How to Correctly Value a Liquor Store for Sale – The Guide

A liquor store can be one of the most attractive prospects for those looking to enter the world of entrepreneurship. Traditionally, they are seen as “essentials” providers, with a good turnover and reasonable margins. However, considering a liquor store valuation can be quite a difficult proposition. The entire industry is somehow reliant on old fashioned 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, 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 value in and of 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 strong sales, but the sales themselves mean nothing.

While you can of course review the percentages given to you and use them to interpret any anomalies accordingly, the best method of business valuation, according to liquor store experts, is based on cash flow or profits from the owner. 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 owner profits. This refers to the money he will have left over after all expenses have been taken into account and essentially represents the funds he will use to pay off 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 minus the capital expense allowance. The last item refers to any major alterations or investments that he will need to make in the foreseeable future, by installing upgraded computer systems or redecorating, for example. Always make sure that any “later additions” are appropriate and reasonable.

Since you are buying the business at a premium, relative to the “multiple” attached to the value, you must of course ensure that it is sold as an ongoing 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. Buyers will often 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. A liquor business typically turns inventory eight to 10 times a year and must ensure that its individual inventory does not include a large number of items that may not be salable or not suitable for the season.

Beware of a landlord claiming 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 business 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 rented space, as is often the case. Find out exactly what you need to do: before you proceed, take over the lease yourself or qualify for a new one.

A word about owner financing, which can be offered. Generally speaking, you can add the value of 30-50% of the seller financed amount and consider that to be a premium to the stated trade value, compared to a cash transaction.

Be vigilant during times when you meet with the owner, visit the premises, or perform your due diligence. Consider the number of patrons you see entering and exiting the store and use that as a benchmark, 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 really get a value for the work 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!