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How To Value A Liquor Store For Sale
A liquor store can be one of the most attractive prospects for those who are seeking to enter the world of entrepreneurialism. Traditionally they are seen as purveyors of "essentials," with good turnover and reasonable margins. However, considering a liquor store valuation can be quite difficult. The industry is somewhat reliant on antiquated barometers and the owner may try to offer you the business based on traditions rather than real elements.
A liquor store can be an incredible opportunity for someone who is looking to invest in the world of entrepreneurialism. Generally, liquor stores are seen as purveyors of “essential items,” with excellent turnover and fairly good margins. However, performing a liquor store valuation can be a tricky business. The whole industry is overly reliant on antiquated barometers and it’s quite possible that the owner might try to sell you the business based on old standards instead of real world value.
Due to these traditions, the industry has a somewhat veiled view of measures used to assess actual, individual business values. No two liquor stores are the same, as they have different footprints, different specialities, the existence or absence of certain subsidiary products which can represent substantial values in themselves, etc. Always remember that you need to focus on the claim of profits and not by reference to given percentages or to the fact that the business may have solid sales, but sales in and of itself means nothing.
While you can of course review percentages given to you and use them to interpret any abnormalities accordingly, the best method of business valuation, liquor store experts all agree, is based on cash flow or owner benefits. Often they will refer to a figure which represents a “multiple,” and this multiple can be three, four or five times. What does the multiple refer to?
The most common figure used represents the owner benefits. This refers to the money that you will have left after you have taken all expenses into account and essentially represents the funds you will use to service the debt, pay yourself accordingly and to build the business. When looking at the books your owner benefit is defined as net income added to the owner salary, perks, depreciation and interest less capital expense allocation. The latter element refers to any major alteration or investment you will need to make in the foreseeable future, by installing updated computer systems or redecoration, as examples. Always be sure that any “add backs” are appropriate and reasonable.
As you are buying the business at a premium, in relation to the “multiple” attached to the value, you must of course be sure that it is being sold as an ongoing concern. This claim is particularly appropriate when it comes to the inventory of the business. Make sure that you buy this inventory at terms which are realistic to you. Often, buyers will seek to remove the cost of the inventory from the valuation and add it on separately. It should always be treated as an integral part of the valuation and not used to inflate the seller’s position. Typically an inventory is turned over by a liquor business between eight and 10 times per year and you should ensure that your particular stock does not include a large element of items which may be unsalable or seasonable.
Be particularly wary of any owner who claims there are vast amounts of cash sales, because if they can’t prove these sales on paper, don’t even think about paying for it - never pay for something based on their word alone. In other words, they shouldn’t be allowed to benefit twice - first when they cheated the tax authorities, and then from a largely inflated business sale value.
Remember that you must have a good conversation with the leaseholder or management company, assuming that the business occupies a rented space as is most common. Understand before you go any further what you would need to do to assume the lease or to qualify for a new one.
A word on owner financing, which may be offered. Generally speaking, you may add the value of between 30 and 50% of the amount financed by the seller and consider that to be a premium to the stated business value, versus an all cash transaction.
Be on the lookout during times when you meet with the owner, visit the premises or otherwise conduct your due diligence. Consider the number of patrons that you see going in and out of the store and use this as a benchmark, bearing in mind the time of day of your observation. Do you see many family members of the owner working there or watch the owner working excessive hours? Ask yourself whether you want to replicate the situation and how you can truly arrive at a value for the work input by the family members, especially if they are being paid off the books.
When thinking about how to value a liquor store, don’t forget that proper valuation is most definitely an art, not a science!