The engagement was to value a long established Hardware store in a regional town of Victoria. The purpose of the engagement was to either facilitate a succession plan or a sale on the open market. This example is an excellent case study as to why it is inappropriate in SME’s to value the goodwill separately to the going concern. The Hardware store had been trading since 1978, financial records were excellent, the premises were immaculate and occupied a prime position in the small town. Like all businesses it had some pitfalls, however on the whole a very good business and an excellent operation. Fortunately, from a valuation perspective, I was able to dig up some sales data from the sale of previous hardware stores and also get in touch with a respected business broker who had sold a number of Hardware stores in the past. It was determined that Hardware stores traditionally had been assessed on :-
- Rule of thumb 10% of total turnover + stock. For stores with a Turnover of less than $2 million.
- Value of Plant & Equipment + Stock
I applied these two methods and ironically arrived at similar figures. However once you removed stock and the value of plant & equipment from the going concern nothing was left for goodwill. One would think that a business of this statue would certainly have a component of goodwill. A risk assessment was completed to produce a capitalisation rate and applied to an adjusted PEBITDA. This produced a figure similar to what had been produced by the previous two methods and again no component for goodwill. Sales data further supported this conclusion. The realisation that the market was reluctant to pay for goodwill in a Hardware store was a bitter pill to swallow.
In many cases, brokers had to explain to their hardware store clients that given the nature of the industry the goodwill is actually wrapped up in the stock. Another lesson in that businesses should be assessed as a return on their investment of the going concern, as the businesses return will be compared to other forms of investment.