30 Sep Appraising Multi-Location Businesses

Written By: Ally Yan, CVA

(4-6 minute read)

SBA lenders frequently encounter acquisitions involving multiple locations or multiple legal entities. Although these businesses may appear similar to a single-location operation, additional valuation considerations exist because value is influenced by how the locations operate together, their management structure, and whether they function as one integrated business. It should be noted that a business valuation of more than one location or more than one entity will typically result in a different value compared to the individual sum of all locations, as each location may receive a different earnings multiple, dependent on the individual factors of each business. It should also be noted that if the locations have separate purchase prices, the SBA requires separate values by location as they cannot be appraised as one business.

When appraising multi-location businesses, it is important to first understand the structure of the financials. For example, a business owner can report the revenues and expenses of five restaurants on one tax return under a single entity, or they can choose to report separate financials for each individual location. An Appraiser must confirm the subject of the valuation provided by the client matches the financials provided.

Valuation Considerations

One of the factors to consider is the management structure of the locations. When there are multiple locations under the business, there could be a general manager at each location and/or an area/regional manager who oversees all locations. If the owner is absentee in the business, the Appraiser will assume the hypothetical buyer will take over the area manager’s role. Accordingly, the area manager’s salary would be added back to the Company’s net income. However, if the locations had to be valued separately, the appraiser would likely have to adjust for the general manager’s salary at each individual location. With only one location, the hypothetical buyer would be assumed to replace the individual location’s manager.

Another factor is the Company’s estimated capital expenditures amount. If the company only operated from one store, they would need to spend a certain amount to maintain equipment levels and update lease improvements of the one location. However, for multiple locations, the capital expenditures (and franchise-required renovation costs, if applicable) required for each location would need to be considered.

Furthermore, the ownership of the real estate and the lease should be known as it could be different across locations. This will allow for fair market rent adjustments for the owned locations, as necessary. As an example, consider a company that operates four locations – one of which is owned by the owner with the remaining locations leased from an unrelated third party. To account for a fair market rent adjustment for the owned location, the Appraiser would require a breakdown of the rent expense for the owned location. The actual amount paid by the company would be added back to the net income and a fair market rent rate would be removed.

Combined Valuation Benefits

There could potentially be certain benefits to having multiple locations. For example, if the business owner owns multiple liquor stores, they could achieve synergies across locations in terms of bulk buying materials and better cost discounts. This would result in a higher margin for the business and, in turn, a higher multiple. Additionally, there are other general advantages a business with multiple locations has over a one location business. The business would be able to offer products to a wider range of consumers which can mitigate the impact of local economic downturns or fluctuations. If one location experiences a decline in sales, the other locations could help offset the loss. This reduces overall risk. Furthermore, with multiple locations, the business can centralize management and share resources that would lower costs and improve margins. There would also be less risk associated with customer concentration if the business has multiple locations, which can also increase the multiple.

Valuation Case Study

The example below goes through the differences of how valuing multiple locations would differ from a single location. The original purpose of the business valuation was for the combined value of three retail store locations. However, the client decided they wanted the value of each location separately. It would be difficult to separate the combined value of the original report into individual values by location based on a prorated amount or by applying the same earnings multiple to each location as a different analysis would be required.

In this scenario, the three locations have combined sales of $5MM and net income of $700K and received a multiple of 3.5x SDE. However, when looking at the locations separately, one of them is performing more poorly than the other two, with lower sales and earnings. Based on the differences in sales and earnings of the individual locations, the smaller store would likely receive a lower multiple than the other two (and the combined multiple of the three stores).

Additionally, regarding management addbacks, if each location were valued separately, the manager addback would be different than when valued together (as previously discussed). The actual general manager salary at each location would be added back. However, for the combined business, the area manager’s salary would be used instead. The earnings calculations would be different depending on the situation. Please note that the sales, earnings, and multiples listed below are for example purposes only.

  

With multiple locations, having the financials separated by location (if all operations were reported under the same entity), would be helpful for the Appraiser to analyze the trends in sales and expenses by location, although not required. While one location may be experiencing an increase in sales and earnings, another could be showing a declining trend. However, the multi-location business is still treated as one value, with one combined sales and earnings amount and growth rate. Analyzing businesses with multiple locations requires additional analysis compared to a one-location business. While each location has its own financial performance and operational differences, when combined, the management structure, capital expenditures for each location, synergies / economies of scale should be taken into consideration when determining the value and multiple.