Key Adjustments When Valuing a Retail Shoe Store
By Alan Miklofsky, 10/12/24
When buying a retail shoe store, accurately determining the store’s value requires more than just looking at standard financials. Whether using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), SDE (Seller’s Discretionary Earnings), or True Net Income, adjustments are necessary to reflect the realistic performance of the business and uncover its true earning potential. Here’s a guide to the key adjustments and considerations that ensure a fair valuation.
1. Adjusting for EBITDA or SDE to Reflect Operational Realities
Both EBITDA and SDE need to account for non-recurring or owner-specific expenses that will change under new ownership.
Revenue and COGS Adjustments
One-Time Sales Promotions: If the store held aggressive sales events to boost revenue (e.g., liquidation or clearance sales), these events shouldn’t inflate the valuation.
Non-Recurring Vendor Credits: Eliminate any one-off vendor rebates or special terms that won’t continue in the future.
Inventory Management: Ensure the cost of goods sold (COGS) reflects a sustainable product mix rather than temporary inventory buyouts or overstock purchases.
Owner’s Salary and Discretionary Expenses (SDE)
Owner’s Compensation: Adjust earnings to reflect market-rate salaries, especially if the current owner’s salary is unusually high or low.
Personal Expenses: Many small business owners run personal expenses (vehicles, travel, etc.) through the business—these should be removed from the financials.
Lease and Occupancy Adjustments
Below or Above Market Rent: If the store benefits from a favorable lease or pays rent above market value, adjust the rent to reflect fair market conditions.
Lease Term Considerations: If the lease is near renewal, determine if the new terms will impact the business. Pay close attention to any increases in rent or Common Area Maintenance (CAM) fees.
Labor and Personnel Adjustments
Temporary Staffing: Adjust labor costs if the store temporarily increased staffing for an event or holiday season.
Family Members on Payroll: If family members on payroll won’t stay with the business, those salaries should be excluded.
Marketing and Advertising
One-Off Marketing Campaigns: Exclude the effect of large, one-time campaigns that won’t recur in the future.
Vendor Marketing Support: If the business currently receives temporary advertising subsidies from suppliers, adjust for their eventual expiration.
2. Non-Operating Income and Expense Adjustments
For both EBITDA and SDE, it’s important to separate out any non-operating income or expenses to focus on operational profitability.
Exclude Non-Operating Income: Rental income from unrelated properties or side businesses shouldn’t be included in the valuation.
Remove One-Time Expenses: Legal fees, consulting costs, or other one-off expenses unrelated to day-to-day operations should be excluded.
Debt Servicing Adjustments: EBITDA adds back interest expenses, as the new owner may have different financing terms or restructure debt differently.
3. Assessing Inventory and FFE (Fixtures, Furniture, and Equipment)
The value of current inventory and operational assets directly impacts the store’s enterprise value.
Inventory Valuation: Inventory should be valued at cost, and adjustments should be made for any obsolete, damaged, or slow-moving stock.
FFE Condition and Replacement Needs: Ensure the fixtures and equipment are in good working order. If the buyer will need to make replacements or upgrades soon, factor those into the valuation as future capital expenditures (CAPEX).
4. Enterprise Value vs. Asset Value Adjustments
When valuing a shoe store, it’s essential to distinguish between the enterprise value—which includes goodwill—and the asset value, which focuses solely on tangible assets like inventory and equipment.
Working Capital Adjustments: Consider whether the store operates with lean or excess working capital and whether additional capital will be required to sustain operations.
Goodwill and Brand Value: A store with strong customer loyalty, a good location, and vendor relationships commands additional value beyond its tangible assets.
5. Choosing Between EBITDA and SDE
The choice between EBITDA and SDE depends on the type of buyer.
EBITDA Valuation: EBITDA is more appropriate for strategic buyers looking to acquire the store as part of a portfolio, since it strips out owner-specific compensation.
SDE Valuation: SDE is often used when the buyer is an individual owner-operator, as it reflects what the new owner can expect to earn after stepping into the seller’s role.
6. Applying Valuation Multiples
Shoe stores are typically valued using a multiple of EBITDA or SDE, depending on the business model and growth prospects.
EBITDA Multiples: Retail businesses may sell for 3-5x EBITDA, depending on industry trends and local competition.
SDE Multiples: For owner-operator buyers, the business may be valued at 2-3x SDE, reflecting the expected annual cash flow after taking over.
Higher Multiples: Stores with strong brand identity, exclusive vendor relationships, or low competition may command higher multiples.
7. Economic and Industry Trends
The retail shoe business is dynamic, and external factors must be factored into the valuation.
E-commerce Integration: A store with a robust online presence is more valuable than one that relies solely on foot traffic.
Competitive Landscape: Assess whether the store faces pressure from big-box retailers, online competitors, or changing customer preferences.
Seasonality: Footwear sales often fluctuate seasonally, so ensure the financials reflect a full-year average rather than peak-season revenue alone.
Conclusion
Valuing a retail shoe store requires careful adjustments to EBITDA, SDE, or True Net Income to uncover the store’s true earning potential and ensure a fair valuation. By normalizing revenue, adjusting for one-time expenses, and factoring in lease and personnel changes, buyers can get a clear picture of the business's profitability. Whether you’re buying the business as an investment or as an owner-operator, these adjustments provide the foundation for determining the right price and maximizing the store’s long-term value.
This approach ensures you’ll walk away with a business valuation that reflects both the current operation and future potential—an essential step toward making a well-informed acquisition.