Liquor Store Valuation: The 5 Things You Need to Know
Aside from the value of the existing inventory and any other assets such as real estate, there are 5 critical questions you should ask when buying a liquor store.
Owning a liquor store can be very lucrative, but buying one after an inaccurate business valuation can dig you into a deep financial hole. So be your own business appraiser: Think about these factors and calculation methods before you start your engines.
1. How is the Liquor Store’s Financial Health?
Whether you’re looking to take over an existing store or buy into a franchise, you need to study the potential shop’s financial statements. If it’s possible, look at the last 3 to 5 years of the store’s annual revenue. How complete is their balance sheet? Are their annual sales trending up, or do they vary year to year? Will your projected cash flow be able to cover the cost of a small business loan?
Ask yourself why the trends are moving the way they are. Is the current business owner making an obvious mistake, like marketing a product in the wrong market? Or are their financial records more indicative of an ongoing issue?
2. How is Your Debt Management?
The financial status of the store isn’t the only thing to consider. Just like for most small business owners, you need to look at your own financial health. Chances are, you’re going to need the help of small business financing. And if your credit score is lower than ideal, even purchasing a liquor store below market value can get expensive down the road. Review your credit scores, tax returns, and other documents to get a better idea of how you can improve your lending terms.
Calculate the cost of a business loan. Make sure that new debt is a part of your picture of the store’s financial health. You should also make sure you’ve properly researched the types of funding best suited for your store. Depending on your store’s needs, you may want to look into government-backed SBA loans; equipment loans to purchase storage, refrigerators, and more; or even a business credit card. Smart financing leads to the right amount of working capital, helping you meet payroll, buy more inventory, and pay for repairs.
3. Alcohol Distributors
The United States alcohol sales industry operates in what’s known as a three-tiered system. Manufacturers create the drinks. Distributors then sell those products to the retail businesses, restaurants, and bars. Then finally, the retail businesses, restaurants, and bars sell them to the public.
Meeting with your future distributors can be helpful with regard to your valuation. Often, distributors have monopolies on certain brands in area. You won’t have the ability to go between different distributors in order to get the best deal on, say, Beefeater Gin. You’ll be told the price. You may be able to get a discount by buying in bulk, but many stores simply don’t have the ability to buy, store, or sell 100 cases of Beefeater.
How do distributors affect your valuation? Think about the fact that the the country’s three biggest wine distributors control 50% of wine sales. A monopoly on your supply affects the cost of your inventory. Depending on the distributor, you could be facing a small profit margin for many of your best selling products.
4. Laws and Regulations
You’ll need to be familiar with the laws regarding liquor sales for your store’s location. Laws at the state, county, and local levels can all make a liquor store more or less valuable.
For example, 17 states in the US have a government monopoly on the sales of one or all forms of alcohol. So if you’re looking to buy a liquor store in a state that only allows beer sales in licensed liquor stores, that can make the store more valuable. On the other hand, if you’re looking at a liquor store in a state where spirits can be sold in grocery stores, you’re competing with powerful big-box distributors that have the ability to buy in bulk.
So you’ll have to think about what you can sell. You’ll also need to look into what other products you can offer. Some state liquor regulations, like those in Colorado, don’t allow liquor stores to sell any foods that aren’t directly related to drinking alcohol. If you’re not allowed to sell profitable non-alcohol products, that should factor into your business valuation.
Licensing is also an important factor to consider. Liquor licensing laws vary state to state. Some states will allow the liquor license to be transferred between business owners (outgoing to incoming), so the price of the license can be included in your valuation.
But in some states, you’ll need to apply for a license of your own. That can be very expensive. Licensing can cost as little as a couple hundred dollars or as much as 5 figures. They also tend to take a while to process. You could be waiting up to 12 weeks to receive your liquor license in Ohio.
5. Location, Location, Location
The location of your liquor store will have a massive influence on its valuation and cash flow. You need to consider the laws and regulations from above, but you also need to think about the real estate itself, just like you would for any small business.
Does the store have bright and obvious signage? Is it on a main street, or off on a side alley behind a restaurant? Is it near a shopping center?
Also think about what type of store are you aiming to own. Do you want to own a higher-volume store with a wide selection? You may want to acquire a space near a bigger shopping center, which might lead to a higher valuation and higher rent in the future. Access to that real estate will make the store more expensive.
According to Stephen Bethel’s The Valuation of Liquor Store Operations: An Invaluable Guide for the Appraisal of Liquor Store Businesses, Real Estate and Equipment, there are three general valuation methods you can use to calculate your valuation after you take all the above factors into consideration.
First, you could use cost valuation. Look at cost valuation as the sum total of the physical objects available at the store. You’re purchasing the building, the inventory, and possibly even the licensing. If the seller’s asking price is the ceiling value, a cost valuation could be the floor, since future earnings aren’t a factor.
You could use a market approach for your business valuation. This technique involves research into the purchase price of similar liquor stores in the area and, adding in the factors above, deciding upon a price.
Finally, there’s income-based valuation. In such a valuation, you would examine the store’s pre-existing debt, outgoing cash, payroll, profit margins, revenues, discretionary spending, cash flow, and surplus to determine your purchase price.
The best way to determine the true business value is to use all of the above factors and valuation styles together to form a more complete picture of the liquor store’s true market value. A strong valuation will come from a knowledge of the store’s current real estate, licensing, and inventory combined with an understanding of its financial health and competitors’ pricing.
Human beings have been drinking alcohol since the very dawn of civilization. Drinking is as human as agriculture, and neither are going away any time soon. As long as you’ve put lots of thought and research into determining the value of the business, the purchase of a liquor store can be a profitable choice.
The COVID-19 pandemic is causing disruption for business owners in liquor industry.
Read more: How to Manage Liquor Store Inventory