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No Easy Way to Figure a Shop's Sales Price

Published February 1, 2010

BY ALAN COTÉ

BRECKENRIDGE, CO—“What’s my business worth?” It’s a question that virtually all bicycle shop owners ask themselves, yet there’s no easy answer. Unlike the sale of a residential property, where recent comparable transactions are usually easy to find, the sale of a retail bicycle shop can be tricky business.

In interviewing a number of experts on the topic, as well as bike shop owners who had purchased their businesses from previous proprietors, it’s clear there’s no certain formula for finding a shop’s overall worth.

A number of common rules-of-thumb do exist for such valuations and resulting sale prices. One states that a business is worth one year’s gross sales. Another benchmark says that worth is two times earnings plus the value of inventory—this for a bike shop that gets about 2.5 inventory turns per year. But, such numbers serve as a mere starting point.

“The important thing to consider is ‘What are you selling or buying?’” said Tom Beckett, a certified business intermediary based in Breckenridge, Colorado. “Another way to think about it is, ‘What can’t be created if you instead started a new business from scratch?’”

Beckett has plenty of industry-specific knowledge to back-up his reasoning. For 10 years, he owned and ran the Sports Garage in Boulder, Colorado, before selling it in 2004. Now, with a Colorado real estate license, he has brokered the sale of about half dozen bike/ski/outdoor shops.
Some deals Beckett has seen have gone for more than the two-times-earnings-plus-inventory rule, and others for less. Often, it’s other intangibles—often hard to quantify in dollar terms—that can affect the value of the business.

“A business is a three-dimensional entity, so there are other value drivers in finding its worth,” said Beckett. “In the recreation industry, it could be higher than average margins, or a great staff. Or maybe strong affiliation to a good, established event. Those things can let you market the business at a premium.”

Numerous other factors could add value, like consistent revenue from a fleet of rental bikes. While proximity to colleges, beaches or a cycling destination should be reflected in annual sales numbers, these local strengths can further bolster value by insuring a long-term supply of tourists and fresh customers.

Carrying strong brands is an obvious boon for a business, but there’s no guarantee that a supplier will continue to sell to a new owner. “As part of a buyer’s due diligence, they’ll need to meet with vendors. Almost all the time, the relationship will transfer,” said Beckett. “The culture of the business is important to vendors, but ultimately, vendors want someone who represents product well and pays on time.”

Another bit of extra worth can lie with legacy—a name and storefront that’s remained in the same location for generations and become a local institution. On the other hand, longevity can be a liability: In 2009, Gamache Cyclery in Fitchburg, Massachusetts was unable to find a buyer and closed after 95 years in business (see Nov. 1, 2009 issue), even with top lines like Trek and Giant.

Brad Hill of Goodale’s Bike Shop, in New Hampshire, considered purchasing Gamache’s, but found that much of the remaining inventory was old and of low value. In addition, the once-vibrant milltown of Fitchburg has been on a longterm economic slide.

“Years ago, inventory was like money in the bank,” said Hill. “Now, anything around for more than 12 to 24 months starts to lose value, especially when distributors blow old stock out at big discounts.”

Long-established business owners are also likely to be less concerned with debt compared to a new buyer. This adds another angle to determining a selling price. “Revenue is often not a good basis for valuation,” said Beckett. “What it may come down to is the buyer’s cash flow. A buyer might be financing a majority of the purchase price through an SBA loan. Servicing that debt has to be a consideration in the purchase price, whereas a longtime-owner wouldn’t have that kind of debt.”

While all business owners have to respect their bottom line, many retailers are driven by other motivations. In the late 1990s, Doug and Jan Tanner were looking to buy a shop in New England. A friend of theirs wanted to sell his Connecticut shop. “I sat down with my CPA. He said, ‘What, are you crazy? Put your money into something else,’” Doug Tanner said.

“The CPAs are cut and dried, they just look at the numbers. That’s their job,” Tanner added. “But that’s not the only thing to look at. Some people are numbers-driven, but for others, it’s a lifestyle question.”

Several years later, the shop owner lowered his price, and sales had gone up. The Tanners made the purchase, renaming the business Benidorm Bikes. The shop has thrived in their 10 years of ownership. And the Tanners are still close with the friend they bought from. “He doesn’t own a shop, so he rides a lot more than I do,” quipped Tanner.

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