Helpful Ideas For Correctly Valuing A Liquor Store For Sale
posted in Bricks and Mortar Business |A liquor store for sale can be an extraordinary opportunity for someone who is intending to enter the highly competitive arena of entrepreneurialism. Traditionally, liquor stores have been viewed as providers of “essentials,” with excellent turnover and fair margins. However, performing a liquor store valuation can be a tricky business, even under the best of circumstances. The whole industry has become overly reliant on out-of-date barometers, and more often than you might expect, an owner will try to sell you their business based on long-standing traditions instead of actual “real world” elements.
As such, because of those traditions, the industry retains a somewhat veiled view of strategies utilized to assess actual, individual business values. When it comes to liquor stores, no two are identical, as they have different locations, specialities, and the absence or existence of certain subsidiary products which could easily represent significant 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 certainly go over the percentages which are provided to you and use them to clarify any abnormalities which come up, the most useful method of business valuation, liquor store experts all agree, is specifically 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. So, what exactly does this particular 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 going to buy liquor store 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 wary of an owner who claims a large amount of cash sales, as if they cannot prove it, you should never pay for it. In other words, they should not benefit twice – first when they fool the tax department and secondly from an 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 considering how to value a liquor store, remember that valuation is an art not a science!
Richard Parker is the President and founder of the prestigious Diomo Corporation – The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream to buy a business.
