If you are thinking about putting your supermarket up for sale, one of the first things you need to determine is the profitability of your business. As buyers want an investment that will offer them superior returns, higher profitability means you’ll have more buyers who are willing to pay for your supermarket at the price you want.
So how exactly do you determine how profitable your supermarket is? Allow us to help you with that.
There are several factors in appraising a business that is set up for sale. You may compute your supermarket’s profitability by using a couple of formulas and a very handy reference called a profit and loss statement. Here are some useful formulas you can use:
- Gross profit lets you see how much mark-up you get to charge on each item sold. It is revenue minus direct cost – usually cost of purchases plus shipping cost.
Gross profit = sales – cost of sales
This means that if you sold $17,000 worth of goods for the past month but spent $5,000 on raw materials, your gross profit is $12,000.
- Net profit tells you how much your supermarket made after cost of sales and other expenses such as overhead and interest have been deducted.
Net profit = gross profit – other expenses
Following the previous example, if your supermarket spent $2,000 on taxes and overhead, your net profit is $10,000.
- Sales per square metre lets you see how much you are making in relation to your rent or building expenses. This is especially useful if your supermarket is less than a year old and you have no previous numbers to compare your current figures with yet.
Sales per square metre = total net sales ÷ square metre of selling space
This formula does not take into account products in your warehouse or those that are not displayed in your supermarket. For the formula to be effective, the figures being compared are best taken from the same time period. Therefore, your monthly sales per square metre is ideally compared to your monthly rent.
For instance, your 20-square metre supermarket costs $5,000 a month. By dividing your building expenses with your supermarket’s area, you will see that you are spending $250 for every square metre.
Let’s say your total net sales for the past month reached $10,000. Using the sales per square metre formula, you determine that you are making $500 for every square metre of your store. This means that for every square metre, you made $250 more than the money you spent on your building in the past month.
Both gross and net profit provide an excellent picture of how your supermarket is performing at any given period. These figures are best calculated on a regular basis (quarterly, annually or others) and then compared with numbers in the past but using similar time durations so you can establish trends and determine your supermarket’s ability to yield profit.
A profit and loss statement is another excellent reference that gives you a rundown of the numbers relevant to your supermarket. It is a list of your store’s sales and the expenses incurred over a certain period. Like the net and gross profit formulas, this statement gives you a clear idea of how much you made after all expenses are deducted.
The profit and loss statement is crucial to the computation of the proprietor’s earnings before interest, taxation, depreciation and amortisation (PEBITDA). This speaks of the core profitability of the business before the effects of financing and investment decisions (ie interest, depreciation & etc). PEBITDA is a well-accepted measurement of profitability and is used in different ratios to discern other aspects of earning power. A business broker can best help you identify the unobvious factors that could maximise the PEBITDA of your store.
Your sales are choppy if figures consistently rise and fall over succeeding periods with no sign of any apparent trend. The term came from “choppy,” the word used to describe the erratic, unpredictable behaviour of the sea when there is a storm. As in its original usage, choppiness in business is often interpreted as a sign of trouble and underlying financial problems.
Choppiness becomes evident when you examine your gross and net profits, among others. For instance, your profit for the previous quarter totalled $1,000. Over the next few weeks, your profit rose and fell between $1,200 and $600 but by the end of the next quarter, your profit ended up at $1,050. Ideally, your supermarket should have consistent, if not continuously growing sales.
Needless to say, there are many factors that could induce choppy sales, from shifting seasons to changing the variability and quantity of items on shelves to changes in suppliers’ prices of supply. As such, choppiness itself should not be a cause of worry as it is not an ultimate measure of value. The profit and loss statement, as well as the PEBITDA, offers a more comprehensive glimpse into your business’ significance as an investment and therefore, are worth looking into if you are putting your supermarket for sale.
So how profitable is your supermarket? If you are unsure, you can always seek out experts who will help you determine the profitability of your business and the level of returns you can expect should you decide to sell it.
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