Conducting Due Diligence When Buying a Liquor Store

The due diligence process goes far beyond a simple evaluation of the financial statements presented. You need to be able to access all files and records, review information, and research staff as they review what they tell you. It is recommended that you allow at least four weeks for this process and do not be tempted to rush into judgment. Some issues may only come to light for a period of time, and therefore you need to proceed carefully.

There are a few decisions you can make about purchasing a liquor store before fully immersing yourself in the due diligence process. While you can engage in a lot of number calculations and work on your feet as you go, is there anything you have learned about the industry up to this point, or about this specific business, its location, or its owners thus far that should give you a break? For thought? If, for example, you already know that financial records are incomplete for reasons given by the seller, or if 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 a reason. or other, they can all be reasons for you to turn around and say good morning.

For a due diligence process to be completed, you will need to focus on seven different areas:

1. The facilities.

We have already discussed the need to dedicate four weeks to this entire process and you must agree with the seller that during this time you assign an agreed period to observe the operation of the business. First, you will need to evaluate the interior and exterior of the facility and calculate what you may need to spend to repair, replace, or upgrade. Remember that staff attitude is very important in the retail business and you should immediately assess how existing staff interact with customers. Are they always nice, attentive, fast? Personal problems or conversations should not be obvious. Ask yourself if the store looks good, has a good atmosphere, appears fresh and clean, has restrooms and seating areas in good repair, and is generally immaculate.

You should also make sure you are satisfied with the specific location of the business, the competition around you, the type of people who regularly frequent the area, the accessibility, and don’t forget, always be particularly vigilant for any potential or pending major road construction. in the area, as this could literally “make or break” the business you are considering buying.

2. Finance.

At a minimum, you should review profit and loss statements, balance sheets, and tax returns. You would do well to enlist the services of an accountant with experience in the liquor business to assist you in this regard. Look at all the vendor invoices and compare them to the income. This can be a time-consuming process, but you will 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 get written confirmation from the providers of their current conditions.

Remember some of these industry benchmarks:

– the gross margin must be between 24 and 28%

– rent must be 7% of maximum income

– the product mix must contain up to 70% liquor or up to 40% wine

– labor must represent 5 to 7% of income

– the net profit must be 8 to 12% of the income

– the inventory must be renewed between eight and ten times a year.

3. The team.

All equipment and furnishings should be in good working order and nothing should require long-term repair or replacement. To make sure of this, you should carefully review all maintenance and service records, check yourself to see if each cooler box is clean and in good condition, and inspect all other equipment to make sure it is well cared for.

4. Provider agreements.

Your wholesalers and suppliers are absolutely essential when purchasing liquor store business assets and you should know them well during your due diligence. Can the arrangements be transferred to you or will you have to make new ones? You don’t have to be prepared to make a deal with existing vendors or vendors and you really should research as many options or opportunities as you can. For example, you may see better terms elsewhere and this knowledge will be great ammunition when it comes to negotiations and peace of mind.

5. Leasing contracts.

Always make sure that the lease is transferable or that there are no obstacles in front of you. You must be able to assume or purchase a long-term lease before proceeding.

6. Operations.

You will likely need multiple licenses and this should be an area of ​​particular concern when it comes to a liquor license. Sometimes these may not be assigned or transferred or jurisdictions may establish other onerous terms.

Follow daily procedures from opening time to closing time; Who has access to the keys and alarm settings? Does the company have a procedure for emergencies of any kind? Ask the seller to provide you with an optimal inventory level. Make sure to review all insurance certificates and be adequately covered for all eventualities. You will need to speak with credit card processors and commercial banks and be prepared to move to access better rates if necessary.

7. Employees.

As this can be a significant cost and liability area, focus here. Check each member’s compensation, especially if there is a possibility that 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 will often be wary of informing their employees that the sale is in progress, they must nevertheless analyze each employee individually, assess their loyalty and competence, and adjust their plans accordingly. Understand that certain procedures can be quite traditional for them and you need to 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 will need to meet with them before consummating a contract.

When you come across a liquor store for sale, if you conduct your due diligence to a very high standard, you will have the opportunity to see exactly how the business works, on a daily basis, and nothing awaits you. uncomfortable surprises if you decide to take over.

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