Liquor Store Valuations For Businesses for Sale
Accurate liquor store valuations can be a complicated process for business sellers and buyers. It need not be overwhelming or difficult especially when the seller’s financial records are organized and made readily available to the buyer.
The liquor store valuation is often a starting point for the parties’ negotiations. Oftentimes the business listing price is NOT the final purchase price. Sellers and buyers ultimately determine the value of a business by agreeing what will be paid but the price point does not define the business’ worth to each party. Worth for a seller may be an expedited disengagement from the business for health or family reasons. Worth for a buyer may be fulfilling a long-held goal or developing opportunities for family. The worth placed on the business sale ultimately drives the value.
It is very common for sellers to value their businesses on the high side and buyers will value businesses on the low side. Sellers are often emotionally attached to their businesses and, therefore, value it higher. They will add in elements to their calculation such as years of hard work but, sadly for them, sweat equity is not monetizable for business valuations.
Buyers, on the other hand, are naturally interested in purchasing the business opportunity on the low end of the value scale as they assume the responsibility and expenses of operating a going concern. The difference in value bias between liquor store sellers and buyers is why business brokers’ valuations are the best starting point for negotiations to the ultimate sales prices.
Small Business Liquor Store Valuations
Liquor Store Brokers will vary what type of liquor store valuations they perform depending on the circumstances involved with a liquor store sale. The following are the main types of of valuation methods used for liquor store valuations.
- Asset Valuations: This involves calculating the fair market value of all of the assets of a business to determine the appropriate price. This is usually performed when the business is not profitable.
- Liquidation Value: The value of the liquor store assets are calculated AS IF it were forced to sell all of them in less than a year’s time. This is usually indicative of a distress sale.
- Multiple of Earnings: The is the net income (profit/owner’s benefit/seller’s cash flow) of a business multiplied by a specific multiple derived from comparable sales to determine list price. This method is commonly known as Seller’s Discretionary Earnings (SDE).
- Rules Of Thumb: The selling price of other “like” businesses is used as a multiple of cash flow or a percentage of revenue. This is a “napkin scratch” method. For liquor stores, it’s 40% of annual sales plus inventory.
The most popular liquor store valuations method, and the one used by lenders, is the Seller’s Discretionary Method (SDE) which is what we’ll focus on in the remainder of this article.
SDE – Seller’s Discretionary Earnings
Liquor stores are valued primarily on a multiple of earnings. This liquor store valuations method is a formula known as Seller’s Discretionary Earnings (SDE), Owner’s Benefit, Adjusted Earnings, etc. Seller’s Discretionary Earnings (SDE) is used by business brokers, lenders, accountants, appraisers, etc.. SDE essentially involves determining the true value of the liquor store’s profitability. Once the business’ profit is determined, it is then multiplied based on comparable sales.
The SDE formula uses the business’ past 3-5 years of financial information to determine the owner’s salary, debt service, depreciation, amortization and excess personal deductions. The formula assumes that revenue, expenses and profit remains status quo after the buyer assumes ownership.
Calculating the business’ profits, plus the owner’s salary and benefits and then adding back (“add-backs”) non-cash expenses (amortization and depreciation), and non-recurring expenses (i.e. one-off legal expense). Though no perfect, this methodology, has proven itself to be the most effective way to establish the valuation basis of small businesses.
The SDE formula can be summarized as follows:
Pre-Tax Profit + Owner’s Salary + Additional Owner Perks (like benefits, car, etc.) + Interest + Depreciation
Why Is Depreciation Added Back?
Depreciation is not an actual cash expense. Instead, it’s an accounting approach that permits a business to deduct the purchase of an asset over a period of time known as the asset’s useful life. For example, let’s say ABC Liquors spends $30,000 on new signage and the accountant determines the useful life is 5 years. Rather than take the deduction for the full $30,000 in the year the asset was purchased, the asset deduction is spread out over 5- years or $6,000 per year ($30,000 divided by 5 years). So the depreciation add-back is based on the fact that depreciation is a non-cash expense.
Why Is Interest Added Back?
Interest payments are typically unique to the business owner. Not every business carries debt or a particular type of debt for the business. So while business financing is common, it’s not standard and based on each business owner’s operational approach. Moreover, most business opportunity sales structured as an asset sale involves the seller paying off any business-related debt with the sales proceeds. The buyer takes the business unencumbered with the seller’s debt. Where a business is sold as a stock sale, the buyer assumes the seller’s debt; however, business sales structured as a stock sale are extremely rare in liquor store sales.
Small Business Valuation Multiples
What Are Liquor Store Multiples?
In the United States, most small businesses will sell for approximately 2.3 multiple of the SDE. Depending on a number of factors, some businesses will sell for more and some for less. According to the Business Reference Guide, Business Broker Press, 2020 Edition, liquor stores multiples will range between 2-4x earnings plus inventory.
Liquor stores with revenue under $1 million will be at the lower end of liquor store multiples. Average liquor store profits are 3.5% of revenue. A liquor store with payroll of 7% of revenue, lease costs of 3-7% and gross profit of 25%+ is highly marketable. Liquor stores with profits margins of 30% or higher, with volume sales (over $1 million) are very desirable and will sell for a high multiple.
Long-term liquor stores that are well-located, highly profitable, strong vendor relationships, higher than average inventory turns, strong security system, stable staff, long-term lease, updated physical assets, and a full liquor license will sell for higher multiples. In situations where there’s a high grossing stores in proven locations that is very hard to replicate, the multiple can be higher.
Additional factors that influence multiples is whether there is ample parking. Heavy local competition is a negative factor as is high crime rate.
Good liquor store businesses are always in high demand. As we’ve seen with the pandemic, liquor store business fare well even in crisis. During the initial Phase I of COVID-19, liquor store sales skyrocketed by 25%. Sales have continued to remain strong since. Good liquor stores are in high demand often with more buyers than sellers particularly for those long-term liquor stores with computerized systems that have been consistently profitable.
The Dark Side of Liquor Store Valuations
One of the industry not-so-secrets is that liquor store owners have been notorious for skimming. Granted, more buyers now are using credit and debit cards in computerized point of sale systems which has cut-down on skimming which mostly occurred with cash sales.
Some liquor store sellers attempt to add-back the amount skimmed to increase their business valuation This, however, is not appropriate. Apart from underreporting revenue, the business owner already got the financial benefit of underreporting revenue by minimizing their tax revenue. They should not now also get the benefit of a higher business valuation by trying to add-back what should have been originally reported. The seller also puts his sale value at risk because the buyer will likely mistrust the seller’s financials when they understand that the information is distorted due to the seller’s skimming. This will undermine accurate liquor store valuations.
In severe situations, the SDE formula may not work for liquor store valuations. The liquor store owner probably should avoid disclosing their fabricated tax returns to the prospective buyer. In this situation, the seller may need to reconstruct their financials, along with third-party resources as proof, as an alternative way to show proof of earnings. If the store is consistently profitable, the seller might be better off delaying the sale by a few years, stop skimming and then go above-board with their financials to capture their full business value in liquor store valuations.
How Mission Peak Brokers can help you buy or sell a liquor store.
For more information on all things related to Liquor Store For Sale in California, Mission Peak Brokers is here to help.
Should you need assistance buying a liquor store, or selling a liquor store, contact Mission Peak Brokers. We have performed hundreds of liquor store valuations and closed numerous liquor store deals. We know the ins and outs of what makes liquor store valuable and how to get the deal done.
For more information on liquor store business opportunity sales, check out our Liquor Store Brokers hub.
In addition to selling liquor store business opportunities, we also manage liquor store commercial real estate.
We are the #1 Liquor Store Brokers in the Bay Area!