Looking to buy a wine store - what is the best way to come up with valuation

I am looking to buy a wine store. It’s not on the market. The current owner says “I have some numbers in mind, problem is the profitability isn’t high enough to justify them.”

What is the best way to value a wine store? I have heard that for small businesses, it ranges from 2.5x to 4x total discretionary income (basically owner’s salary + store income), depending on the size of the store.

What do you think?

Cashflow divided by a typical Cap rate for a wine shop? A quick search gave me just one example at 9%, but that seems a bit low so search for other more similar examples. Your 25-40% cap rates seem high (that’s 4 to 2.5 x earnings), but I’d see how the numbers come out both with and without the manager’s salary.

If the profitability can’t support his numbers, then his numbers are too high.

It doesn’t matter what metric you use to value the business if the owner has an unrealistic valuation in mind. You may simply be wasting your time, unless the owner has a real reason for selling.

Thanks. Agree with you and Chris. Another personal friend of mine - who built and sold a business - told me something along the lines of most small business owners think their business is worth more than it really is, particularly when it’s time to sell.

It’s clear that an unrealistic valuation doesn’t make sense. I could take what I would invest and just build out a store myself. Inventory is inventory whether it’s mine or yours so it doesn’t have special value. A business’s value, as I see it, is in the value of its name (goodwill) + the value of its profitability.

While it’s clear that this individual may ask for too much, the question is how to determine the far extreme limit. Let’s say $2m gross sales (beer and wine + misc). What is the point at which it’s worth taking over the business, versus saying to him, “That’s too high. I can open my own store and do better than that for less cost,” implicitly pointing out that if I did that the value of his store would likely go down.

One reason to buy the store is it’s been in business 20 years, is located in an ideal location - between the local choice grocery store and the local liquor store (control state here).

A reason not to buy is if it’s established brand is not quite what I would build if I could build from scratch.

Another point is I am a family man and stepping into immediate income stream would be nice.

I don’t see enough information to give an informed answer, but here are some thoughts.

Owners says, “I have some numbers in mind, problem is the profitability isn’t high enough to justify them.”

First is to define profitability, and to do that you need to separate owner’s draw. Take the total profit including the current owners salary, and subtract what it would cost to hire a fully competent manager who could maintain the store at current levels without your intervention. You are going to want to see a decent ROI on your investment. What that is can be up to you, but I’d expect 10% or so, considering that a small retail business is much riskier than stocks or fixed income, and if you are buying yourself a job, paying more than than you would pay for experienced hired help doesn’t make sense.

Next is to look at what you feel with confidence you can add to the profitability. If you have experience in wine retail, or have been successful in marketing other products, you may be more willing to pay more for potential. If you can’t walk in the door and think of five things immediately that will improve the store, you better be at the far conservative range of valuation. Usually the only time that works is when the owner is highly motivated to sell.


P Hickner

Thanks. Yes I haven’t quite seen all the books. May just be patient.

I do have some ideas for improvement, changes. Will keep you posted if anything happens.

There’s far too many variables that aren’t clear from the post, especially when it comes to assets. Does the store own its location, or is the location rented? What the value of the inventory in stock? Are there key employees who will stay with the business? What’s the going rate for liquor licenses in that area? Is there much local competition?

I would suggest retaining a local business valuation expert, preferably someone with expertise in valuing wine stores. Ultimately, you need an independent person to look it over and tell you whether the price the owner wants makes sense, both in terms of valuation and in terms of cash flow.

A factor you didn’t mention, though, is whether YOU have any experience in running a business in general or a wine store in particular. The owner’s numbers might be reasonable for someone who is well-versed in the industry, but it might be a terrible investment for someone who doesn’t really know the wine retail biz.

Bruce

Good points all. I do run a ca. $4m food and beverage operation at a resort. The store does not own but rents. I know how to sell wine, though retail is different than hospitality. I know how to manage people. The value of the inventory to me is not as important - inventory is inventory, whether I buy it from an existing retail store or from wholesalers. There is a good buyer/manger who essentially runs the daily operations, so I could even be semi-absentee for a while, buying time to make improvements. There is not much local competition, aside from a grocery store, which is real competition, but the store specializes in different things than you find in a grocery store (this is not a mega-grocery store).

There is some Internet business which I would be worried about given how things are.

Essentially I am trying to determine what the value of the going business is - being able to buy a known commodity with established traffic. I spoke to a business broker today about a different store in a different state and he said the usual going rate is between 1.5x and 2x the net annual earnings. Of course it differs depending on whether you are in a jurisdiction with restricted licenses, as I am not.

We bought an existing wine and cigar shop in 2002. The first time I approached the owner, he wanted 350K. One year later I bought it for 55K and I overpaid. There wasn’t even 25K worth of product. Maybe 5K in furnishings, cash register and credit card machine. There was little “good will.” We had to “support” the business for 3 years until we could see light at the end of the tunnel. Now it’s been years of building inventory and taking no money out of the business, making connections, building a customer base and adjusting to the mercurial wine market.

The first time I approached the owner, I heard all about how much he was making a year. At the time, I thought it was profit, not total sales, so it sounded good to me. Over the next year I watched the business operation, did my own calculations and realized the business was worth 30K plus 5K for the “name” and “good will.”

Things are changing so you need to know the actual inventory, annual sales for at least 3 years and bills paid for those three years. Is their business model up to date and/or successful? You have a better model? If you don’t pay yourself, you save that much in wages. Will it be enough?

PS. Not including sick days, Carrie has had 27 days off in 14 years. I get a week a year for a golf tournament in SC and Tuesday afternoon for 9 holes, weather permitting.

“I could even be semi-absentee for a while”

I highly recommend being at the store as much as possible in the beginning.
First, you want to build rapport with the customers. Even if the store is currently well run, you want the customers to be loyal to you, not the staff. I think there are threads somewhere about mass staff defections to start their own store.
Second, you need to see first hand how the staff is treating the customer. Good customer service is rare, and if you really want a store to shine, you are going to need the best. Even with no other stores in the vicinity, the internet is out to take all customers from everywhere.

P Hickner

Good points, Peter! Thanks!

File that idea under “what is the fastest way to lose my money”

I see owners ‘wanting’ inflated multiples of ebitda for their business’ all the time, but if you ask them how much they would pay for their business today with their own $, you hear a much lower #.

I’m not much help, but if I were buying a wine store, I wouldn’t pay much over inventory/ hard goods costs, along with something small for ‘good-will’ and a willingness to work a lot. Randy, from his comments appears to be an ideal person to speak with.

Unless you have an additional (more lucrative) revenue stream, I imagine this type of operation requires the owner to be a full-time employee or the math won’t work.

There’s a reason why most of the small wine shops in my area also became wine bars and the ones that survive serve ‘real’ food. The margins on bottles are tight. By-the-glass and food service can be the profit driver.

It used to be that a small retailer could add sales and profit by selling on line. I think the opportunity to do that is largely gone these days with state restrictions what they’ve become.

Just my 2¢, but Randy is painting a true picture as well.

There’s a reason why most of the small wine shops in my area also became wine bars and the ones that survive serve ‘real’ food. The margins on bottles are tight. By-the-glass and food service can be the profit driver.

It used to be that a small retailer could add sales and profit by selling on line. I think the opportunity to do that is largely gone these days with state restrictions what they’ve become.

Just my 2¢, but Randy is painting a true picture as well.

Along similar lines.
A friend bought a corner commercial building (renovated old house) and opened a bike store in the main floor 2 years ago. Smartest thing they did when they opened the store when adding a coffee bar in one end. He says that coffee and a few pastries sold is the only thing that makes that building profitable.

FWIW the current owner is basically semi-absentee, allowing his buyer/manager to run most of the day-to-day stuff.

I guess basically yes I was asking what multiple of cash flow or EBITDA was worth it when buying this kind of business. Inventory I am not worried about b/c if I buy 500k inventory from him or from wholesalers it is mostly the same (assuming the product he bought is still saleable, which I think it is). So I was just trying to value the worth of the business outside of inventory and ffe - how much is it worth to buy a business with a certain income stream (assuming you could keep that stream going, if not increase it. One thing is he does do about a small bit - maybe 10% - Internet sales and I could see that being hit.)

I would think the multiple would really be at least .5 but no more than 2. At least .5 b/c it’s worth it to have an established stream of customers used to coming to the store for 20-25 years, but no more than 2 because within 2 years if I started my own shop I should have something comparable to the level of business the shop would have competing against me (keep in mind that would likely be lower than what it is now b/c the town doesn’t really need two stores).

And I have thought of the food/wine bar side, but right now I am a resort food and beverage manager and regularly don’t get home until 11 or later and I thought it would be nice to have a store that closes at 7, even if I work later than that it could be at home or not all the time.

But I do like the fun that comes from being around people enjoying wine. But it’s not great for family life and it is exhausting, what I do now.

Thanks everyone for chiming in!

I hear you about the hours once you go the winebar/food route. I’m just describing what the reality has been here in OC, SoCal. Too much competition from big boxes and supermarkets and not enough demand for exclusive small production product. Margin on straight retail bottles here is 35-40% IF you’re not trying to compete with others on more visible labels… then it can be as low as 10-15%. Of course this is all related to market and volume. People keep opening places but, in the past few years, they’re all winebars w/ adjunct retail or ‘winery’-type operations. May just be this market.

Karl, a couple questions:
How big/small is the town you live in that you would be “the second wine store?” Do you have a limited walk-in customer base? Does the current owner have another income besides the store?

I ask because we have so many wine stores in Napa we send each other customers and borrow a bottle or two to fill on-line orders occasionally. Each store has it’s niche and model with crossover on merchandise. Downtown stores pay high rent. Those of us on the outskirts pay reasonable rent.

We work closely with most of the limo companies, wineries and hotel concierges, (who change monthly) to bring in customers looking for our niche.

Our cigar sales, (niche) pay the bills right now, but will soon fall off with the new CA tobacco tax. Wine sales were the money maker but on-line sales are waning and cutting into that money we turn around into inventory.

We take no money out of the business. We have no employees, no workman’s comp payments and no employee health plans. I have my retirement to support us, Kaiser Health Insurance and the store still owes us money we can only recoup by selling the business.

We are licensed as a bar but don’t promote the business as a bar. We can if we want to. We can add food service easily. Both will require employees, workman’s comp insurance and longer hours, but both can be moneymakers. A live music permit is cheap and could go that direction with the bar. All it needs is somebody 20 or 30 years younger than Carrie and me that know what that age group likes. People our age have handicap plates and walkers. They like the old couple that run the store.

Retail is a bloodbath - just make sure you know that going in. If you don’t have a plan to be able to operate on very slim margins you are essentially buying a part of a dying business.

Most solid retail businesses are going to trade at 3-5.5x EBITDA. If the owner works full in the business and draws a salary you can usually bake that into the price as well. Inventory is always included. One you have someone who tells you they want to sell you a business at 1x EBITDA plus inventory you really need to think about what you are buying - because the business owner is telling you you’re not buying squat. They are telling you that you could easily replicate this business elsewhere, that there is nothing to buy, and you can essentially trade out their cash and put yours in it so they can do something else. No enterprise value, nothing.

Most people end up evolving into some type of wine bar because the margins are big and it essentially is the only way they see to save their business.