The due diligence process goes far beyond an evaluation of the financial statements presented. You need to be able to access all files and records, review information and researchers as you review what they tell you. It is recommended that you allocate at least four weeks to this process and not be tempted to rush to judgment. Some problems can only come up for a while and so you need to be careful.
There are a few decisions you can make regarding buying from a liquor store before diving fully into the due diligence process. While you can engage in a lot of figure calculations and footwork as you go, is there anything you have learned about the industry so far, or about this specific business, its location or its owners so far that should give you pause? For thought? For example, if you already know that the financial records are incomplete for reasons stated by the seller or if the condition of the store or its assets is not as expected or expected, inventories are incomplete, inspections, certificates or licenses you are engaged by for some reason: they can all be reasons for you to turn around and have a good day.
To complete a due diligence process, you need to focus on seven different areas:
We have already talked about the need to devote four weeks to this whole process and you have to agree with the seller that during this time period you allocate an agreed period to monitor the operation of the business. First, evaluate the interior and exterior of the plant and calculate what you might need to repair, replace, or upgrade. Keep in mind that staff attitude is very important in retail and you should immediately evaluate how existing staff interact with customers. Are they always comfortable, attentive, fast? Personal problems or conversations should not be obvious. Ask yourself if the store looks good, if it has a good vibe, if it looks fresh and clean, if it has well-maintained toilets and seating and is generally spotless.
Also, make sure you are happy with the specific location of the company, the competition around you, the type of people who regularly frequents the area, accessibility and don't forget, always pay special attention to any possible or pending major road construction in the area, as This can literally "make or break" the business you are considering buying.
2. Financing.
At a minimum, you must review income statements, balance sheets and tax returns. You would do well to hire services from an experienced liquor store to help you here. Look at all vendor invoices and reconcile them with income. This can be a time consuming process, but you will be able to determine your margins this way. Pay close attention to transactions involving cash, especially if it involves your suppliers. You must receive written confirmation from the providers of your current terms.
Remember some of these industry standards:
- gross margin must be between 24 and 28%,
- the rent must be 7% of the maximum income
- The product mix should contain up to 70% liquor or up to 40% wine
- labor must constitute 5 to 7% of income
- net income should be 8-12% of income
- furniture must be delivered eight to 10 times a year.
3. The team.
All equipment and fixtures must be in good working order and nothing should require long-term repair or replacement. To ensure this, you should carefully review all maintenance and service items, take a look to see if each cool box is clean and well maintained, and inspect all other equipment to ensure it is well maintained.
4. Supplier Agreements.
Your wholesalers and suppliers are essential when buying liquor business assets and you need to know them well during your due diligence. Can schemes be transferred to you, or will you have to make new ones? You don't have to be prepared to settle on existing suppliers or suppliers and you really have to research as many options or opportunities as possible. For example, you can see better terms elsewhere, and this knowledge will be a great ammunition when it comes to negotiation and peace of mind.
5. Leases.
Always make sure that the lease can be transferred or that there are no obstacles ahead.
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