Gap: valuing a retail business

Excel model available. Version 1.2 · Valuation date: 2026-09-04.

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Start with one piece of the business

Choose one brand and follow a product from purchase to sale. Write down the selling price after discounts, the merchandise cost, and the cash committed before the customer pays. Then identify the store and central costs still needed to run the business.

Three things to work through

Sales customers actually repeat

Ask: How much growth comes from existing stores and customers, and how much comes from new space or a change in the reporting calendar?

Find: Brand sales, comparable-sales disclosures, store openings and closures, and the fiscal calendar.

Then decide: Separate ongoing demand from growth that requires more stores, stock, and capital.

Margin after the markdown

Ask: What happens to profit if the same stock sells at a lower price?

Find: Gross margin, inventory balances, markdown commentary, and relevant sourcing costs.

Then decide: Test lower sales and a lower merchandise margin together; do not hold margin flat just to preserve the valuation.

Cash needed to stay in business

Ask: How much inventory, store spending, and rent must the business fund before growth produces cash?

Find: Seasonal working capital, capital expenditure, lease commitments, and store closure costs.

Then decide: An attractive earnings multiple can still leave too little cash after the operating commitments are paid.

Where the valuation can go wrong

Keep rent and leases on a consistent basis when comparing companies. If the valuation includes lease obligations, the earnings and cash-flow measures must support that treatment. A brand-level valuation needs disclosed brand economics; sales alone do not establish brand profit.

Apply Mike’s judgment

Reconstruct sustainable earnings before choosing a multiple. An expense is not removable merely because management calls it an adjustment. Keep the required replacement cost and maintenance spending in the case.

Write down what must be true for the price to make sense. Test lower revenue and lower margins together, including financing and required investment. Keep buyer-created synergies separate from the business’s standalone value.

Open the workbook and try one change

1. Read Start Here, then open Valuation Summary to see the range of methods.
2. Review Assumptions and Sources & Adjustments. Separate reported figures from assumptions before changing the case.
3. Change one operating assumption, then test lower revenue and lower margins together. Follow the effect through Operating Forecast, DCF, and Sensitivities.
4. Read Checks after each change. Resolve a failed check or funding shortfall before relying on the result.

In Trading Comps, keep rent and lease treatment consistent. Then use Operating Forecast to test slower sales, more markdowns, and more cash tied up in inventory. Compare the change in DCF with the price ceiling in Acquisition Returns.

Compare the answers

Use Trading Comps and DCF to compare market pricing with the cash the business can generate. The Transactions and Sum-of-the-Parts sheets add perspectives where the inputs support them; read their assumptions before treating the outputs as evidence. Acquisition Returns is a buyer-affordability exercise, with its own financing and return assumptions.

Check enterprise value (the operating business) separately from equity value (what remains for shareholders after the relevant cash, debt, and other adjustments). If methods disagree, identify the assumption causing the gap before choosing a range.

Choose a valuation method

Copy this assumption note

• Assumption that matters: ___
• Evidence supporting it: ___
• What is still unknown: ___
• What changes in the downside: ___
• Effect on cash, price, or the handover: ___
• Next evidence to obtain and owner: ___

Carry the finding into the deal

Before You Buy: Follow the Work helps test the operating assumptions. After the Deal: Keep the Business Working helps assign the changes and protect continuity.