses are very low and in some cases negative.  It has to be said that for a large number of business their valuations are, and will continue to be, based on net tangible assets. 

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There is rarely any goodwill in the retail business valuations I have seen lately.

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That said, good retail business valuations do exist, and common themes and initiatives I have seen include:

• Having an effective and enhancing online presence - online is the "new black" for retail, and is where the significant growth opportunities exist.

• Stock levels must be kept low along with a low level of non-cash working capital.

• Integrate all your systems to keep office and business management costs low but maintain regular daily, weekly and monthly reporting to stay on top of trends.

• Low cost of sales margin is critical - source your retail goods carefully.

• Expand into new markets - either new customer segments or new product segments.

• Enhance your sales with additional services as these often have a higher level of margin and also help to lock in repeat customers.

• Have expert knowledge of online promotion and marketing - it is now so critical that even if online promotion and marketing is being outsourced - make sure you understand what is being done so that you can manage the expectations.

• Invest in people - train them in the products and services sold, customer service, merchandising, store operations - everything.  Great service is an intangible benefit but it keeps customers returning.

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