I had a simple question from a client – to value his retail business……. This began as a fun investment, as the year has gone by what began as fun, is draining his time, energy and a bit of cash – a typical response from an entrepreneur – “I will just sell it……. how much is it work?” my response below which I thought would make a good blog – please note this is missing exact figures and information as this is confidential……….
How do I answer such a complex question – especially with a business and a marketplace I have never seen…….
I can only go from the last set of accounts that were created for the business – for the year ending XXXXXX as the accounts show a loss based on this alone the business is considered a “going concern” with a Directors note that they hope it will come into profitability – as you see on the balance sheet there has been a Directors loan into the accounts, however the business has a net book value of tangible assets of £12k plus an inventory of £10k so there is value there – however the balance sheet is negative £29K – you could also refer to the bank and have a cash flow statement of the money in and out of the business – this is also an indicator of the business either performing positive or negative.
I understand that as this is a seasonal business along with the set-up costs that you have forsaken it is possible to sell if there is value with the market and uplift with your brand, location, other competition and market place/strength but a business is only truly worth what somebody else is willing to pay – the right minded buyer would look at the opportunity, location and brand if these are good and the business has been badly managed or not given the attention needed this can push up the sales price – however if it has been managed well and the market is simply not buying this usually means a sunk cost and no opportunity.
You have to remember that 80% of start-ups usually fail in the first year – and without cash flow supporting the business you need to consider the work, time, money and energy needed to gather a return on your investment.
I often deal with business owners that can become attached to their business and are either too optimistic about the enterprise or don’t use any data / information / facts that can truly demonstrate if the business will work, I would personally suggest that you perform an autopsy of the business and how you believe it is running.
I would also get you to look at the sales of the business and check:
New Customer numbers and average spend
Repeat customer numbers and average spend Upsell opportunities Frequency buying opportunities the effect of raising prices – would you lose custom
I would also look at the business critically and decide if sales activity can be increased and the revenue streams this would address – and separately if marketing and awareness would generate more purchases versus overhead. I would also think of new revenue streams to add to the business with little investment or data driven opportunities.
Looking at the profit and loss sheet on these accounts if the business was to sell nothing and not purchase any stock/inventory the running costs of the business is £117.72 per day (253 banking days in a year) this is the burn rate as the accounts are the first year the gross profit isn’t accurate but if you worked on a 30% mark-up you would need to sell £392.40 a day (253 days) just to breakeven as the business is seasonal you could double these numbers to show a 6 month period – this is of course based on the overhead costs from 2018 accounts.
I hope this helps you and as an entrepreneur you really have to look at this with your own eyes and business instinct and determine if this is going to be successful and what you’re willing to compromise – personally you started this as you seen a gap in the market place data / information should drive this and really ascertain if there is a gap.