Are you about buying or selling a liquor store and you want to perform due diligence? If YES, here are 3 different ways to value a liquor store business. Estimating the value of a liquor store can be quite a difficult process.
According to experts, the whole industry is more or less reliant on antiquated barometers and the owner may be seeking to offer a buyer the business based on traditions rather than real world elements. Owing to these traditions, the general industry has in some aspects a veiled view of measures used to assess actual, individual business values.
But it is important to first note that no two liquor stores are the same as they have different footprints, different specialties, the existence or absence of certain subsidiary products which can also tell or alter substantial values in them, etc.
When looking to value a liquor store, buyers are trying to ensure that the claim of profits and value are real. The more reason they prefer to focus on the cost by reference to given percentages or to the fact that the business may have solid sales, but sales in and of itself means nothing.
However, irrespective of who is buying or selling, there is always a professional opinion about the value of a liquor store, and it also includes the value of the property. It is pertinent that the price of the property be factored into the price of the liquor store. When these and many other factors come together, both parties can arrive at a fair price for the value of the property, business and assets, and generally reach a good consensus.
Most Common Liquor Store Valuation Approach in the United States
For the sake of the article, we will be explaining the key three approaches to valuing a liquor store. These approaches are the: (1) cost (asset based), (2) market, and (3) income approach. The cost approach tends to focus mainly on the adjustments and nuances of making balance sheet adjustments, while the market approach values the store based on market multiples.
Lastly, the income value approach tries to provide a “reality check” as to the value of the store based in cash flows. All three are properly explained below:
1. Asset Based Business Valuation
This valuation method is used to value a company as a going concern. The assets are the supplies and equipment that is being sold to the customers or clients. All of this is added up to find the value of the assets, subtracting for the current value of the items. Notwithstanding, it has a number of shortcomings in that it does not consider intangible assets such as: assembled workforce, trademarks, customer lists, technical knowhow, etc.
Most importantly, if a buyer were to “start the business from scratch,” then this buyer would probably purchase all of the assets at a liquidation value. This valuation methodology is most important to the insurance industry and financial lenders and usually represents the floor value of a business.
Although assets can add up, they are typically a minor part of the business. A business heavy in assets that does not make much money is worth less than a business with few assets that brings in plenty of customers. Liquor is the main asset in a liquor store. The value of the liquor is mainly determined by the location and the customer base and is potentially valuable in the right location.
2. Market Valuation
Here, the store sales are leveraged to analyze the current market value of the business. While the sale of a business is not the most common event, if there is another sale of a liquor store within the last six months or so, this serves as a good comparison for the current market value of the business.
The customer base is a major factor in this valuation and in the supply and demand at a liquor store. For example, a liquor store whose main customers are bar owners purchasing for their business might have a higher demand for liquor than stores that cater to locals.
This valuation approach tends to be useful for establishing ranges for businesses which are worth less than $1,000,000 but are most helpful for small businesses which are less than $500,000 in value. Note that the smaller the business the more applicable the rules.
Yet there are problems with this valuation approach. This approach is usually too general to be applicable to an individual company. When using this approach, the valuation numbers do not take into account varying types of leases, profitability ratios, activity ratios, or other financial measurements that vary from business to business.
3. Income Based Market Valuation
The best method of business valuation, according to liquor store experts, is the income based, cash flow, or owner benefits valuation approach. 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? Note that the most common figure used represents the owner benefits. This means the money that you will have left after you have taken all expenses into account essentially represents the funds you will use to service the debt, pay yourself and build the business.
When looking at the books, the 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, for instance.
Always ensure that any “add backs” are appropriate and reasonable. For most buyers looking to buy the business at a premium, in relation to the “multiple” attached to the value, they must of course be sure that it is being sold as an ongoing concern.
Whether you are buying or selling a liquor store, you will have to be able to value what the business is worth. As a buyer you want to get your money’s worth and run a successful business in the future. As a seller you want to get what the business is worth, especially if you have put blood, sweat and tears into it.
These points of view can be very different and that is where you have to know how to meet in the middle for both buyer and seller to get a good deal. Nonetheless, when thinking about how to value a liquor store, don’t forget that proper valuation is most definitely an art, not a science.