Selling a liquor store in California can be highly profitable. Liquor stores are evergreen businesses that can be highly lucrative and, in turn, can also be highly profitable when sold as a business opportunity.
A well-run, profitable liquor store in a great location is considered a highly desirable business opportunity. Liquor stores have proven to be evergreen, essential businesses that remain highly profitable during all types of economic conditions. As a pandemic-proof business, there are typically more buyers than sellers for these types of business opportunities.
Savvy liquor store sellers know that a well-run, profitable liquor store can be sold at a premium. Preparing for sale, they will optimize their business’ performance, properly organize all key records and minimize excess tax deductions in order to reflect their actual cash flow and liquor store business valuation.
Discriminating buyers will put in the extra effort to find a good liquor store, understand the valuation of the business, and know how to assess its strengths and weaknesses. Seasoned buyers will also have financing in place in order to act quickly when the right liquor store business opportunity emerges. Since great liquor store businesses sell quickly, often with competitive buyers, smart buyers prepare early and are ready to move fast when the time is right.
Liquor store valuations are the foundation of a successful sale for liquor store business sales. In order to assure that a liquor store is profitable, an accurate business valuation is crucial for both buyers and sellers when selling a liquor store. The business valuation will provide the parties the financial language to ground their negotiations and, hopefully, achieve a mutually beneficial successful business sale.
Selling A Liquor Store- 6 Essential Factors
1. How strong is the liquor store’s cash flow?
When it comes to selling a liquor store, cash is king or in this case, cash flow is king. When looking at the liquor store’s financial statements, it’s important to analyze these key documents:
- The last 3 to 5 years of the liquor store’s tax returns.
- The last 3 to 5 years of the liquor store’s profit & loss (P&L) statements.
- A complete balance sheet
- The last 3 to 5 years of sales tax statements
It’s important to consider whether the annual sales and net income are trending up, trending down or remaining stable year over year for the past 3 years in particular. If earnings dipped or are declining, it’s important to consider the causes for the decline. Is the cause the market, bad management, unexpected expenses, etc. More importantly is whether declines can be remedied.
Cash flow is the foundation for business valuations. If declining revenues/net income is an ongoing issue that cannot be remedied by the seller, than the valuation will plummet. On the other hand, if the issues can be addressed, a buyer may be able to pick up a good business at a much better price than if the liquor store was performing optimally.
For liquor store business buyers, it’s also imperative to study the stability of cash flow in light of debt service management. Will there be enough cash flow to cover the cost of financing the purchase of the business along with reasonable income for the business buyer?
2. What financial method is being used to value the liquor store?
Liquor store valuations may be performed by several different formulas. Depending on the financial health of the business, whether it is a going concern and whether it is part of a portfolio of liquor stores, will determine the most appropriate type of business valuation for the liquor business.
The primary formula is known as the Seller’s Discretionary Earnings (SDE). SDE is a market comparative approach which determines the cash flow of the business and then applies a multiplier to determine the most probable selling price (MPSP) for the business.
Finally, if the business is not profitable, the most appropriate valuation method is the asset based approach. This approach determines the value of the business assets, such as the liquor license, furniture, fixtures and equipment, inventory, etc. to ascertain the purchase price.
3. How solid are the seller’s vendor relationship with alcohol distributors?
A solid relationship with the liquor store’s alcohol distributors is fundamental to successfully selling a liquor store. Distributors often have monopolies on certain brands in an area which may restrict price negotiations if say the vendor is the exclusive distributor for a particular name brand.
Discounts may be had where the business buys in bulk. Yet this is only viable where the store has sufficient storage capabilities and high volume sales. Determining the risks from distributor monopolies and alternatives will help minimize thin profit margins.
4. Is the liquor store compliant with all applicable California laws and regulations?
Sellers and buyers should be familiar with California laws and regulations as well as county and local laws that are applicable to running the liquor store business. Having a full liquor license, obviously, increases the profitability and value of liquor store whereas a convenience store with a beer and wine license will also be profitable provided they sell non-liquor inventory that is relevant to their market.
The value of the liquor license is factored into the value of the business being sold. Liquor store licensing is, therefore, an important factor to consider. California permits transferring the liquor license in a business sale between the liquor store buyer and seller assuming the buyer meets licensing requirements and the seller’s license is not restricted due to infractions.
5. How desirable is the liquor store’s location?
The location of the liquor store has a major impact on its valuation and cash flow. A store located in a busy shopping area, well-lit area with ample parking with minimal competition is highly desirable.
Stores with bright and apparent signage on a main street tend to be more successful. The safer the neighborhood, the better of course. Additionally, stores near both commercial and residential areas tend to have consistent foot traffic at all hours.
For many liquor store business sales, the business is sold with a lease. The most common scenario is the lease is assigned from seller to buyer as part of the sale. To secure lender financing via Small Business Administration (SBA) financing, the lease must be at least 10 years in duration either through the underlying lease or with options to renew. Where a lease is near expiration, the seller is better off letting the buyer negotiate a new lease with the landlord in order to avoid remaining on the lease.
Some liquor stores are sold along with the commercial property. For those lucky enough to purchase both the business and commercial real estate, the business value is substantially greater since the value of the building will appreciate while the fixed costs remain controlled and not subject to periodic landlord negotiations.
6. Is the liquor store buyer qualified ready, willing and able to buy the business?
Selling a liquor store successfully requires the buyer to have financing. The buyer’s financial status along with the business’ financial health are both regarded when an SBA lender is considering financing a liquor store business sale.
The buyer’s credit score should be reasonable to show that they are credit worthy. The buyer will also need to produce their tax returns and other documents to persuade the lender that they should provide financing. Most lenders will also want to see relevant experience or some type of management experience in order to approve funding.
Buyers should also calculate the cost of the loan as well as whether they might need additional financing such as working capital for inventory, payroll, etc.
For parties who do not meet the traditional lending requirements, liquor store financing can be secured by alternative means. Buyers with poor credit or sellers who skim may not be able to secure traditional financing. Consequently, the parties can agree to seller financing as a reasonable alternative whereby the liquor store is held as the collateral for the loan. The seller will make additional income from the interest portion of the payment.
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.
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