Translating Your Analyses into an Accurate Valuation

Nail down the right sale price for your pawn business.

In my last two articles, “Mergers and Acquisitions: How to Get the Best Deal,” and, “How to Prepare for the Sale of Your Pawn Business Before Calling a Buyer,” we took a look at the six steps an independent pawn business owner needs to take in order to get the most out of the sale of their business. We also looked at what it takes to build a pro forma.

Today, we’re digging even deeper, and taking a look at the specific items in your pro forma—the comprehensive financial analyses you present to potential buyers—and how pawn shop owners can translate those items into a proper, accurate valuation.

Some people will tell you that valuation is everything. And in a way, it is. If your valuation is off; that is, if it isn’t adequately supported by your pro forma, it is likely that the potential buyer will either walk away or counter with a too-low offer that doesn’t reflect what your business is actually worth. In other words, an inaccurate valuation can easily squelch a deal or cause you to lose out on a lot of money.

Remember, your pro forma should be based on your business’s revenue and expenses and show that you understand the buyer’s operating model. Why? In addition to knowing the particulars of your current business, buyers want to know what they’re going to get out of the purchase of your pawn business once they take over. When your pro forma accurately projects their potential net income for future years using solid financial data, it becomes a powerful selling tool. Presenting potential buyers with an acceptable return on invested capital (ROIC) that is reflected in the sale price will always stack the deck in your favor.

Let’s assume that your pro forma includes your projected revenue and adjusted operating expenses based on trends and expected business model changes. Let’s also assume that your pro forma includes known traits of various buyers’ stores in the market; that is, their yield on loans, gross profit margin, and expense ratio to net revenue, etc.

What else do you need in order to come up with an accurate sale price?

If you’re serious about getting the most out of the sale of your pawn business, your pro forma should also take into consideration any estimated capital expenditures the buyer will bear. These might include new signage, computer systems, graphics, packaging, and possibly, new store fixtures. Unfortunately, these things will put downward pressure on the ROIC, and potentially, the price.

You might be asking why you should include capital expenditures in your pro forma if they’re going to drive down your sale price. The simple answer is that if you can come up with an acceptable estimate for these expenditures, the buyer will be less able to surprise you with numbers for expenditures (that might be significantly inflated) that you haven’t already explored. When a buyer realizes that you understand their company and the pawn industry at a high level, they are less able to drive the sale price down to a point that doesn’t reflect your business’s true value.

If your pro forma is accurate and realistic, your sale price should include projections for an acceptable percentage of the potential buyer’s ROIC for up to 3 to 4 years. For example, it might reflect a 15 to 25 percent annual ROIC by years 3 and 4, following the sale of your business. (An acceptable percentage of ROIC for up to 3 to 4 years post-sale is pretty standard.)

To come up with a proper valuation, you will also need to include the intangibles. Five of the big intangibles that buyers often neglect to include in a pro forma are:

1. Size of the building (or buildings) and parking
Take into consideration the growth the buyer expects to achieve, anticipated storage room and retail space needs, and how parking might accommodate an increase in customers.

2. Proximity to other stores, commonly referred to as “overlap”
Ask yourself: Is my store within one or two miles of one of the buyer’s other stores? If so, is my store in any way superior in size, parking or location? Acknowledge potential problems and play up potential benefits. Potential benefits might include the possibility of combining locations that are close in proximity.

3. Quality staff tenure
Quality staff members and lower than normal turnover can give you leverage. Consider what your staff might be worth to a potential buyer.

4. Barriers to entry
Whether a barrier to entry is a municipal license, zoning restriction, or state statute, it can be a definite advantage to your sale price and desirability. If you have a haymaker of a store and restrictions prevent competitors coming to your area, you have a value-add item. Note any barriers to entry that may work in your favor as a seller.

5. Time versus years in business
A 2-year-old store that has grown to over $200,000 in loan balance is potentially more appealing to a buyer than a 50-year-old store with the same loan balance. Brand value is a funny thing, and is usually evidenced by financials rather than by years on the block.

Once you have a solid valuation, what’s next? When should you contact qualified buyers? How should you handle negotiations? We’ll tackle those questions and more in my next article.

Article originally published in the National Pawnbroker Magazine.

Copyright 2015 by Steve Stallcup, CEO and Founder