Before buying or selling a liquor store, every buyer and seller wants to know how much it is worth. The attractiveness of running a liquor store is strong since it is often less sensitive to economic downturns, making it one of the more stable business alternatives accessible.
Liquor stores are seen to be an excellent alternative for business owners who prefer to remain “hands-off.” In reality, liquor stores require far more monitoring than is often assumed, and one must not ignore the fact that running a liquor store necessitates tight administration, strong customer service skills, and smart organization, possibly even more than most other companies.
The valuation of the liquor shop is sometimes used as a starting point for negotiations between the parties. Sellers and buyers determine the value by negotiating on a price, but that price does not define the business worth’s to each party.
We’ll talk about how to figure out how much a liquor business is worth in this article. But, before you calculate the value, are you aware of the factors that go into liquor shop valuation?
Factors considered in Liquor Store Valuation:
The following five facts are necessary to make an educated choice about purchasing a liquor business:
- Store Location – The sale price of a liquor store will be affected by its location such as is it on the main street? Is it near a shopping center? It’s not only affect because of its attractiveness, but also because of state rules and permits. The business will be sustained as long as the store offers a diverse range of items (tobacco, cheese, snacks, and so on) and is conveniently placed.
- Licenses – License is an important factor. Every state, county, and city has a different set of liquor laws and varies from state to state. In some states, the license transferred from one to another may be very simple but in some states, a store cannot be sold since there is a ban on the new licenses. In California, you must have a valid liquor license to sell any form of alcohol. The application fee and annual fee vary as per the type of license applied in California. California license is categorized into two types: General and Non-General License.
General License: Hard alcohol includes in the general license. Types 47, 62, and 70 include in the general license.
Non-General License: The beer and wines are included in the non-general license. Types 41, 42, and 61 include the non-general license.
- Taxation – Taxation is also an important factor as it could differ from state to state. Both the state of California and the federal government levy excise taxes on liquor. Excise taxes are implemented by every state and applied on a per-unit basis. Liquor retailers in California must pay a $3.30 per gallon state excise tax on any liquor sold, in addition to federal excise taxes.
- Hands-on Job – Owners of liquor stores must either be full-time employees or hire reliable full-time management. Liquor stores are not excellent absentee enterprises, as effective inventory control is critical to a profitable liquor store. If a business owner wants to be more hands-off, they must set up an inventory control system and closely monitor it.
- Books and Records must be in order – Liquor store proprietors have a negative reputation in the business world for falsifying documents. If the financials must be rebuilt, the buyer must demand that the seller provide sufficient proof to back up the asking price. If the buyer is a good bookkeeper, then stronger financials may be all the firm needs.
- Inventory costs – A potential buyer should be informed that liquor stores are typically evaluated as the sum of the company value and inventory and that the overall price is within their budgetary limits. Because a successful liquor shop will flip its inventory 8-10 times a year, the inventory for sale should be current and easily sellable; otherwise, when the firm is bought, the buyer will be forced to pay for another order of items on top of the existing inventory.
When these factors are considered, both parties may arrive at a reasonable price for the store. After considering all of the above factors, now discuss valuation methodologies.
Methodology Used in Liquor Store Valuation:
Depending on the conditions surrounding a liquor shop sale, liquor store brokers undertake several types of liquor store valuations. The most common forms of liquor shop valuation methodologies are as follows:
- Asset-Based Approach – This approach is used to value a company as a going concern. The supplies and equipment sold to consumers or clients are considered assets. It determines the appropriate price by calculating the fair market value of all of the assets of a business. This is generally done when a business is not profitable.
- Market Approach – The current market worth of the business is calculated using store sales. While the sale of a business is not frequent, if another liquor shop has sold in the recent six months or so, this provides a solid benchmark for the business’s current market worth.
- Income Approach – The income-based, cash flow, or owner benefits valuation technique is the best form of a company valuation. To estimate purchase price, look at the store’s pre-existing debt, outgoing cash, payroll, profit margins, sales, discretionary expenditure, cash flow, and surplus.
Liquor shops are typically valued based on their earnings. There are Seller’s Discretionary Earnings (SDE), Owner’s Benefit, Adjusted Earnings, and other formulas are used to value liquor stores.
Seller’s Discretionary Earnings (SDE):
A popular cash flow multiple used to value small business transactions is the seller’s discretionary earnings (SDE). It begins by calculating the company’s operational earnings before subtracting anticipated costs that a new owner might not incur. Compensation for the owner, personal costs for the owner, and other expenses such as non-recurring or unrelated business things are all examples of these expenses.
SDE = Pre-Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + Depreciation
You’ll need to know how to value a liquor store if you’re buying or selling one. As a buyer, you want to get your money’s value and run a lucrative business in the future. As a seller, you want to get the most money for your company, especially if you’ve put your heart, soul, and sweat into it. Long-term liquor establishments with solid vendor relationships, high inventory turnover, consistent workers, updated physical assets, and a complete liquor license will sell for more money. These points of view might be radically opposed, and it’s up to you to find out how to meet in the middle and obtain a good deal for both buyer and seller. When examining how to value a liquor store, keep in mind that proper liquor company valuation is an art, not a science.
Author: Pooja S. – Jr. Analyst