It’s the ultimate daily British ritual of going down to the corner shop for milk and bread. Running a convenience store might only yield an average of £7.75 per visit, but the volume makes running a corner shop a potentially profitable venture.
One of your first obstacles is determining whether you’re getting a good deal on buying a corner shop. Look at the market, and you’ll see a considerable amount of variation because it’s all about location, footfall, products sold, brand reputation and, of course, profitability.
Let’s go into what you can do to value a convenience store if you’re thinking about starting a new chapter in running your own business.
How can you determine the value of a convenience store?
You’ll hear stories of people snapping up a corner shop for £20,000, with others paying six-figure sums for the freehold. There’s so much volatility in values because a Central London shop might bring in £2,000 a day, whereas a small village shop might bring in just a few hundred pounds.
With more than £47 billion in sales from the UK’s convenience stores, it’s clear that there’s money to be made, but you want to ensure you’re getting the right price to start.
Before going any further, we must mention that corner shops don’t work like other retail assets. Most retailers benefit from the “critical mass” effect of being in a similar place as other retailers. Profitable convenience stores thrive off being the dominant (and often only) force in a particular area.
So, what goes into determining the value of a convenience store?
- Location – Limited competition in a high-footfall area always enhances the value of a convenience store.
- Size – Larger stores benefit from being able to stock and sell more products, as well as serve a greater range of shopper needs.
- Product Mix – What are you selling? This plays into size and product availability. Large product mixes boost the value of a shop. For example, do you sell freshly baked pasties or fresh fruit and veg?
- Opening Hours – Convenience stores are all about convenience, and much of that plays into opening hours. Shops are more valuable if they’re open for longer hours, seven days a week.
- Owner’s Accommodation – Some shops go for much more because they also incorporate upstairs accommodation, allowing business owners to combine personal and professional into a single venue.
It also helps if you’re a recognisable brand. There’s a reason why supermarkets have benefited hugely from trying to expand into the sector. Today, just 39% of stores trade under their own names, demonstrating the immense value of building a trustworthy brand on a local, regional, or even nationwide scale.
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Valuation multiples for a convenience store business
Valuation multiples is one of the most common methods a professional business valuer might use to determine how much a shop is worth. Essentially, a valuation multiple is a ratio comparing two factors against each other.
Seller’s Discretionary Earnings (SDE) is a popular multiple for small businesses. It represents the financial benefit your shop would provide a single full-time owner-operator. It’s calculated by taking a business’s net profit and adding back a select number of discretionary expenses.
So, you would compare the SDE with the implied value of a particular convenience store. It’s then compared with recently sold shops to find out how much your shop could be worth.
Here’s a rundown of valuing a shop using two simple approaches.
Valuing a convenience store with a market approach
A market approach to valuation is one of the most simplistic ways of valuing a small business. It’s just like how people might look for houses in Zoopla. You look at recently sold stores in your area and see what they sold for to get an idea of whether a shop on the market is overvalued or undervalued.
Of course, there’s more nuance than that. Issues like what a shop sells, its size and where it is come into play. Due to the volatility involved in the convenience store market, this can be unreliable if you cast your net too wide. Another issue is there might not be enough recently sold stores in your immediate vicinity to rely on the market-based approach.
However, the advantage is if you’ve got enough recent data to work on, it’s one of the quickest ways to get an estimate of whether you’re getting a good deal or a bad one.
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Valuing a convenience store with an income approach
Another option is to use the income approach. The income approach uses the current value of its cash flows or future earnings to provide a single value for a business now and in the future. In other words, you’re valuing the shop based on the income it generates.
However, there’s more than one income-based valuation method. Two of the most common are the capitalisation of cash flow or using the discounted cash flow model. Here’s how these two work:
Capitalisation of cash flow method
Capitalisation of cash flow is best used when buying a shop that’s been in business for a substantial period. It’s also perfect for shops that have relatively stable histories.
A business valuer will choose a period of time and use that to decide what the buyer can expect to earn from the shop. They’ll divide the time period by an appropriate capitalisation rate to arrive at a figure. The capitalisation rate is the reasonable rate of return a buyer can expect.
Additionally, it’s a method that factors in common risks a buyer might encounter when attempting to realise their expected earnings.
Discounted cash flow method
The discounted cash flow method relies on three to five years of financial projects to assess how much a shop might pull in in the short to medium term.
The only difference between this method and capitalisation of cash flow is a business valuer will use a discount rate instead of a capitalisation rate. However, the value of this method depends on having reliable forecasts, which might not be available.
We generally prefer not to use this option because discounted cash flow focuses on future cash flow estimates, which is a more inaccurate and unreliable area to look at because nobody can predict the future.
But there’s no doubt that it can be a helpful method to employ because it allows for variations that could impact the value of a shop, including growth rates, debts and random factors that won’t figure into your long-term business plans.
Valuing a convenience store with Cogogo
The easiest way to value a convenience store for your new venture is to work with professionals, like our team here at Cogogo. We can support you in gaining an accurate business valuation and purchasing the most suitable store for your budget, needs and goals.
Speak with our team today to find your ideal convenience store and get started on your new venture in the right way.
