What is a toy store worth?

A toy store’s sales total says little by itself. If the store’s sales are concentrated in the holiday period, the figure depends on where the twelve months end, and the stock on the shelves can be worth different amounts depending on the month it is counted. BDC describes three main valuation methods, earnings-based, market-based and asset-based, with a valuator choosing one or a combination depending on the type of business and the available information, and it notes that the multiple used under a market approach varies greatly with the industry, market conditions and other factors. Anything said here about multiples is therefore illustrative discussion, never an appraisal of a particular store. What follows covers what a buyer can check in a toy store, what may be discounted, and why two stores that look alike can price apart.

The holiday period can distort the trailing twelve months

For a store whose sales peak in the holiday period, a trailing-twelve-month figure depends on where the twelve months end. A year that closes just after the holiday period includes the whole peak; one that closes in midsummer includes a quiet stretch and a stock position built for a season that has not started. A buyer can ask for monthly sales and margin by category over several years to see whether the peak is steady or rides on one hit product. The seasonal-business answer covers the general method. Markdowns after the peak are worth reading alongside the sales that preceded them, since the margin that survives is what the earnings figure rests on.

Stock can be priced as its own line

The Canada Revenue Agency notes in its guidance on selling a business that, in some cases, a sales agreement sets out a price for each asset, a value for the inventory of the company and, if applicable, an amount that can be attributed to goodwill. Where it does, the inventory line is a negotiated figure: how the stock is counted, and at what value, is written into the agreement. For a toy store the questions to settle are how seasonal assortments and licensed tie-in lines are counted and valued once their selling window has passed, and whether the count falls before the peak or just after it, because the same shelves may be valued differently on each date.

Recast earnings separate the store from the owner

BDC says a valuator typically reviews the financial statements, the prior-year tax return, discretionary and non-recurring expenses and management compensation. In a toy store those headings might cover owner pay that sits above or below what a replacement manager would cost, a clearance event that lifted cash but cut margin, an events programme run for traffic rather than profit, or a year in which a recalled line was written off. A buyer can ask for a document behind each adjustment. Treadstone Law’s article on add-backs says items labelled one-time that appear in the financials more than once across the years reviewed belong in the ongoing cost picture of the business, not outside it.

Supplier lines are goodwill that may not transfer

If a store depends on exclusive or first-to-market lines, whether those lines carry over to a new owner is uncertain until the supplier says so. The answer depends on the supplier’s own terms, so the question goes to the supplier in writing, including whether an allocation is tied to the seller’s sales history. BDC advises sellers to address any supplier or customer concentration issues or, if that is not possible, to think about ways a buyer could mitigate them, and says unaddressed issues could affect the price or terms of a sale. See supplier concentration risk for how buyers weigh it.

Recall exposure can reach the seller of the product

Under the Canada Consumer Product Safety Act, the Minister of Health may order a person who manufactures, imports or sells a product for commercial purposes to recall it where the Minister believes on reasonable grounds that it is a danger to human health or safety (section 31), and if the order is not complied with in the time specified the Minister may carry it out at that person’s expense (section 33). No one may advertise or sell a product they know is subject to a recall order or to a voluntary recall in Canada because it is a danger to human health or safety (section 8), and the Act’s definition of selling includes having a product in possession for sale. Stock caught by a recall therefore cannot be advertised or sold by anyone who knows of the recall, and BDC says unaddressed issues could affect the price or terms of a sale.

Why two similar-looking toy stores price differently

Take two stores with the same sales. In one, the suppliers have confirmed in writing that they will open the key lines for the next owner, and the stock is mostly current. In the other, one licensed line carries the year and a large block of last season’s stock is on hand. Those facts bear on how much of the revenue a buyer could repeat, which is one way identical sales can lead to different prices; BDC says the final selling price can be affected by numerous factors, such as market conditions, due diligence, the availability of financing and the seller’s post-transaction involvement. A buyer can start from a short list:

• Monthly sales and gross margin by category, with the holiday quarter shown on its own.
• Inventory ageing, split into current, seasonal and licensed stock.
• Supplier terms for every exclusive or licensed line, and who holds each account.
• The recast schedule, with a document behind every adjustment.
• Any recall correspondence and the records of what was done about it.