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 investigative personnel while reviewing what they tell you. It is recommended that you allow at least four weeks for this process and not be tempted to rush to judgment. Some issues may only come to light after a period of time and therefore you need to proceed with care.
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 up to this point, or about this specific business, its location, or its owners so far that should give you some thought? pause? for thought? If, for example, you already know that financial records are incomplete for reasons given by the seller, or the condition of the store or its assets is not what you expected or expected, inventories are incomplete, inspections, certificates, or licenses they are engaged for one reason or another, all could be reasons for you to turn around and have a good day.
For a due diligence process to be complete, it will need to focus on seven different areas:
1. The Facilities.
We have already told you 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 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 matters or conversations should not be apparent. Ask yourself if the store looks good, has a good vibe, appears fresh and clean, has well-maintained restrooms and break areas, and is generally spotless.
You should also make sure that you are satisfied 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 attentive to 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 alcoholic beverage business to assist you on this point. Look at all the invoices from the providers and compare them with 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 vendors. You will need to obtain written confirmation from the providers of their ongoing terms.
Remember some of these industry benchmarks:
– 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 should be 8-12% of revenue
– Inventory must be rotated eight to 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 quite some 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 ensure it is well cared for.
4. Vendor Agreements.
Your wholesalers and suppliers are absolutely essential when you buy liquor business assets and you should get to know them well during your due diligence. Can arrangements be transferred to you or will you have to make new ones? You don’t have to be prepared to deal with existing suppliers or vendors and you really should investigate 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 ahead of you. You must be able to assume or acquire 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 establish 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 salesperson to provide you with an optimal inventory level. Be sure to review all insurance certificates and be adequately covered for all eventualities. You will need to talk to credit card processors and commercial banks and be prepared to move to access better rates if necessary.
Since this can be a significant area of cost and liability, focus here. Check the compensation of each member, especially if there is a possibility that it will be paid in cash “under the table”. If you see that there is high employee turnover, ask yourself why. Is there a procedure for training? Although the salesperson is often wary of informing his employees that a sale is in progress, 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 opportunity 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.