Retail is one of the most prevalent industries in the United States. Basically, there are five factors that determine the valuation of a retail business:
- Nature of Business: Banks tend to avoid lending to certain types of businesses. Typically, they try to steer away from cash-based businesses like delis and restaurants. This lack of access to capital dampers future expansion opportunities and lowers the value of the business.
- Entry barriers: Retail businesses with a barrier to entry over an industry receive higher valuations. For example, franchises are valued more than stand alone retail establishments, which have a high risk of failure.
- Location: Locations for retail establishments can make or break the business. Locations in or near a busy shopping mall or including a drive way or impressive aesthetics can significantly increase the value of the business.
- Lease: Lease terms can influence the valuation of a retail business. For example, longer leases without escalation charges exceeding 4 percent annually improve the value of the establishment. Typically, retail business valuations range from 0.4 to 1.3 times the revenue.
- Revenue Distribution: A corporate client roster can increase the value of a retail business. For example, a restaurant that caters corporate events is highly valued. Supplier terms can also significantly affect business valuation. Terms exceeding 30 days or bulk discounts over 3 percent are extremely favorable.