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Disruption to the retail sector – how can business valuations help?

There is no doubt that the pandemic has caused significant disruption to the retail sector, resulting in many finding it difficult to maintain a healthy cashflow with revenues and profits down on past years. To help business owners know their company worth and to support their individual ongoing lockdown exit strategy, they need to know the different types of valuation methods and the appropriate time to use them.

Covid has advanced the popularity of ecommerce at the highstreets expense

The rise in popularity of ecommerce and an increase of insolvencies on the High Street has been clearly seen over the last couple of years, although this has been accelerated by the effects of the Covid-19 pandemic. The financial strain that many businesses are under has been highlighted by the mass announcement of retailer restructuring plans and moves such as John Lewis deciding not to award its employees with annual bonuses last year.

Business valuations could assist your road to recovery

In the current climate, there are many cases where a business valuation is required and will be delayed or not go ahead. For the valuations that do go ahead, for example, implementing employee share schemes, restructuring, management buy-outs or even a sale, it’s unlikely to be an easy process. By understanding the range of valuation methods available and the appropriate time to apply them, business owners can learn what their company is worth to support their plans on the road to recovery.

How to conduct a business valuation:

Capitalisation of earnings or discounted cashflow (DCF) are the main established techniques used for business valuations. These can be tricky to apply in times of economic difficulties and can result in a valuation which does not always reflect the worth of a business. Although there are complications to consider, it is still possible to use these methods to create a valuation for a business.

Discounted cashflow:

The DCF method reflects that the valuation of a business depends on its future net cash flows, reduced to recognise the risk of achieving those cashflows and the time span over which they are achieved. It relies upon the certainty and availability of detailed reliable forecasted cashflow figures, often several years into the future. Currently the ability to forecast is much more difficult, especially where there are foreign transactions, due to the volatility in exchange rates. A business could apply a number of scenarios or ‘what-if’ events to the forecasted cashflows to provide a range of values, as well as updating based on the current management accounts. This will help to provide the most accurate position possible.

Capitalisation of earnings

The capitalisation of earnings method involves multiplying expected future maintainable earnings by the market multiples observed for comparable listed companies and/or in comparable transactions, allowing for adjustment for relevant factors such as control and marketability. This heavily relies on a business’ key financial data, both historic and future forecast. In the previous 18 months, many businesses will have experienced lower revenue and profits or even losses than in previous years. This can distort the current business value so as an alternative, especially if a business is expecting to recover to pre-pandemic levels, a business could look at previous profitable years and exclude the ‘outlier’ years.

In addition, this method also relies on obtaining a suitable multiple. As multiples are linked to market data, any volatility or fluctuation in the markets would then be reflected in the valuation. In the current climate, it is worth obtaining a multiple from several sources to ensure it is suitable. Retailers should also consider the net asset value of the business, which can provide a useful cross-check and will sometimes be the primary method if a business is loss making.

However, the current net asset position may not be reflective of the current values of the assets and liabilities. It is also essential to consider the realisable value of the assets. At this time, asset values may have fallen, so adjustments would be required to return the balance sheet to its current value. Other external valuers may also be required. For example, if the business owns property this would need a separate valuation.

The current economic uncertainty means that although using these methods will provide a base valuation for the start of negotiations, this will not be 100% accurate. It is important not to forget that careful consideration needs to be taken to look at a business’ current circumstances, why the valuation is required and the financial information that is available. Therefore, it is essential that businesses take these considerations into account and use the most appropriate method when valuating their business.

How to maximize the value of your retail business:

business growth on laptop graphic

There are a number of things retailers can do to improve their attractiveness to potential buyers, especially if they are considering selling their business in the short term. The top 3 are:

  1. Building a strong management team.  Whilst this is not necessarily critical to all buyers, an experienced and effective management team that make informed and sound decisions will provide resilience within a business and contribute to its robustness and value.
  2. Improving the robustness of the business model, often by having multiple income streams, is critical. This has been highlighted in recent times by those retail businesses with a strong ecommerce platform as well as traditional high street presence. 
  3. Having strong data sets, so that figures, trends and the impact of external events can be measured.

Retailers should also consider additional options such as employee share incentive schemes to reward key individuals and boost employee retention. These schemes can help to drive up the overall value of the company and get people on board with the business’ commercial objectives.

With some lockdown restrictions now lifted, businesses across the retail sector will be hoping to soon see an increase in better trading conditions. It is vital that businesses have accurate valuations in order to support any future plans for restructuring as trading conditions change. By applying the right valuation technique and seeking the right expert support, retailers can confidently plan for a more profitable future.

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