It is common to wonder what your retail business is worth. A business valuation refers to the process of estimating the total worth of a company. Keep in mind that valuations can cost you a lot of time and money. As a result, most small businesses do not calculate a valuation every year. However, depending on the needs of your fashion brand, you may have to conduct a business valuation more frequently.
Satisfying your curiosity is not the only benefit of knowing the value of your retail company. There are many advantages of finding out the worth of your business. For example, a business valuation can act as a guide for your brand’s future plans. You will also be able to come up with effective ways to improve your valuation.
Here are 4 simple steps to determine your retail business valuation:
- Figure Out Your Reasons for a Valuation
- Collect Business Information
- Examine Different Valuation Methods
- Select an Approach
1. Figure Out Your Reasons for a Valuation
The first step is to figure out your reasons for calculating the value of your fashion company. It is important to understand why you want to get a business valuation, so that you do not waste any of your resources. Your reasoning for doing so may not be the same as other brands.
If you plan on selling your retail company, it is crucial to conduct a valuation. You will want to get the most money possible from the sale of your brand and not want to settle for less than a fair value. As a result, a business valuation can aid you during this negotiation process. It can be of assistance to you if you are considering selling stock in your company as well.
Furthermore, determining how much your fashion brand is worth can be useful for when you are seeking funding. You might need money for growth, improving your product development, or if your business is struggling. Potential investors will be more likely to give you funding if you provide them with an accurate valuation of your company now and an approximate valuation after receiving their investment. Then they will have a better idea of how their money will increase the worth of your brand and how they will achieve a return on investment.
Another main reason for calculating your retail business valuation is that having this knowledge can be helpful for settling different types of disputes. For instance, if your company is facing a legal issue or tax problems, you will have an easier time resolving them if you are aware of your brand’s worth.
In addition, a business valuation will be significant when dealing with partnerships and changes in ownership. When entering into a partnership, you will need to know the value of your fashion company to be able to figure out a partnership share value. Meanwhile, if you are buying out a business partner, look over your partnership agreement and make sure to conduct a valuation of your retail brand. You must have this information to determine your partner’s ownership value and ultimately make a fair offer. In divorce cases, there can be disagreements over the worth of a company. Therefore, knowing the value of your business will be useful and reduce added stress.
There are multiple reasons businesses might want to calculate a valuation and comprehending why you specifically would like to find out the worth of your fashion brand can assist you throughout the valuation process.
2. Collect Business Information
Collecting business information is the next step for you to take in order to determine the value of your retail company. You should have financial statements for at least the past three years. Don’t forget to gather your brand’s tax filings and returns. There should be a record of one-time and non-essential expenses too.
You need to research market conditions before having a business valuation done. Look into business trends and risk factors, so that you will have a clear picture of the market. If the fashion sector is booming, you may see an increase in your valuation because there is more demand for your products. Meanwhile, if there are a lot of companies in the retail industry similar to yours, this condition might decrease your valuation.
Your tangible assets are crucial to know during the valuation process. Tangible assets are your retail brand’s material resources that typically have a physical form. Examples include land, buildings, equipment, inventory, and cash on hand. Their value is not difficult to calculate.
Also, you must identify your intangible assets and figure out their approximate value. Intangible assets are non-physical resources that impact the worth of your fashion business. Patents, copyrights, trademarks, and other intellectual property are all intangible assets. Goodwill is another type of intangible asset that is especially important for a company in the retail sector. Examples of goodwill include brand reputation and customer loyalty. Although they are not easy to measure directly, you need to estimate their value since they are essential for the valuation of your fashion brand.
Make sure to collect data regarding your company size and management experience. When determining the worth of a brand, the size is taken into account. Larger retail businesses usually get a higher valuation. They are not as risky as smaller companies because they have more income streams and accessible capital. Moreover, consider management experience. Effective senior leaders can boost your business valuation. As a result, you should be keeping track of the accomplishments of your management team. It is key to look at the experience level and loyalty of your employees too because they can raise the value of your fashion business.
Accumulating information about your competitive advantage and future growth potential is necessary as well. When there are so many brands in the retail industry, your products have to stand out from your competitors. You must offer something unique whether it is special designs or an extraordinary customer service experience. If your competitive advantage cannot last long, the worth of your fashion company will go down. Furthermore, you should determine your future growth potential. Figure out if you would be able to develop new product lines. If you collect data showing that your brand and industry are both expected to grow, it will lead to a higher business valuation.
3. Examine Different Valuation Methods
Now you need to examine different valuation methods. There are multiple ways to find out the worth of your retail company. We are going to go over an income-based approach, asset-based approach, and market-based approach.
Let’s take a look at an income-based approach first. The two commonly used income-based approaches are the capitalization of earnings method and the discounted cash flow method (DCF). With the capitalization of earnings method, you have to create a forecast based on cash flow, annual rate of return, and expected value in order to determine your business valuation. You should utilize this approach when you are expecting your cash flow to be stable in the future. The discounted cash flow method is another way to find out the worth of your fashion business. You will calculate the present value of your brand’s future cash flow. Then this value is discounted based on risk. If you are expecting your cash flow to fluctuate greatly in the future, you should use this approach.
An asset-based approach can be utilized too. An example of this approach is the adjusted net asset method, which is also known as the asset accumulation method. You take the difference between your retail company’s assets and liabilities, which are adjusted to reflect their fair market values. Although this method includes tangible and intangible assets, off-balance sheet assets, and unrecorded liabilities, keep in mind that this approach is not the most accurate when representing goodwill and intangible value.
A market-based approach is a valuation method you should examine as well. With this approach, you can figure out your fashion company’s value by looking at the sale price of comparable businesses in the retail industry. Check to see if there are specific methods used by companies in this sector. Remember to find brands similar to yours in size, customer diversification, location, and other characteristics. All of this information that you gather about your market will aid you in determining a suitable business valuation.
4. Select an Approach
The final step is to select an approach. After discussing various methods to calculate your retail business valuation, it is time to choose one that fits your brand the best. There are multiple factors to take into account. It will be helpful to think back to the first step of this process where you figured out your reasons for calculating the value of your fashion company.
Income-based approaches may be ideal for you if you would like to utilize your financial history to find out your business valuation. If you have a well-established brand with steady income, the capitalization of earnings method is the way to go. You can use this approach to convey to investors that their investment in your retail company is low-risk. Meanwhile, select the discounted cash flow method if your new fashion business has potential for growth, but is not profitable yet.
Depending on your retail brand, an asset-based approach might be more useful to you. You should choose this method if your company’s adjusted net asset value is higher than valuations based on income or cash flow. An asset-based valuation is effective for internal use as well. It can assist you in tracking your spending. This method is also best for businesses that are liquidating, which means they are selling off their assets and ultimately closing.
There are several reasons you might select a market-based approach. For instance, if you are able to easily collect information about sales prices of other companies in the fashion sector, you should consider this method. In addition, if your company and the retail industry are growing rapidly, I recommend choosing a market-based approach.
Business valuations are conducted often in the fashion sector. Today we covered 4 simple steps to determine your retail company’s valuation. First, figure out your reasons for a valuation. You may calculate the worth of your business if you are planning on selling your brand, offering stock in your company, or if you are seeking funding. Other reasons you might want this knowledge is for settling disputes or dealing with partnerships and changes in ownership. The second step is to collect business information. Before having a business valuation done, you must gather your financial data and information about market conditions. You need to identify your tangible and intangible assets, company size, management experience, competitive advantage, and future growth potential too.
Third, examine different valuation methods. In this article, we discussed an income-based approach, asset-based approach, and market-based approach. You should carefully consider all of your options. Then the fourth step is to select an approach. Your brand’s needs will differ from other fashion businesses. Therefore, take your time when choosing a method, so that you can get the best valuation for your retail company.