What is a sporting goods store worth?

Two sporting goods stores with the same sales on paper can sit far apart in price, because the shelves are only part of what a buyer weighs. The rest is a calendar and a set of relationships: how the year divides between winter and summer sport, how much work is done by a service department someone has to keep staffed, and which team, school and league customers will keep buying once the person who sold to them has gone. The Business Development Bank of Canada points out that a company’s fair market value is not necessarily the price it sells for. This guide covers the reasoning behind a price, not a number for any store.

Read a full cycle, not the latest few months

Seasonality can distort a sporting goods store’s numbers. Results taken in the middle of a strong winter flatter a store that leans on hockey and snow sport; a period ending after summer sport peaks tells a different story about the same business. A buyer who asks for monthly sales by category across several full years can see how well the two halves of the year support each other, and how much annual profit lands in a few weeks. The more evenly the categories fill the calendar, the less the thin months, when rent and payroll run against low sales, weigh on the year. The seasonality entry explains the wider effect on retail figures.

The service department is a second business inside the store

Tuning, sharpening, fitting and repair may earn money on a different rhythm from product sales, so a buyer can look at them separately and ask how much of that value sits with the technicians. If the owner does most of the work in the department, the owner’s bench time can be replaced at a market wage before profit is counted. Ontario’s guide to the Employment Standards Act explains that when a purchaser hires an employee of the seller, the employee is credited with past employment for certain entitlements, subject to an exception the guide describes for a gap in employment of more than 13 weeks, and British Columbia’s Act treats employment as continuous and uninterrupted when all or part of a business is disposed of. A long-serving technician is both the department’s value and, given those continuity rules, a cost the buyer has to take into account.

Team, school and league accounts are priced by who holds them

Institutional customers may be a steadier base than walk-in traffic if a club or school orders each season. They may also be held personally, with the coach or athletic director dealing with the owner rather than the store. The BDC lists customer concentration risk among the things that stop an owner getting full value for a business. A buyer should ask how many accounts there are, what share of sales the largest few represent and how each is renewed. Accounts that are documented, spread across many customers and known to more than one person in the store may leave a buyer less exposed than the same sales resting on one friendship.

Brand standing and the quality of the margin

Vendor and brand relationships, including any territory exclusivity, support a price only to the extent they continue under the new owner. That is a question for each vendor, not an assumption. The same discipline applies to margin. A store earning much of its profit at advertised reductions invites the question of what its “regular” prices rest on. Under the Competition Act, a representation to the public about the price at which a product is ordinarily supplied by the person making it is reviewable conduct unless that person, having regard to the nature of the product and the relevant geographic market, establishes a substantial volume sold at that price or higher within a reasonable period, or that it was offered at that price or higher in good faith for a substantial period. Pricing habits that must change under a new owner reduce the earnings a buyer can count on, the same normalizing exercise described under add-backs.

Stock is valued apart from goodwill, and the count date matters

Where inventory is counted and paid for separately from goodwill, the date of the count decides what the buyer is really acquiring. If seasonal goods lose value as a season ends, a closing just after the peak can leave a buyer holding last season’s range, so ask how the count treats carry-over stock. The Canada Consumer Product Safety Act defines a consumer product as one that may reasonably be expected to be obtained by an individual for non-commercial purposes, including recreational and sports purposes, and prohibits advertising or selling one the seller knows is the subject of a recall order, or of a voluntary recall in Canada because it is a danger to human health or safety. Recalled protective gear is not stock a buyer can count on selling.

Questions that move the price

• How evenly winter and summer categories fill the calendar across several full years
• How much recast profit comes from tuning, fitting and repair, and whether more than one technician can do the work
• Whether the team, school and league accounts are documented and known to more than one person in the store
• Whether each vendor has confirmed that brand and territory arrangements continue for a new owner
• How much of the stock belongs to the current season, and whether any of it is under recall