Performing Due Diligence When Buying a Liquor Store
The process of due diligence goes way beyond just an assessment of the presented financials. You need to be able to access all the files and records, review information and research personnel as you review what you’re being told. It is recommended that you allocate at least four weeks for this process and do not be tempted to rush to judgment. Some issues may only come to light over a period of time and thus you should proceed carefully.
There are some decisions that you can make about buying a liquor store business before you immerse yourself fully in the due diligence process. While you may engage in a lot of number crunching and foot work as you go forward, is there anything that you have learned about the industry to this point, or about this specific business, its location or its owners thus far that should give you pause for thought? If for example you already know that financial records are incomplete for reasons given by the seller, or the condition of the store or its assets are not as you had hoped or expected, inventories are incomplete, inspections, certificates or licenses are compromised for one reason or another – all may be reasons for you to turn around and bid good day.
For a process of due diligence to be complete, you will need to concentrate on seven different areas:
1. The Premises.
We’ve already talked about the need to allocate four weeks to this entire process and you should agree with the seller that during this time you allocate an agreed period to observe the operation of the business. Firstly you will need to assess the inside and outside of the facility and work out what you may need to spend to repair, replace or upgrade. Remember that the attitude of the staff is very important in the retail business and you should immediately assess how the existing staff interact with clients. Are they always personable, attentive, prompt? Personal issues or conversations should not be apparent. Ask yourself whether the store looks good, has a good ambience, appears fresh and clean, has well-maintained restrooms and break areas and is generally spick and span.
You must also really make sure that you’re pleased with the specific location of the business, the surrounding competition, the kind of individuals who regularly frequent the area, the accessibility – and don’t forget, always be particularly aware of any possible or pending major road construction in the area, as this could literally “make or break” the business you’re considering buying.
2. The Financials.
As a minimum, you will need to review the profit and loss statements, the balance sheets and tax returns. You would do well to employ the services of an accountant who is experienced in the liquor business to help you here. Look at all the supplier invoices and reconcile them to revenues. This may be a time intensive process but you will be able to determine your margins this way. Be very aware of any transactions that involve cash, especially if it involves your suppliers. You will need to get written confirmation from the suppliers of their ongoing terms.
Remember some of these industry benchmarks:
– gross margin should be between 24 and 28%
– rent should be 7% of revenue maximum
– product mix should be up to 70% liquor or up to 40% wine
– labor should represent 5 to 7% of revenue
– net profit should be 8 to 12% of revenue
– inventory should be turned over between eight and 10 times per year.
3. The Equipment.
All of the equipment and the furnishings should be in good working order, and nothing should require repair or replacement for quite some time. To ensure this, you should carefully review all of the maintenance and service records, take a look for yourself to check and see if each refrigeration case is clean and well-maintained, and inspect all the other equipment to make sure it’s well looked after.
4. Vendor Agreements.
Your wholesalers and suppliers are absolutely essential when you purchase liquor store business assets and you must get to know them well during your due diligence. Can arrangements be transferred to you or will you have to make new ones? You do not have to be prepared to settle with the existing suppliers or vendors and you should really investigate as many options or opportunities as you can. You may, for example, see better terms elsewhere and this knowledge will be great ammunition when you come to negotiations and peace of mind.
5. Lease Contracts.
Always be sure the lease is transferable or that there are no obstacles ahead of you. You must be able to assume or acquire a long-term lease before proceeding.
It is likely that you will need a number of licenses and this should be a particular area of concern when it comes to a liquor license. Sometimes these may not be assigned or transferred or other onerous terms may be set by jurisdictions.
Go through the daily procedures from opening time to closing time; who has access to keys and alarm settings? Does the business have a procedure for emergencies of any kind? Ask the seller to provide you with an optimal inventory level. Ensure that you review all insurance certificates and be adequately covered for all eventualities. You will need to talk with credit card processors and merchant banks and be prepared to move to access better rates if necessary.
7. The Employees.
As this can be a significant cost and liability area, be focused here. Check each member’s compensation, especially if there’s any possibility of cash being paid “under the table.” If you see that there is a high turnover of employees, ask yourself why. Is there a procedure in place for training? While the seller will often be wary about letting his employees know that the sale is in process, you nevertheless need to analyze each employee individually, assess their loyalty and competence and adjust your plans accordingly. Understand that certain procedures may be quite traditional to them and you should ask yourself how you feel they will react if you need to make significant changes. If one or more employees are absolutely critical to your success, you will need to meet with them prior to consummating a contract.
When you come across a liquor store for sale, if you perform your due diligence to a very high standard, you’ll acquire the opportunity to see exactly how the business operates – on a daily basis, and you won’t be in for any uncomfortable surprises if you do decide to take over.