How to Value a Hardware Store
According to IBIS World, there are approximately 10,000 hardware stores throughout the United States. These businesses sell hardware, paint supplies, plumbing products, and electrical products. In recent years, the hardware store industry has experienced healthy growth, generating over $34 billion dollars. However, we can expect a steady decline in the coming years. This is due to various factors such as intense external competition and increasing interest rates. Despite these challenges, hardware stores can succeed with a careful approach. Whether you are buying, expanding, or selling a hardware store, it is crucial to understand how to value a hardware store.
There are various factors to consider when learning how to value a hardware store. The best way to start is to receive a business valuation for a hardware store. As part of a business valuation, a valuation expert helps you identify the strengths and weaknesses of a hardware store. This can help you take the next steps in maximizing the value of a hardware store you are buying or selling. Peak Business Valuation is a professional business appraiser. Peak works with many hardware stores across the country. We are happy to provide you with a business valuation for a hardware store. We can also answer any questions you may have on valuing a hardware store. Schedule a free consultation with Peak Business Valuation, business appraiser, below!
How to Value a Hardware Store
There are various valuation approaches to determine the value of a hardware store. At Peak Business Valuation, business appraisers often use the market approach and/or the income approach to value a hardware store. In some cases, the valuation process includes a combination of valuation approaches.
Valuing a Hardware Store Using the Market Approach
The market approach is a common valuation method for hardware stores. To understand the market approach, consider the approach a real estate appraiser uses to value a house. When valuing a property, real estate appraisers compare it to similar properties that have recently sold. This helps them provide an accurate valuation of the property. With the market approach, business appraisers compare your hardware store to similar hardware stores that recently sold on the market. If the hardware store is a private company, the expert uses private transaction databases. They then analyze the financials to determine a fair value for the hardware store.
Multiples for a Hardware Store
When using the market approach, business appraisers utilize valuation multiples. These are ratios that compare a hardware store’s value to a financial metric. To determine the proper multiples for a hardware store, the business appraiser uses the appropriate NAICS or SIC code. Below, we discuss basic market multiples for a hardware store.
REVENUE or SALES Multiples for a Hardware Store
- Valuation analysts apply a revenue multiple to a business’s revenue to estimate its total value.
EBITDA Multiples for Hardware Stores
- EBITDA multiples measure the return on investment hardware store owners can expect to make.
SDE (Seller’s Discretionary Earnings) Multiple for a Hardware Store
- SDE multiples are common when valuing a hardware store. This is because SDE multiples assess a business’s cash flow by multiplying its seller’s discretionary earnings by the multiple.
The multiple the valuation analyst uses depends on the business transaction and the reason for the appraisal. To learn more about how to value a hardware store, see Valuation Multiples for a Hardware Store.
Valuing a Hardware Store Using the Income Approach
Another common valuation approach is the income approach. This approach assesses the risks of the hardware store. Below, we share a few common risks associated with buying or selling a hardware store.
- Location: The location of a hardware store plays an important role in its success. It is vital to locate in areas where there is a steady demand for a hardware store.
- Competition: The hardware store industry faces fierce competition from external competitors like Home Depot. To compete, it is important to differentiate your hardware store.
- Financial Strength: Without careful financial planning, hardware stores may struggle to be profitable. Financial strength is crucial in the hardware store industry.
- Future Outlook: In the coming years, we can expect revenue and profit rates to decline in the hardware store industry. As such, it is vital to prepare for these conditions.
Methods to Value a Hardware Store Using the Income Approach
There are two valuation methods under the income approach. These methods are often used when learning how to value of a hardware store. The first method is the capitalization of cash flow method and the second is the discounted cash flow method. We discuss these valuation methods below.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for hardware stores with long and stable histories. When using the capitalization of cash flow method, business appraisers determine an appropriate amount of economic income for one period. This time frame before or after the appraisal date is then divided by an appropriate capitalization rate. The cap rate reflects an accurate rate of return a buyer can expect. In addition, the capitalization of cash flow method also assesses any risks associated with buying or selling a hardware store. Some of these risks are listed above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for businesses with strong financial histories. Businesses with reliable forecasts may also benefit from the discounted cash flow method. When using this method, valuation analysts use 3-5 years of projections to estimate the value of future cash flows. They then discount future cash flows using a discount rate rather than a cap rate. Keep in mind, this method is less reliable because it is limited to future cash flow estimates which can be subjective.
Summary
When valuing a hardware store, business appraisers may use the market approach and/or the income approach. The valuation method the expert uses depends on various factors. To understand which valuation approach is most suitable for your hardware store, receive a business valuation for a hardware store. As part of a business valuation, business appraisers help you understand how to maximize the value of a hardware store. This is crucial whether you are buying, expanding, or selling a hardware store.
Peak Business Valuation, business appraiser, is proficient at valuing hardware stores. We are passionate about helping hardware stores succeed. Peak can provide you with a business valuation for a hardware store. In addition, we are happy to answer any questions you may have about how to value a hardware store. Start now by scheduling a free consultation with Peak Business Valuation!
See also Valuing a Hardware Store, Market Multiples for a Hardware Store, and Value Drivers for a Hardware Store.
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