Buying a Bookshop: Valuation of a Small Business

There is a quaint bookshop around the corner. The selection is not large; the latest non-fiction and timeless novels – my favorites. Coffee is served filling the place all day with the delicious aroma of ground coffee beans. It so happens that the owner has put up the business for sale. I can see myself doubling as book aficionado and coffee barista…..

Like many whose largest purchases have been their residential homes and a car every few years, this will be my first and possibly only purchase of a business. Now comes the tricky part. What is the value of the bookshop business and how much should I pay for it?

Of course I will negotiate the price down as much as possible but I need to determine some starting value as benchmark to start a discussion with the owner. To assist I have called on the advice of B. N. Counter and associates, a nearby accounting firm.

The value of a small business is made up of two components; the assets of the business and the income of the business.

Assets

Consider that if I were to start the same bookshop from scratch, I would have to pay for the shelving, fittings, cash register, possibly a delivery vehicle and the stock of books. This in itself has value and is a start point in determining a price for the business. With one of the young Counter associates, a smart young lad called Namba Kruncha, we look at the balance sheet and asset register of the shop. It comes to a value of $10 000.

Net Income

My planned little venture means that I am buying the future income that the bookshop will produce. Every year the shop sells a certain amount of coffee and books, it pays for new books, coffee beans, rent and utilities, and the four students who alternate as staff earn a monthly wage. Deduct these expenses from sales and what is left is the net income of the business. Over the last three years the net income per year was $12 000 on average. The future is uncertain and not all future income is paid for today, so a multiplier is applied to the net income amount. As a rough rule of thumb; the income multiplier applied to the price of a small retail business would be about 0.75 to 1.50 times. Let’s take the multiplier as 1.25 which pegs the net income value at $15 000.

The asset value and the net income multiple is added.

Voila, the value of the shop is $ 25 000.

“Not so quick” says Namba.

Many factors influence the asset and net income values. The age and condition of the shelves and furnishing, the amount of books in stock that may be old and out of fashion and then there is the niggling issue that the lease is expiring in six months and a large increase in rent is expected. B. N. Counter’s astute associate also points out that the shop is in one of the new hotspots in town and sales can be expected to boom over the next few years. A local college has only recently agreed to order most of its fiction literature through the shop.

All these and more may influence the perceived value of my little dream shop. 

Ultimately all is up to negotiation between buyer and seller.

This fictitious story illustrates one way of valuing a small business. Valuation is not an exact science and the method shown is but one simplified example.If you were really to find yourself in a situation of buying or selling a small business, professional advice is recommended.

Now then, where can I find a good bookshop….to buy that is.