Ask Me Help Desk - How much should I pay to buy this business ?

Dear Experts,

I am seeking your help as I am considering buying following business.

I am interested in buying Liquor Store and I have got the financials from the seller. The total Sales including Wine,beer and Liquor is 650k per annum. It does lottery too approx 45k a year. The business is on lease and pay rent 36k yearly. After deducting cost of sales the gross margin is 200k and after deducting total expenses business net income is 45k. The last 3 years financials shows that business is declining by 10-15 % due to bad economy.

What do you think is fair price to buy this business ? How much maximum I should pay to buy this liquor store?

Thanking you for your suggestion.

Vish

Vish

In valuating this business you need to look at a multiplier of the net income. There is no magic figure in that regard - but a range would be anywhere between 5 to 10 times annual net.

If the business were on the upswing, that is net showing growth, the owner would be in a position to look for 10 times trailing net - and you'd probably have to offer something in that ball park. If you were confident that you could maintain the growth trajectory, then something on the order of 10X net would by OK. If you were growing by 10% per year lets say, then you've recouped your investment in 7 years, and you're then in a position that after ten years you've more than doubled your original investment, and your gain after that will be at least 20% of your original investment per year.

On the other hand, you're actually looking at a business that has shown a 10% decline in net for at least the last year. In that case, if you're determined to own this business, offer 5x net (or even less if the owner is really anxious to be out of the business. You're taking a risk here obviously, as if the economy takes more than a year to turn around, and the business keeps decreasing, then you're in trouble. On the other hand if things turned around in a year, and you get get some growth, then you recoup your investment in maybe 4-5 years.

I have to ask you a couple of things. What do you know about running a liquor store? Besides dealing with customers, you'd have several distributors that you would buying from. Know anything about that? Have you looked at other factors that may be influencing the decline in sales. Even in bad times, people still like to drink. Is the store getting the same amount of traffic in terms of customer count, but they're just buying less expensive brands? You need to take a more granular look at the sales. What would you be able to do it increase traffic and business?

Last is financing. I didn't factor in financing costs. If you're financing this deal, then time to profit under either scenario above is delayed by a couple of years due to your financing costs. With sales declining, purchasing with financing is very risky, and you probably wouldn't want to offer more than 4X net - if you made an offer at all.

Some questions:
1. Does the license transfer with the store?
2. If so, what is the value of the license? This is important because the value of the license will not necessarily decline if your business continues to slide.
3. In what kind of neighborhood is the store located? If surrounded by industrial sites, the business may recover when manufacturing picks up again.
Hope to hear from you soon, Vish

Jeffinnport

I thank you so much for your help and advice

Now here is the deal………I am on final stage for negotiation on this business but the owners of this particular liquor store owns 20 other stores and have been in the business for more than 25 years now. In other words, these people are highly experienced and know how to make me pay more for the business that we are negotiating right now.
I am being new to this industry and not having enough knowledge about every thing that I have to take care once I buy this liquor store, I seek your kind assistance to make the correct decision about the price.

Financial are like this. Actual cash flow for this business is 35k. This store is located at very good area and used to do over 1 million just few years ago. Another thing, licenses are not available in this county and the last license actually sold for 245k. License will be transfer on our name with the purchase of this business.

In addition, since this store runs completely by employees, currently payroll expense is 75k, which will be less than 20k if I buy and run this store. I could also save up to 10k by cutting unnecessary cost that I see in the financials.

Seller is asking for 375K. They are very firm on their price right now. I don’t know the price is fair or not.

Should I pay 375K for this store? Is it high price, fair price or good deal?? What do you think I should be paying for this business? Please give me range.

I will sincerely appreciate your comments or suggestions on this and I look forward to hear from you soon.

Vish

Quote:

Originally Posted by jeffinnport

Vish

In valuating this business you need to look at a multiplier of the net income. There is no magic figure in that regard - but a range would be anywhere between 5 to 10 times annual net.

If the business were on the upswing, that is net showing growth, the owner would be in a position to look for 10 times trailing net - and you'd probably have to offer something in that ball park. If you were confident that you could maintain the growth trajectory, then something on the order of 10X net would by OK. If you were growing by 10% per year lets say, then you've recouped your investment in 7 years, and you're then in a position that after ten years you've more than doubled your original investment, and your gain after that will be at least 20% of your original investment per year.

On the other hand, you're actually looking at a business that has shown a 10% decline in net for at least the last year. In that case, if you're determined to own this business, offer 5x net (or even less if the owner is really anxious to be out of the business. You're taking a risk here obviously, as if the economy takes more than a year to turn around, and the business keeps decreasing, then you're in trouble. On the other hand if things turned around in a year, and you get get some growth, then you recoup your investment in maybe 4-5 years.

I have to ask you a couple of things. What do you know about running a liquor store? Besides dealing with customers, you'd have several distributors that you would buying from. Know anything about that? Have you looked at other factors that may be influencing the decline in sales. Even in bad times, people still like to drink. Is the store getting the same amount of traffic in terms of customer count, but they're just buying less expensive brands? You need to take a more granular look at the sales. What would you be able to do it increase traffic and business?

Last is financing. I didn't factor in financing costs. If you're financing this deal, then time to profit under either scenario above is delayed by a couple of years due to your financing costs. With sales declining, purchasing with financing is very risky, and you probably wouldn't want to offer more than 4X net - if you made an offer at all.

Dear Friend

I thank you so much for your help and advice

Now here is the deal………I am on final stage for negotiation on this business but the owners of this particular liquor store owns 20 other stores and have been in the business for more than 25 years now. In other words, these people are highly experienced and know how to make me pay more for the business that we are negotiating right now.
I am being new to this industry and not having enough knowledge about every thing that I have to take care once I buy this liquor store, I seek your kind assistance to make the correct decision about the price.

Financial are like this. Actual cash flow for this business is 35k. This store is located at very good area and used to do over 1 million just few years ago. Another thing, licenses are not available in this county and the last license actually sold for 245k. License will be transfer on our name with the purchase of this business.

In addition, since this store runs completely by employees, currently payroll expense is 75k, which will be less than 20k if I buy and run this store. I could also save up to 10k by cutting unnecessary cost that I see in the financials.
Seller is asking for 375K. They are very firm on their price right now. I don’t know the price is fair or not.

Should I pay 375K for this store? Is it high price, fair price or good deal?? What do you think I should be paying for this business? Please give me range.

I will sincerely appreciate your comments or suggestions on this and I look forward to hear from you soon.

Vish

Quote:

Originally Posted by C-O-P

Some questions:
1. Does the license transfer with the store?
2. If so, what is the value of the license? This is important because teh value of the license will not necessarily decline if your business continues to slide.
3. In what kind of neighborhood is the store located? If surrounded by industrial sites, teh business may recover when manufacturing picks up again.
Hope to hear from you soon, Vish

Vish,
I think you have a good opportunity here, based on your ability to optimize the return on the investment. Since the license transfers with the business, you are getting value that can be realized in a sale if you are not able to make a go of the store. As well, you seem to have looked hard at what you can do with the business to improve the financials. The key here, also, is that a little store like this runs on Customer service. No employee will treat YOUR Customers like YOU will! I would like to hear from you in a few months, after you have increased business by being there yourself and have been able to see your personal income fund your personal version of the American dream. Congratulations!

Hi Vish,

That's all good information to add to the equation.

The value of the liquor license itself is a large chunk of the owner's asking price - and given the saturation of the licenses in your county is a valuable equity component of the deal. I can see why they are firm on their price.

You also mention the savings in employee costs, which is an important financial factor. Essentially you'll be paying yourself to work there, so to a large extent the cash flow can be looked at as a real return on investment, or can be used to service any debt, etc. One cautionary note. Be careful that you don't discount the employee cost too much. I don't know the hours that you can keep in your location, but it is likely that you'll be open at least 10 hours/day Monday through Saturday. Since you sell lottery, you really need to have two people in the store at all times. First of all, a customer buying liquor is going to get upset if they have to wait for a person doing a lottery transaction (pick the numbers, pick the cards, etc.). Second you need two people in the store to make sure that if it's busy you don't get ripped off. Theft from liquor stores is a real problem. You should probably make sure you keep on at least one employee that has a pretty good knowledge of how things work, and that you can TRUST.

Since you'll be an active owner, working a substantial amount of the open hours, you do have a great opportunity to influence the business, as far as providing personalized service, taking pride in the appearance and available products, etc. Since the store is currently owned by a chain, the available products are probably dictated by the chain's purchasing agreements. You'd be able to tailor your inventory to meet the demographics of the people that come in the store. That's all a big plus as far as potential growth.

Make sure that any contracts that the chain has are transferable as part of the deal. The liquor license is obviously part of the deal. Make sure that the lease for the space is transferable, and any purchasing agreements with distributors are transferable. Leases for a business are usually written so that if the business sells, the lease transfers - but make sure you check that out so that you don't get blindsided. And also understand how much longer the lease runs. Distributor arrangements can always be renegotiated later, but you certainly wouldn't want to have to do that right at the beginning. You want a chance to get a feel for what sells and what doesn't so that you can adjust your product mix if necessary. That might even mean dropping a distributor. Or you might find a distributor that is anxious to do business with you that couldn't previously do business with the chain.

So as far as your question about this as a good deal, I'd say it is on a strictly financial basis, assuming that your diligence and consideration take into account the things I outline above.

The success of the store going forward would be completely on your shoulders obviously. Your biggest risk here is that you know little about the business. This is one reason keeping on an employee that is knowledgeable would be critical. It's likely that you can get some knowledge transfer and mentorship from the distributors and sales people, especially as far as products, but probably also some useful liquor store business tips. I haven't looked, but I'd be amazed if there are not on line groups you can join that are oriented towards

You also need to be someone that is extremely service and customer oriented. Even the grumpy customers need to get a smile and a helpful attitude.

So if you're willing to throw yourself into the store, you feel like you are customer oriented, and you're willing to work your you know what off, then I'd say go for it.

Good luck in your endeavor.

Jeffinport

With your great help, we have been able to take the decision to buy this business. The deal is through but we still have to apply for the loan from bank. Bank is saying we have to produce business plan. I have never written a business plan. Since you are very intelligent and knowledgeable , can I request you to prepare me a brief business plan for our liqour store? I know I am asking for a lot but my loan is completely depending on our business plan and I don't want to take the risk.

I sincerely appreciate any help that is possible.

Vish

Quote:

Originally Posted by jeffinnport

Vish

In valuating this business you need to look at a multiplier of the net income. There is no magic figure in that regard - but a range would be anywhere between 5 to 10 times annual net.

If the business were on the upswing, that is net showing growth, the owner would be in a position to look for 10 times trailing net - and you'd probably have to offer something in that ball park. If you were confident that you could maintain the growth trajectory, then something on the order of 10X net would by OK. If you were growing by 10% per year lets say, then you've recouped your investment in 7 years, and you're then in a position that after ten years you've more than doubled your original investment, and your gain after that will be at least 20% of your original investment per year.

On the other hand, you're actually looking at a business that has shown a 10% decline in net for at least the last year. In that case, if you're determined to own this business, offer 5x net (or even less if the owner is really anxious to be out of the business. You're taking a risk here obviously, as if the economy takes more than a year to turn around, and the business keeps decreasing, then you're in trouble. On the other hand if things turned around in a year, and you get get some growth, then you recoup your investment in maybe 4-5 years.

I have to ask you a couple of things. What do you know about running a liquor store? Besides dealing with customers, you'd have several distributors that you would buying from. Know anything about that? Have you looked at other factors that may be influencing the decline in sales. Even in bad times, people still like to drink. Is the store getting the same amount of traffic in terms of customer count, but they're just buying less expensive brands? You need to take a more granular look at the sales. What would you be able to do it increase traffic and business?

Last is financing. I didn't factor in financing costs. If you're financing this deal, then time to profit under either scenario above is delayed by a couple of years due to your financing costs. With sales declining, purchasing with financing is very risky, and you probably wouldn't want to offer more than 4X net - if you made an offer at all.

Dear Friend

With your great help, we have been able to take the decision to buy this business. The deal is through but we still have to apply for the loan from bank. Bank is saying we have to produce business plan. I have never written a business plan. Since you are very intelligent and knowledgeable , can I request you to prepare me a brief business plan for our liqour store? I know I am asking for a lot but my loan is completely depending on our business plan and I don't want to take the risk.

I sincerely appreciate any help that is possible.

Vish

Quote:

Originally Posted by C-O-P

Vish,
I think you have a good opportunity here, based on your ability to optimize the return on the investment. Since teh license transfers with the business, you are getting value that can be realized in a sale if you are not able to make a go of the store. As well, you seem to have looked hard at what you can do with the business to improve the financials. the key here, also, is that a little store like this runs on Customer service. No employee will treat YOUR Customers like YOU will! I would like to hear from you in a few months, after you have increased business by being there yourself and have been able to see your personal income fund your personal version of the American dream. Congratulations!

Vish

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