Grocery Store Valuation

This page is designed to help owners of stores in the grocery business understand what drives the value in their business and learn how a grocery store valuation or supermarket valuation can help an owner think strategically about the future of his or her business.

Many business owners already hold a number in their head about the value of their business. However, it is almost universally the case that that number is incorrect – by a wide margin (58.9% on average by our calculations). In a recent study of our own clients, we found that only one out of ten business owners was able to accurately estimate the value of their company.¹

Understanding the value of the grocery store or supermarket will allow owners to take proactive steps to increase that number, as well as strategize about the best way to monetize the value when they one day seek to leave the business.

The Foundations of Grocery Store and Supermarket Valuation

Business owners ought to have a firm understanding of the fair market value of their business for a variety of reasons. The value number comes into play when:

• Buying or selling the business
• Finding areas of operation in which to improve
• Seeking finance from a bank or loan institution
• Succession planning
• Estate and gift tax planning
• Developing the owner’s exit strategy

But short of actively listing the business for sale, how do appraisers determine the value of the business?

The Three Valuation Approaches

There are three business valuation approaches used by all appraisers, no matter what type of business they are valuing. These methods are:

1. The Income Approach: This method focuses on the earnings generated by the business in the recent past. If the store can demonstrate a sustainable pattern of high profits, it becomes very desirable to an outside purchaser.
2. The Asset Approach: Businesses with large amounts of assets – tangible or intangible – may find that the value of the business resides within those assets.
3. The Market Approach: This method examines recent sales of companies similar to the subject company. It’s just like when you are selling your house and see what other homes on the block sold for.

Key Value Factors

In the business world, there are many factors – both internal and external – which play a large role in the long term success of the business. Many the business owner can control, but many he or she cannot.

External Drivers

Here are four of IBISWorld’s most important external drivers that can affect your business²:

• Disposable Income – Per capita disposable income (PDC) for your area can greatly affect the quality and quantity of items that are purchased and what you can stock. More disposable income means more consumers can buy beyond the staple items. Fortunately, PDC is expected to increase over the next year.
• Consumer Sentiment Index – This consumer confidence barometer is related to consumer spending patterns, which in turn affect consumer’s willingness to purchase more expensive items. This driver is governed by business conditions, unemployment, inflation, economic policy, and more. With consumer sentiment poised to increase, this poses a potential opportunity for growth.
• Competition – With the industry already crowded and increasing competition from convenience stores, big box stores, and warehouses, the stakes are rising. With this factor expected to increase, it could be a threat to industry growth.
• Population – Whether the population is growing or shrinking alongside age and gender distribution can effect the value of business.

External drivers are often out your control, but understanding exactly how much they are affecting your business is crucial.

Success Factors

There are a number of business elements that you do have a control over. Listed below are five of the most important success factors selected by an IBISWorld industry report³.

• Proximity – It’s important to be close to your key markets with a location in a well trafficked and accessible area like shopping strips and malls, in addition to having ample parking and visible signs.
• Flexible Workforce – Having a flexible workforce, including many young workers with little or no previous work experience, is highly beneficial for keeping expenses low.
• Stock On Hand – Efficiently controlling your stock on hand provides customers with the assurance that your store will always have the products they need, making your store their first and only stop.
• Competition – With extremely difficult competition and little product differentiation, pricing often becomes the key differentiator from other stores.
• Efficient Technology – Leveraging technology allows operations to flow smoothly. This includes security and sale processing technology that speeds checkout and cuts down on employees handling the register.

Grocery Store Rules of Thumb

A rule of thumb can be used as a guideline in the valuation of a business. Just remember: rules of thumb are purposefully vague and ignore every aspect of what makes your supermarket different from its competition.⁴ Still, they are helpful in determining a ballpark range that you might expect to fetch in the marketplace:These guidelines make the assumption that your grocery store is just like your competitors’, with the exception of sales, EBITDA, etc. Any other factors that differentiate your store from a competitor’s are ignored.

• 20% of annual sales plus inventory
• 2 to 3 times Seller’s Discretionary Earnings (include inventory, equipment, and fixtures)
• 3 times of EBITDA

Looking Forward

The grocery store and supermarket industry has weathered the recent recession relatively well with many stores taking advantage of consumer’s desire to watch their budgets. Many stores have successfully capitalized on households cooking more at home rather than eating out. However, the industry is not immune to the downturn and many stores have shuttered. Even if consumers are visiting the supermarket more often, they are likely choosing cheaper options than they may have prior to the recession.

Once the economy rebounds, supermarkets and grocery stores might expect revenue to drop if consumers eagerly resume eating out rather than staying in. Keep in mind that competition among stores will remain robust and that some smaller stores may close from this increasing pressure.

Grocers who have spent years or even decades developing their grocery stores into successful businesses may now be thinking about their options as they take a less active role in the day to day operations of the business. Many owners plan to sell – though statistically only about 10% of all businesses end up selling. The process of “cashing out” of the business will most likely take 5 or 10 years. Determining the value of your business now will help you understand the spread of options you have and help you streamline your business’ profitability and maximize the proceeds you get when you finally leave the business.

The Value of Your Grocery Store or Supermarket

Would you like to speak with someone who can tell you exactly what a valuation would mean to you and your store? Please fill out our contact form and we’ll help you understand where the value is within your business. If you’d like to speak to somebody today, give us a call at (800) 895-4100 and one of our expert Value Advisors will be happy to speak to you.

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¹ Unpublished survey of SPARDATA’s business owner clients in 2010
² IBISWorld. (2011, February). Supermarkets & Grocery Stores in the US. Retrieved from IBISWorld Industry Market Research database.
³ Id
⁴ 2011 Business Reference Guide published by the Business Brokerage Press. Used with permission of the author.

5. IBISWorld. (2011, February) Id.