A liquor store can be one of the most attractive prospects for those looking to enter the world of entrepreneurship. They are traditionally considered “essentials” providers, with good turnover and reasonable margins. However, considering the valuation of a liquor store can be quite a difficult proposition. The entire industry depends in some way on outdated barometers and the owner may be looking to offer you the business based on traditions rather than real world elements.
Because of these traditions, the industry has a somewhat veiled view of the measures used to assess actual and individual business values. No two liquor stores are the same, as they have different footprints, different specialties, the existence or absence of certain subsidiary products that may represent substantial values in themselves, etc. Always remember to focus on the profit claim and not in reference to given percentages or the fact that the business may have solid sales, but the sales themselves mean nothing.
While you can, of course, review the percentages you were given and use them to interpret any abnormalities accordingly, the best business valuation method, according to liquor store experts, is based on cash flow or owner profit. They will often refer to a figure that 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’s profit. This refers to the money he will have left after all expenses are accounted for, and essentially represents the funds he will use to pay off the debt, pay himself accordingly, and build the business. Looking at the books, your owner’s profit is defined as net income plus owner’s salary, benefits, depreciation and interest less the capital expenditure allowance. The last item refers to any major alterations or investments that he will need to make in the foreseeable future, by installing updated computer systems or redecorating, for example. Always make sure that any “later addition” is appropriate and reasonable.
Since you’re buying the business at a premium, relative to the “multiple” attached to value, you of course want to make sure it’s being sold as a continuing concern. This statement is particularly appropriate when it comes to business inventory. Be sure to purchase this inventory on terms that are realistic for you. Often buyers will look to remove the cost of inventory from the valuation and add it separately. It should always be treated as an integral part of the valuation and not used to inflate the seller’s position. Typically, an alcoholic beverage business rotates inventory eight to 10 times a year and must ensure that its particular inventory does not include a large number of items that may not be salable or unseasonable.
Beware of an owner who claims a large amount of cash sales, because if you can’t prove it, you should never pay for it. In other words, they shouldn’t benefit twice: first, when they cheat the tax department, and second, from an inflated commercial sale value.
Keep in mind that you should have a thorough discussion with the management company or tenant, assuming, of course, that the business is in leased space, which is often the case. Find out exactly what you need to do: before you go ahead, take on the lease yourself or qualify for a new one.
A word about owner financing, which may be offered. Generally speaking, you can add the value of 30-50% of the seller financed amount and consider that a premium to declared market value, compared to an all-cash transaction.
Be vigilant during times when you are meeting with the owner, visiting the premises, or conducting your due diligence. Consider the number of patrons you see entering and leaving the store and use that as a reference point, taking into account the time of day of your observation. Do you see many members of the owner’s family working there or do you see the owner working too many hours? Ask yourself if you want to replicate the situation and how you can actually arrive at a value for the labor of family members, especially if they are paid off the books.
When thinking about how to value a liquor store, don’t forget that proper valuation is definitely an art, not a science!