Question:

I am considering making an offer on a retail camera business. It has been in biz for over 30 yr. Owner wants to retire. Has posted 4.5% avg. growth over the last 12 yrs. The last two yrs, 15% growth. Gross receipts for 2004 are $400,000. How do I best determine its worth and what is fair value for trade name and goodwill? No real estate is involved. Lastly, is retail a good biz to get into in the current economic outlook?

Answer:

You raise some excellent points in your email. It certainly seems that this business has many interesting and solid characteristics to it including the years it has been operating and the continued upward trend in revenues.

Insofar as a valuation is concerned, there are a number of things to consider: first, while the revenues are important, as you know you will take profits to the bank. As such, it is critical that you breakout the actual Owner benefits figure. In this business, it will typically be:
Pre tax profit + Owner Salary/Perks + Interest + Depreciation – Allocation for Capital Expenditures (i.e. store improvements, investments in new equipment, etc)
Once you obtain that figure (for the last three years at least), you will want to attach a multiple to them to arrive at a reasonable purchase price. Retail businesses such as these typically sell for around 2 – 2.5 times this figure. However, there is a lot of consideration to be paid to the very nature of this business and the inventory and equipment that may be involved.

As such, this is one type of retail business where a percentage of revenue is often used to establish the price plus the assets.

Under this scenario, valuations are generally around 10 – 20% of the total revenue plus the cost of the fixtures/equipment and inventory (at cost).

Regarding your last question about getting into this type of business given the current market, the question is best answered by your desire to operate a retail location plus key factors such as nearby competition, any changing technology that could severely impact the industry and, of course, to determine with absolute certainty what drives the business. Is it location? Know-how of the owner? If so, is the lease solid? Do you have the same level of expertise?