What is your business really worth?Published on 15th July 2019 2019-07-15T11:00:00+00:00
The small convenience shop, with its shelves stacked with everything from groceries to alcohol, tobacco and lottery cards looked to be at risk when large retailers made their move into the sector.
The good news is that the privately-owned shop may be healthier than ever, with innovations such as package collection and dry cleaning joining the old favourites. Around 6% of all UK retail comes from convenience stores, and they are one of the few retail sectors that seem to be unaffected by the internet.
So the future may be bright for your convenience store - but what is it actually worth?
You need to know, and the answers may surprise you.
The key value drivers of a small retail business
Turnover is often used as the basis for business valuations. But as a convenience store owner, it may not be the most appropriate measure.
As a retailer, you make money by buying in stock and selling at a higher price than you paid for it - earning a profit on each product sold.
But there is only so much mark-up you can put on a routine item like a chocolate bar, and even lines like alcohol, where a larger margin is possible, will still be price sensitive. Customers may expect to pay a little more when your business is close to their home - but they will still decide to make the trip to the supermarket if costs are too high, and the difference can be a matter of pennies. So your overall margins will be small - and you will need to shift a large volume of stock to generate a reasonable income.
However, there’s another reason why turnover is misleading. You might include your Lottery takings in your turnover, but those takings are not your money, you’re simply collecting them for Camelot. Your share is just 5% - and only 5% should be included in the turnover. Papers, utility meter charge-ups, bus tickets - the story is the same.
You cannot look at your turnover
This means that the method used for valuing many businesses - a multiple of turnover which depends on the sector - does not really work for the convenience store sector. For a retail business, a very large turnover may only mean a small profit.
To work out the value of a convenience store business, you might need to dig a little deeper into the figures.
Turnover vs profit
You could look at your weekly takings. Or your annual turnover. Or your gross profit. But none of these really matter. The net profit - the amount that you take home every week - is actually the only measure that counts.
It's not enough just looking at what you think you made last week. You need to have your full business accounts covering at least the last 2-3 years. This is so that you know the average profit the business is making and are not basing all your expectations on one unusually good or bad year.
If your business is making £25K a year in net profit, it sounds good - but if you don’t pay yourself a salary, it’s not actually a profitable business. If you are working 12 hours a day, six days a week you are working for less than minimum wage.
The business needs to generate enough to pay at least a minimum wage plus a profit. You may take your profit out in the form of a dividend at the end of the year rather than a monthly salary, or you may take a small amount on PAYE to benefit from your personal allowances - but it is the profit figure that counts in arriving at a value.
Does your partner, or even your children, help out in the shop? If they are not getting paid you need to deduct the amount it would cost you to hire someone to come and assist for those hours.
If you base your valuation on this, according to some calculations your business could have a negative value.
So what can you do?
There are no hard and fast rules about valuing a newsagency or corner shop because most of its real value - its ability to generate money - comes from your hard work.
That said, it is possible to arrive at some kind of figure for the ‘goodwill’ - the ongoing custom that your business enjoys. Because of your small margins, this might be as low as 10 times your weekly shop sales. If that is £2,500, your goodwill could be worth £25 000.
You could also add the value of your premises to this figure. If you own your shop, and the premises above, you could be left with a much higher sum.
A call to your local estate agent could give you an idea of what your premises are worth.
So as a basic example:
Annual turnover £520,000 - weekly turnover £20,000 - net weekly profit - £1500 - value for the business - £15,000.
This is for a leasehold shop. If the premises were owned and valued at £150,000, a fair value for the business would be £165,000.
But be aware that anything - from an old master painting to a corner shop - is only worth what someone is prepared to pay for it. Businesses often sell for a fraction of their original asking price if there isn’t demand in the area.
On the other hand, if business is brisk you may have the scope for opening up more floor space and bringing in more lines, and so may be able to find someone who recognises the potential value of your business. When considering the value of a retail business, historical financial performance should provide some guide to the future.
Looking at what similar stores to your own in your local area have made could help you see what your business is really worth.
Why does it matter?
Surely though, the value of your business is not important unless you are planning on selling up?
Well, actually, it could be. The value of your business and the level of sales and profits you enjoy could be a key factor in raising finance.
The more your business is worth - the more profits it generates - the easier it will be for you to arrange business funding.
Lenders will want to see a profitable business to arrange an unsecured loan - but a low valuation might restrict the amount you can borrow with many lenders.
But at Rangewell, we understand that the convenience store sector has some special needs. We like to find innovative solutions for the businesses we work with - and can often find the solution to your funding requirements with a Merchant Capital Advance - secured on the takings you receive from card payments.
The size of a Merchant Capital Advance - which can be used for any business purpose from buying in stock to purchasing security equipment - will be based on the value of payments you receive each month by card. Your turnover - which might not be accepted by conventional lenders when looking at your loan application - could be adequate security for this type of cash advance.
It can often bring you a cash advance equal to your monthly card takings - which will be paid back automatically by a percentage deduction when customers pay by credit or debit card.
Whatever your funding needs, at Rangewell we can help find the solutions. We are experts in business finance, and our free service can help you secure any kind of business funding your shop might require. Apply for finance today or find out more with Rangewell.
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