Dance Studio Owners: How Much is Your Studio Worth?

Do you know how much your dance studio business is worth?

Did you know there is a simple formula that you can use to find out?

And why would you want to know this? Because like any asset you own it is a great idea to know the value. Knowing your studio valuation gives you a lot of power if you ever want to consider selling your business or possibly taking on a partner. Furthermore, it gives you a benchmark of what your business is worth today and you will then be able to measure how much your business has increased in the coming years.

I Recommend that Dance Studio Owners Use the SDE Formula:

SDE stands for the “Seller’s Discretionary Earnings” and is commonly used for most service businesses to find out what the true value is for a small to medium sized business. There are many ways to use the SDE formula however, I have consulted dance studio owners and have helped them use a simplified version of this to come up with an accurate valuation for their businesses. This valuation has been successfully used to have one partner buy out another one and to have several studio owners sell their businesses to a buyer.

This version of the formula is really quite easy to do and here’s how you can figure it out yourself.

1.     Open up your Profit and Loss Statement for your most recent year:

2.     Take the salary of any and all principals in the business. That means if you are the sole owner, it would be your salary and any draw you take out of the business. If you have a partner or partners, it would be their salaries as well. Add all of this up for the year

3.     Any expenses that are more personal to you. if you were to sell your business these expenses would go away. Like car payments, your insurance, any meals, travel and entertainment expenses.

4.     On your P&L look at the very bottom line which will be net income for the end of the year.

5.     Inventory of costumes, dance wear and anything else that you have in house that you sell. When working on this number it is best to use the number that you paid for these items not what you sell it for. The reason why you do this is because if you were to sell your business no one would want to pay you the retail price for these items. You can negotiate some profit to you on these items but for the purposes of figuring out what your business is worth, I recommend you use what you purchased the items for.

6.     Now you will add up each of the totals from 2 through 5 to get your overall baseline number that you will be working with.

Now that you have your baseline number, we will now be able to figure out what we will be multiplying this number by.

Here are some tips to figure out what your multiple will be.

1.     Number of years you have been in business

2.     Has the income been consistent for at least 3-years

3.     Condition of your floors, mirrors, sound systems and office equipment

4.     Lease terms

5.     What is the gross your business generates

Let’s use this example:

ABC Dance Studio has been operating for 10-years and has had a consistent revenue stream for 3-years plus all of the studio equipment is in good shape and relatively new. This studio has 3 years left on their current lease with option to renew and additionally, the studio grosses $500,000.00 a year

The standard multiple this studio owner would use would be times two.

So, let’s assume this studio has a baseline number of $150,000.00 the studio valuation would be $300,000.00

$150,000.00 x 2 = $300,000.00

If your business grosses over one million dollars the multiple could go up to 2 ½ or even 3 if you have a lot of new equipment or floors and favorable lease terms.

As I mentioned earlier in this article, I have successfully used this formula not only for my studio but for several other VIP consulting clients and this number has pretty much been accepted by all parties. There is some gray area here or there and you may need some guidance in coming up with a proper valuation. Sometimes, it is recommended to have a third party take a look because they are not involved with the business as the owner is.

If you would like help in figuring out your studio valuation or would like to discuss ways on
how to improve your bottom line, I would be happy to consult with you. You can email me at Steve@danceteacherweb.com. Any and all communication we have will be strictly confidential and an NDA will be signed before we discuss any information.

If you are interested in selling your studio, watch this video and contact me to learn more about Ensemble Performing Arts Schools

 

Here’s to your success!

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