Valuation Guide: Art Dealers and Galleries

Description of the Industry

The U.S art dealer industry (NAICS 453920, SIC 5999), includes approximately 23,000 businesses nationwide and generates almost $9 billion in revenues each year. Art dealers, including art galleries, are retail businesses that buy and sell art. In addition to galleries, auction houses and dealers without gallery space are also included in the art dealers industry. Typically, dealers purchase artwork from artists or previous owners and then resell the artwork.  In some cases, dealers may sell work on consignment and keep a commission.

Dealers and galleries may specialize in particular media or genres of art or may be more comprehensive. Works sold may include paintings, drawings, prints, photographs, or sculptures. Some dealers may also offer products and services such as art supplies, framing, appraisals and curatorial services. On average, however, artwork sales account for the vast majority (over 95 percent) of art dealers’ revenues.

The industry went through a phase of uncertainty during the recession, and annual growth decreased by 3.4 percent over the last five years.  However, analysts expect industry demand to improve as the economy recovers, particularly as wealthy collectors begin to buy again.

Art dealers cater to an assortment of clients, but the majority (approximately 65 percent) of art buyers are collectors, followed by companies (24 percent) and other buyers (11 percent, including museums).

The art dealer industry predominantly consists of small establishments, with an average of only two employees each.[1]  The industry is moderately fragmented, with the 50 largest companies capturing 40 percent of the market. [2]

In 2012, Forbes published its list of “America’s 10 Most Powerful Art Dealers” based on revenue and influence.  The top ten, and their 2011 revenues, were:

1. Larry Gagosian, Gagosian Galleries, $925 million
2. David Zwirner, David Zwirner Galleries, $225 million
3. Arne Glimcher, Pace Galleries, $450 million
4. Iwan Wirth, Hauser & Wirth, $225 million
5. Marian Goodman, Marian Goodman Galleries, $150 million
6. Matthew Marks, Matthew Marks Galleries, $100 million
7. Dominique Levy and Robert Mnuchin, L&M Arts, $275 million
8. Paula Cooper, Paula Cooper Galleries, $100 million
9. Barbara Gladstone, Gladstone Galleries, $100 million
10. William Acquavella, Acquavella Gallery, $400 million

Industry Trends

Trends in the art industry are slowly shifting as tastes and incomes change. A few of the most significant changes are:

1. The idea of art as an investment is taking hold.  Over the past decade, the concept of art as an alternate investment vehicle has become increasingly commonplace.  Whereas analyzing the return on investment of a work of art was previously considered vulgar, financial discussions about artists and art works are now accepted in the global art marketplace.  Globalization has expanded the art market and increased transactional transparency, allowing the market to function more efficiently.  The recession also drew in buyers who were interested in fine art’s asset protection properties.[3] Various studies have shown that certain categories of art have low or negative correlations with traditional investment vehicles such as stocks and bonds, leading to increased interest in art for risk diversification purposes.[4]

2. The Chinese art market is driving recovery.  In 2011, the Chinese market became the largest art market in the world, overtaking the U.S.  During 2011, China held a 30 percent share of the worldwide art and antiques market.[4]  The Chinese auction market is the strongest growing market sector, with auction sales increasing by 177 percent in 2010 and 64 percent in 2011.[4] This increase is driven by a growing supply of Chinese wealth in addition to Chinese property and stock market limitations that make art an attractive alternative investment.[4]

3. The Internet has influenced art sales infrastructure.  The rise of the Internet enables greater interaction between dealers and buyers, particularly across long distances.  It also facilitates the exchange of information and images of works of art.[4]  Nonetheless, online sales are still only a small portion of art sales, with less than 10 percent of sales worldwide.[4]  Auction houses have also began using online bidding, but currently only about 5 percent of auction sales occur through online channels.[4]

4. Sales are increasingly event-driven.  In 2011, 31 percent of worldwide dealer sales were made through art fairs, with sales trending away from local fairs towards international fairs.[4] Over recent years, fairs have become a more common and increasingly more important source of revenue for art dealers.  In many ways, the rise of art fairs constitutes the response of galleries to increased competition from the large auction houses.

Key Gallery Performance Metrics

The following are performance metrics that the art dealers use to benchmark their performance to others in the industry:

1. Sales per square foot
2. Inventory turnover
3. Number of exhibitions per year
4. Number of artists represented
5. Number of repeat clients

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value a gallery, as follows:

1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business value is equal to the cost of acquiring its physical assets.  This approach may be best for a business that is facing bankruptcy or liquidation.

2. Income approach to value (capitalization of earnings): This method is most applicable for companies that have predictable and constant growth of earnings and a long history of operations. The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).

3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established art dealers with low growth rates as well as new dealers with higher rates of growth, but requires predicting changes in future cash flows.

4. Market approach to value: This method utilizes market indications of value such as publicly traded comparable companies’ stock and acquisitions of privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following performance metrics are based on a study of U.S. art dealers:[5]

	2007	2008	2009	2010	2011
Operating Profit (% of Net Sales)	7.9	5.8	6.0	6.7	10.3
Current Ratio	2.3	2.1	2.4	1.6	2.2
Quick Ratio	0.6	0.4	0.6	0.4	0.5

Before using this data for a specific valuation it should be evaluated for appropriateness.

Industry Organizations and Publications

Some organizations and publications that publish helpful information include:

1. Art Dealers Association of America, www.artdealers.org, an “organization of the nation’s leading galleries in the fine arts”[6]
2. National Antique & Art Dealers Association of America, www.naadaa.org, a trade organization of leading U.S. art and antique dealers
3. The European Fine Art Foundation, www.tefaf.com, hosts TEFAF Maastricht, “the world’s greatest art and antiques fair,” as well as publishes art news and an annual art market report[7]

Availability of Publicly Traded Comparable Companies

Most art dealers are not publicly traded.  Of the 14 stocks tracked by Skate’s Art Market Research for Skate’s Art Stocks Index only two, the UK’s Mallett and Germany’s Weng Fine Art, are dealers and three are auction houses.[8]

The auction house Sotheby’s is by far the largest of these art stocks, with a market capitalization of $2.45 billion.[9]  In addition to conducting auctions of fine and decorative art, jewelry, and collectibles, Sotheby’s also offers private art broker and art financing service lines. From 2009 to 2011, auction commissions have accounted for between 82 to 86 percent of Sotheby’s revenues.[10]  At the time of this report, Sotheby’s had a price to earnings multiple of 22.14 and a company beta (a measure of how the stock price moves relative to the rest of the market) of 2.32, indicating higher than average volatility.[9]

The appropriateness of using these measures as a benchmark when valuing an art dealer or gallery requires careful assessment of the subject practice and additional scrutiny of the relevance and comparability of each business.  Although Sotheby’s operates in the same market as many smaller art dealers, its business structure and scale are notably different from most art dealers.

Private Transaction Data

Over the last five years several art dealers have been bought and sold, which permits the potential for comparable valuation multiples from privately held companies.  One database records 8 art dealer business transactions over the five year period from July 1, 2007 through June 30, 2012. [11]  The size of private art dealer companies that were bought and sold recently varies greatly, both in terms of their sales, and the purchase price paid for the companies. The transactions show the following ranges and averages:

1. Total deal values ranged from $26,000 to $250,000.

2. Market value of invested capital (MVIC) to net sales ranged from 0.2 to 0.9 times with a median of 0.3.

3. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 0.6 to 3.0 times with a median of 1.3.

This range of market multiples is based on too small a sample population to be useful without further analysis. These deal values and market multiples may not be informative for valuing any particular art dealer or gallery.  Care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject.  Industry economic conditions also vary at different times, which affect art dealers and galleries as investment opportunities.  Specific factors that are unique for each business must be considered.  Some of these factors include the:

1. Duration of the lease and landlord/tenant relations
2. Proximity of the facility to wealthy populations
3. Level of the dealer’s expertise
4. History of the gallery
5. Competitive environment of the local area
6. Established client list and demographics

Fulcrum Inquiry performs business appraisals for art galleries and other businesses.