Performing Due Diligence When Purchasing a Liquor Store
The due diligence process goes far beyond a simple evaluation of the financials presented. You must be able to access all files and records, review information and research staff while reviewing what they tell you. It is recommended that you allow at least four weeks for this process and do not be tempted to rush to judgment. Some problems may only come to light after a period of time and therefore you should proceed carefully.
There are a few decisions you can make about purchasing a liquor store business before fully immersing yourself in the due diligence process. While you may get involved in a lot of number crunching and footwork as you go along, is there anything you’ve learned about the industry to this point, or about this specific business, its location, or its owners thus far that should give you an idea? pause? for thought? If, for example, you already know that financial records are incomplete for reasons given by the seller, or that the condition of the store or its assets is not what you expected or expected, inventories are incomplete, inspections, certificates or licenses are compromised for one reason or another, they can all be reasons for you to turn around and have a good day.
For a due diligence process to be complete, you will need to focus on seven different areas:
1. The Facilities.
We have already talked about the need to allocate four weeks to this entire process and you must agree with the seller that during this time you dedicate an agreed period to observe the operation of the business. First, you’ll need to assess the interior and exterior of the facility and determine how much you’ll need to spend to repair, replace, or upgrade. Remember that the attitude of the staff is very important in the retail business and you must immediately assess how the existing staff interacts with customers. Are they always nice, attentive, quick? Personal matters or conversations should not be apparent. Ask yourself if the store looks good, has a good atmosphere, seems fresh and clean, has well-maintained restrooms and seating areas, and is generally spotless.
You should also make sure that you are happy with the specific location of the business, the competition that surrounds it, the type of people that regularly frequent the area, the accessibility and don’t forget, always be especially vigilant for any possible or pending construction of a main road in the area, as this could literally “make or break” the business you are considering buying.
At a minimum, you’ll need to review profit and loss statements, balance sheets, and tax returns. You would do well to retain the services of an accountant with experience in the liquor business to assist you at this point. Look at all bills from vendors and compare them to revenue. This can be a time-consuming process, but you’ll be able to determine your margins this way. Be very vigilant about any transaction that involves cash, especially if it involves your suppliers. You will need to obtain written confirmation from the providers of their current terms.
Remember some of these industry benchmarks:
– the gross margin must be between 24 and 28%
– rent must be 7% of maximum income
– product mix must be up to 70% liquor or up to 40% wine
– labor must represent 5 to 7% of income
– net profit must be 8 to 12% of income
– Inventory should be rotated between eight and 10 times a year.
3. The Team.
All equipment and furnishings should be in good working order, and nothing should require repair or replacement for any length of time. To ensure this, you should carefully review all maintenance and service records, check yourself to see if each refrigeration cabinet is clean and well-maintained, and inspect all other equipment to make sure it is well-cared for.
4. Provider Agreements.
Your wholesalers and suppliers are absolutely essential when you purchase liquor store business assets and you should get to know them well during your due diligence. Can fixes be transferred to you or will you have to make new ones? You don’t have to be prepared to strike a deal with existing vendors or vendors and really should research as many options or opportunities as you can. You may, for example, see better terms elsewhere and this knowledge will be great ammunition when it comes to negotiations and peace of mind.
5. Leasing Agreements.
Always make sure that the lease is transferable or that there are no obstacles in front of you. You must be able to take on or purchase a long-term lease before proceeding.
You will likely 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 jurisdictions may set other onerous terms.
Review daily procedures from opening time to closing time; Who has access to the passwords and alarm settings? Does the company have a procedure for emergencies of any kind? Ask the vendor to provide you with an optimal inventory level. Be sure to review all insurance certificates and be adequately covered for all eventualities. You’ll need to talk to credit card processors and commercial banks and be prepared to move for better rates if needed.
7. The Employees.
As this can be a significant area of cost and liability, please focus here. Check each member’s compensation, especially if there is a chance it will be paid in cash “under the table.” If you see high employee turnover, ask yourself why. Is there a procedure for training? While the salesperson is often wary of informing his employees that a sale is in the works, he must look at each employee individually, assess his loyalty and competence, and adjust his plans accordingly. Understand that certain procedures may be quite traditional for them and you should ask yourself how you think they will react if you need to make significant changes. If one or more employees are absolutely critical to your success, you’ll need to meet with them before consuming a contract.
When you come across a liquor store for sale, if you do your due diligence to a very high standard, you’ll get the chance to see exactly how the business works, on a daily basis, and you won’t have any problems. awkward surprises if you decide to take over.