Calculating the Value of an Arts Business

WHAT IS AN ART BUSINESS WORTH?

I've pondered this question a lot over the years and especially as we began closing up our own gallery 17 Cox last spring. Surely out of pure providence, I was also taking a course in business valuation at the same time as we were closing up. I though I'd share some findings (of which I'm pretty proud of considering how opaque the art industry can be). But I think it bears mentioning that almost all art businesses are private companies - meaning their financial reports are not publicly available - and finding such data can be difficult.

Here's what we do know. In 2012, the average salary of an art dealer in the US was $31,000. This salary may seem small but many small potato dealers make sales (and trades) on the side with little overhead. However a brick and mortar gallery in an urban setting, typically needs north of $500,000 annually to sustain itself. Globally the average art company size is 5 people (this includes large institutions), but my findings were half that size. Many galleries operate as individuals with small if any staff and art service companies may be a handful to a dozen or more employees.

WHAT (AND HOW) TO MEASURE?

My two primary sources were BizBuySell and BizComps. Through these data sources I wanted to answer the following questions:
  1. What is the asking price for an art business? 
  2. How much would a buyer be willing to spend? 
BizBuySell is a website that compiles businesses for sale in certain categories. I used the "museums, art galleries and zoos" category to find current businesses for sale. I decided to throw out businesses that were not visual art related (such as zoos!) and was able to find 48 businesses for sale in art retail and art services.

BizComps is a paid subscription service that compiles a list of sold businesses in certain standard industrial classifications (SIC). An art gallery belongs to the SIC of 5999, a miscellaneous retail classification of which art gallery is a subset. Through BizComps I was able to find 11 sold art businesses since 2002 in the SIC 5999.
Examples of businesses for sale on BizBuySell.com

Before diving into the analysis, I want to list what I can't calculate:
  • I can't calculate the value of artworks themselves, just the value of the businesses that work with art as a product or service. However, sometimes the sale of a gallery may include up to 1/2 to 3/4 of its value in its inventory of art.
  • Art is more valuable than its price tag and an art business is more valuable than its revenue. I did not try to value the arts' full economic impact on the community, for example art businesses' effects on tourism revenues and property values were not applied.
  • I did not calculate the arts' non-economic impact either, such as rising livability indexes next to art districts.
  • I did not calculate valuation for all of the arts, I'm just focusing on visual art here, but I had to include some exhibitions and museums that are not specifically art.
  • And finally, I did not want to open the dilemma of calculating only for 'fine art' or 'art with a capital A'.  I'm drawing a wide circle around visual art, crafts, art support services and even some art-like collectible retail. 
FINANCIAL FINDINGS

So, here's the data. The average asking price for an art business was roughly $274,000 and the median was around $150,000. This high average asking price is abnormally skewed over the median because of two large asking prices for a body exhibit and telephone museum (essentially collections) at $2.5 and $1.2 million respectively. However in the end, the average businesses sold for $154,000 and the median sale was $117,000. This lower sale price means that most businesses probably had their asking price haggled down or reduced over time - or only the best bargains were purchased.
ASKING PRICESOLD PRICE
AVERAGE$274,102$137,655
MEDIAN$150,000$117,000

We see a similar purchasing strategy in revenues - only the more profitable businesses were sold in the end. The average revenue (annual gross) of businesses for sale was $338,000 and median was $253,000; but revenue of sold businesses was averaged at $601,000 with a median of $447,000.
REVENUE OF BUSINESS
FOR SALE
REVENUE
OF SOLD BUSINESS
AVERAGE$338,070$601,455
MEDIAN$253,294$447,000

But what does this mean without comparing to the price that the business would sell at? Profitability is related to how much you invest. So I then calculated the asking price over the annual gross - which is essentially how many years will it take for revenue to equal the cost of buying the business. This proportion was less than a year in businesses for sale, about 11 months on average and 5 - 6 months on median. Again the sold businesses have a much faster recouping time - around 3 - 4 months of revenue to meet the sale price.
ASKING PRICE / REVENUESALE PRICE / REVENUE
AVERAGE0.920.299
MEDIAN0.60.226

However, using gross revenue can be misleading since some businesses have less overhead and are more profitable than others, so I also calculated profit over the asking price (called the seller's discretionary earnings or SDE). SDE is a more useful denominator since it tells us how many years in profit it will take to pay off the cost of the business. Asking price over SDE was 3 years 2 months on average and 2 years 4 months on median, which is a pretty sad investment. Taking 3 years to pay off just the cost of buying the business - let alone expanding it - is nothing the average investor should jump at. Looking at the businesses that actually sold, we see that it was around 1 to 1.5 years for profits to equal the sale price.
ASKING PRICE / SDE (profit)SALE PRICE / SDE (profit)
AVERAGE3.141.432
MEDIAN2.381.158

In practical terms, most of these businesses would probably take on a 5 - 10 year loan of around $100,000 and that's going to be a $1,000 - $1,200 monthly payment. Most of these businesses for sale have weak numbers and I also highly question the veracity of some claims of revenue on Bizcomps. However, it does make perfect sense that the actual businesses sold on BizBuySell had healthier profits and revenues compared to their price.
OTHER FINDINGS
Did you know the average art business (for sale) is over 20 years old? I averaged the established dates of the businesses listed on BizBuySell and 1993 is the average established date (1996 was the median). I have many gallerist friends who have closed their doors too quickly, but there are many galleries that last for decades! Perhaps the skewing towards older galleries on BizBuySell is that younger businesses will straight up close their doors instead of trying to sell the business. I definitely think that potential buyers would more interested in businesses that have established themselves (and their clients) over a decade anyway.

I also tried to calculate the average staff for a gallery (using full time as 1.0 and half time as 0.5). I calculated that the average art business for sale has 2.5 employees (median was also 2.5). I think we can extrapolate that at least one of these employees is the owner since galleries are almost always a sole proprietorship or partnership. This doesn't surprise me much given the small scale of most art businesses and the bevy of solo enterprises.

I also found that an incredible 10 out of 48 businesses for sale were willing to do seller financing. The range of seller financing was broad as well; whether it was a tiny $35k operation to a $1.5m company, the businesses were 21% likely to help finance the sale. For those late in their years gallery owners, there may be a non-financial desire to see their passion, their artists, their clients continue into the future. But what does this portend for the past business owner? This could mean payments over many years but could an ailing business owner allow a 20 year financing option? Certainly not a balloon payment, right?

Only 5 of the 48 businesses for sale were attempting to sell real estate and 37 of the 48 listed inventory for sale with the business. As I mentioned before, inventory can make up a substantial amount of the asking price of a business (in some cases 100% of the asking price). The sale of real estate or inventory in a business is a dubious proposition. In one perspective the assets are a fail-safe since they are tangible and hopefully liquid (this might help the banks feel safer lending to you). On the other hand, the business needs to be competitive and shouldn't have its sale price wrapped up completely in assets, but rather some intangible competitive advantages like client relationships or brand recognition.

LIMITATIONS

Please don't draw too many conclusions from this report. It should be noted that the distinctions between industries are often blurred and frustrate attempts to generalize. There is trouble distinguishing the many retail shops that sell "art" such as poster shops or furniture galleries from actual art galleries. Even Homegoods and Sears sell art! In 2009, Andrew Witkin of Boston Art Dealers Association (BADA) recognized 125 galleries operating within the I-495 area of Boston, however a quick Google Map search resulted in 403 results for “art gallery” inside the I-495 area. That's a pretty large difference between recognition by the industry and rampant self-titling as a gallery.


Even within the art industry there is trouble distinguishing between business types. Galleries and art services are often blurred due to multiple revenue sources. For instance, many frameshops often have small galleries and many galleries will offer consultation services.
If you're really curious, you can find the full spreadsheets online here - just browse between the two tabs at the botom. I'm pasting a synopsis below as well. Thanks for reading!

Metrics for
ART BUSINESSES FOR SALE
Information via BizBuySell.com, April 2014
BusinessLocationAsking PriceSDEAnnual GrossAsking Price / Annual GrossAsking Price / SDE
GalleryVT$450,000$140,000$820,0000.553.21
Gallery / FramerWindsor CT$85,000
Art Classes (franchise 1/39)San Diego, CA$85,000$45,000$150,0000.571.89
DIY Studio / ClassesDurango, CO$18,000$35,0000.51
Art GalleryCalabash, NC$200,000$446,0000.45
Exhibit (Bodies)El Paso, TX$2,500,000$250,000$550,0004.5510.00
GallerySaluda, NC$15,000$85,0000.18
Internet Framing (sports)Ventura, CA$489,000$140,000$310,0001.583.49
GallerySante Fe, NM$185,000$96,925$496,4530.371.91
FramerSuffolk (County), MA$265,000$140,450$215,0001.231.89
FramerDenver, CO$200,000$104,000$380,0000.531.92
GallerySuburban MA
FramerDenver, CO$140,000$65,109$148,5970.942.15
FramerSanta Clara County, CA$180,000$130,000$200,0000.901.38
GalleryEaston, MD$100,000$500,000
FramerNC$125,000$61,900$225,2700.552.02
GalleryFredricksburg, TX$225,000$550,0000.41
Gallery / FramerIndianapolis, IN$300,000
Gallery / FurnitureLaguna Beach, CA$250,000$88,000$323,5000.772.84
GalleryYavapai County, AZ$80,000$38,532$253,2940.322.08
GalleryWarwick, RI$45,000
GallerySante Fe, NM$149,000$364,4000.41
Gifts and ArtJerome, AZ$199,000$51,875$500,7330.403.84
GalleryFramingham, MA$14,900$5,000$58,0000.262.98
DIY StudioSouthern Colorado, CO$100,000$53,000$113,0000.881.89
Framer / GalleryGA$149,000$66,000$163,0000.912.26
Art TruckHonolulu, HI$55,000$27,000$53,0001.042.04
FramerSeabrook TX$90,000$123,0000.73
Framer / GalleryOrange County, CA$150,000$48,519$300,0000.503.09
GalleryOrange County, CA$95,000$49,000$125,0000.761.94
GalleryGolden, CO$375,000$50,000$310,0001.217.50
Framer / GalleryPhoenix, AZ$45,000$17,294$75,0850.602.60
GalleryFranklin County, VA$230,000$73,339$499,7920.463.14
GalleryKane County, IL$375,000$150,0002.50
Museum (telephone)Corsicana, TX$1,200,000
GalleryGatlinburg, TN$25,000
Art and GiftsUnion NJ$140,000$110,000$446,0000.311.27
Art / MemorabiliaNew Orleans, LA$360,000$1,500,000
GalleryBrighton, EN$97,789$295,1730.33
GalleryKings County, NY$140,000$63,480$216,0000.652.21
Furniture / GalleryLos Angeles, CA$349000$124,000$866,0030.402.81
Gallery and FramerWinter Park, FL$34,900$14,000$94,0000.372.49
GalleryGlynn County, GA$245,000$19,599$223,7151.1012.50
GalleryHouston, TX$750,000$135,0005.56
Restoration / GalleryMorris County, NJ$440,000$338,736$725,0000.611.30
GalleryWilmington, NC$399,000$149,0002.68
Museum (Black HIlls)South Dakota$150,000$236,8680.63
Gallery / FramerDC$500,000$175,000$600,0000.832.86
AVERAGE$274,102$99,836$338,0700.923.14
MEDIAN$150,000$69,670$253,2940.602.38

Metrics for 
SOLD ART BUSINESSES
Information via BizComps, April 2014
BusinessSale DateSale PriceSDEAnnual GrossSale Price / Annual GrossSale Price / SDE
Art Gallery3/31/2008$226,000$145,000$889,0000.2541.559
Art Gallery2/28/2008$213,000$70,000$447,0000.4773.043
Internet Art Retailing3/24/2007$475,000$183,000$1,327,0000.3582.596
Art and Framing9/19/2007$118,000$73,000$252,0000.4681.616
Art Franchise6/27/2012$45,000$40,000$145,0000.3101.125
Art Gallery6/30/2005$48,000$70,000$188,0000.2550.686
Art Gallery7/31/2002$105,000$106,000$265,0000.3960.991
Art Gallery6/30/2010$50,000$180,000$280,0000.1790.278
Art Gallery6/30/2005$100,000$101,000$1,373,0000.0730.990
Art Gallery2/20/2009$200,000$99,000$499,0000.4012.020
Art Gallery2/12/2007$117,000$138,000$951,0000.1230.848
AVERAGE$154,273$109,545$601,4550.2991.432
MEDIAN$117,000$101,000$447,0000.2621.158