Questions Business and Entrepreneurship

How to value a retail business?

Airtract

Hina Sohail

Heads up in the clouds

Value of a retail business means finding out its caliber and worth in the market at which it could be sold.  The valuation of a retail business is essential so that a retailer could know about the strength and weakness of his/her business. It also helps in setting up a benchmark which is then to be followed up by an analysis of the company.

One thing that should be clear is that the revenue and value of a business are two different things.

Before valuation one should know the Profit and Loss statement as well as the income statement, there are various ways to find out the value of retail business such as:

1. Net Asset Method - It could be considered as the value of net assets. Net assets are calculated by finding the difference between total liabilities from total assets.
Net Assets = Total Assets - Total Liabilities

This method is preferred less because it decreases the value of the business as it is difficult to calculate the value of the intangible assets such as goodwill, patents, and copyrights, etc.

2. By Comparing – The method is known as Market Comparable. The value of a retail business can be calculated by comparing it with the competitors of a similar business. The competitors are those who have already sold their store recently, or the value of their business is known publicly.

This method is sometimes not considered because your business and your competitor's business could vary concerning the strategy used to make a profit, regarding goodwill and credibility. So, it may not give the actual value of a retail store.

3. Discounted cash flow analysis – This method is one of the oldest techniques used to calculate the value of a business or a project. In this method net present value of future cash flows is calculated. The initial step taken is to figure how much profit a retail business is going to make in the future by comparing the net present value of both inflow and outflow of business. But the reliability of this estimation is an essential factor.

Another method is EBITDA which means earnings before interest, tax, depreciation, and amortization. This method is primarily used by those business houses that have substantial assets.

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