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

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

#1 Post by Karl K » November 20th, 2016, 7:38 pm

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?
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#2 Post by Chris Blum » November 20th, 2016, 7:53 pm

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.
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#3 Post by Chuck Miller » November 20th, 2016, 8:02 pm

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.
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#4 Post by Karl K » November 20th, 2016, 8:19 pm

Chuck Miller wrote: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.
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#5 Post by PeterH » November 20th, 2016, 9:04 pm

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.


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#6 Post by Karl K » November 21st, 2016, 5:24 am

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.
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#7 Post by Bruce Leiser_owitz » November 21st, 2016, 7:39 pm

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.

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#8 Post by Karl K » November 21st, 2016, 7:51 pm

Bruce Leiser_owitz wrote: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.
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#9 Post by Randy Bowman » November 21st, 2016, 8:13 pm

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.
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#10 Post by PeterH » November 23rd, 2016, 4:31 pm

"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.

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#11 Post by Karl K » November 24th, 2016, 11:55 am

Good points, Peter! Thanks!
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#12 Post by M A T T H A R T L E Y » November 29th, 2016, 11:30 am

Karl K wrote: I could even be semi-absentee for a while

File that idea under "what is the fastest way to lose my money"
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#13 Post by C. Mc Cart » November 29th, 2016, 12:42 pm

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.
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#14 Post by PeterJ » November 29th, 2016, 12:49 pm

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.
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#15 Post by PeterJ » November 29th, 2016, 12:49 pm

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.
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#16 Post by C. Mc Cart » November 29th, 2016, 1:35 pm

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.
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#17 Post by Karl K » November 29th, 2016, 7:10 pm

M A T T H A R T L E Y wrote:
Karl K wrote: I could even be semi-absentee for a while

File that idea under "what is the fastest way to lose my money"
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!
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#18 Post by PeterJ » November 29th, 2016, 8:15 pm

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.
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#19 Post by Randy Bowman » November 29th, 2016, 8:42 pm

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.
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#20 Post by M A T T H A R T L E Y » November 30th, 2016, 6:41 am

Karl K wrote:
M A T T H A R T L E Y wrote:
Karl K wrote: I could even be semi-absentee for a while

File that idea under "what is the fastest way to lose my money"
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!
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.

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#21 Post by Karl K » November 30th, 2016, 6:59 am

M A T T H A R T L E Y wrote:
Karl K wrote: I

Thanks everyone for chiming in!
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.

Yeah I have seen the 3-4+x EBITDA, and I expect the owner would want 4xEBITDA or more. That being said he hasn't been profitable in tax terms for years, but he and his wife do take salaries. So I wasn't saying he would offer it at 1x - that was just what I would want to pay!

thanks for the input!
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#22 Post by Karl K » November 30th, 2016, 7:04 am

Randy Bowman wrote: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.
Randy, I live in a college town in Virginia. Students more or less double the population of non-students. Couple chain grocery stores with decent wine, plus the one wine/beer store. Current owner's only income is the store. This is not Charlottesville. It is growing and could do with a nice wine bar. But it's also a growth-controlled community, so there's not many new shopping malls going up. The wine store is on the side of the community with the grocery store where the residents tend to shop, right between the nicest grocery store and the liquor store. So ideal spot - lots of parking, you go to the one place for food, wine, and liquor.

There is a new hotel on the other side of town, where there are more rentals for students, that I thought could be good for a wine bar. But it's not quite right. Basically I would like to see a new development pop up and start something there.

As for Napa, I have heard that Master Sommelier Matt Stamp is opening a wine bar there.

Maybe wine bar is the way to go, hire people to work nights. Because that would be one thing I would be losing by going to retail. I have developed skills to manage an operation with 50+ employees, wine store would be under 10.
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#23 Post by Tom Gibson » December 8th, 2016, 8:17 am

How much business experience do you have, generally? Not in running someone else's business (or a line in their business, based on what you said above) but understanding corporate strategy, competitive analysis, competitive intelligence, marketing, balance sheet accounting, etc.

I'll assume you have deep knowledge of inventory management, ordering, product margins, SKU management, etc. based on your current role.

I guess I'm saying don't put the cart before the horse. There's a reason 80% of small businesses fail quickly...and it always relates to not having a solid understanding of those business functions I mentioned above.

That said, retail is the easiest of businesses to value, I think. What's the shop doing in revenue and net profit on a sqft basis? What's the foot traffic like? Signage? Inventory level? Revenue month/month, Q/Q, Y/Y for as far back as it'll go?

I'd never value something like this on a multiple basis, at least not in a vacuum. I spent years as an equity analyst at one of the biggest buy side shops in the world and even when valuing on a multiple basis I needed to ensure that I've modeled future growth and knew the business inside and out, including the risks of my modeled growth levers. As something you'd be sinking your OWN CASH into, I'd want to know it tenfold.

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#24 Post by Karl K » December 8th, 2016, 9:30 am

Tom Gibson wrote:How much business experience do you have, generally? Not in running someone else's business (or a line in their business, based on what you said above) but understanding corporate strategy, competitive analysis, competitive intelligence, marketing, balance sheet accounting, etc.

I'll assume you have deep knowledge of inventory management, ordering, product margins, SKU management, etc. based on your current role.

I guess I'm saying don't put the cart before the horse. There's a reason 80% of small businesses fail quickly...and it always relates to not having a solid understanding of those business functions I mentioned above.

That said, retail is the easiest of businesses to value, I think. What's the shop doing in revenue and net profit on a sqft basis? What's the foot traffic like? Signage? Inventory level? Revenue month/month, Q/Q, Y/Y for as far back as it'll go?

I'd never value something like this on a multiple basis, at least not in a vacuum. I spent years as an equity analyst at one of the biggest buy side shops in the world and even when valuing on a multiple basis I needed to ensure that I've modeled future growth and knew the business inside and out, including the risks of my modeled growth levers. As something you'd be sinking your OWN CASH into, I'd want to know it tenfold.
Thanks, Tom, for you answer. I would say that even though my understanding of some of what you point out about - e.g., corporate strategy, marketing - may be more on the beginner's side, I actually think I understand it better than the current owner. So in a sense I see some value in the possibility of buying the store, because their is untapped latent value. But on the other hand, because in a sense what I would be doing is lifting up the brand, I also wonder if it would be easier to just start from scratch. What I mean specifically is the layout is messy, it's got to be known a little for closeouts, organizationally it could be done better.

The value in the existing business is in the customer traffic, plus the buyer who basically runs the store and lets the owner act like an absentee.

There is actually only one vacant storefront in the shopping center and it's right next to the grocery store. So anyone could just go in and start to compete.

I did have the thought of buying the business and also taking over the new spot, letting the old space be just beer and the new space wine retail or wine retail and wine bar.

But I need to see the revenue per square footage of beer to see if beer could be profitable in a bigger space. That would be a way of maintaining the more casual brand that exists there and creating one that has a nicer environment, more incentive to spend.
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#25 Post by Thomas Keim » December 22nd, 2016, 8:49 pm

Randy Bowman wrote: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.
'Zackly. You pay for total inventory, fixtures/coolers/computers etc - and if the store is making money - three years of profit. If they grossed $350,000 a year, and brought in a net profit of $75,000, then $225,000 plus inventory/fixtures is the starting point.
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#26 Post by jeff davidson » December 23rd, 2016, 7:23 am

Hi Karl,

I was co-founder of a consulting business that we eventually sold. We thought about buying a small business to get started but decided to start from scratch. We learned that even the most careful valuation by experts can be off by an order magnitude for perfectly good reasons. I'm not familiar with the current business climate for wine shops (I did sorta work in the business for a bit), but I'd suggest taking a hard look at starting your own business vs paying for something as ephemeral as good will.

good luck!

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#27 Post by Karl K » December 23rd, 2016, 9:06 am

jeff davidson wrote:Hi Karl,

I was co-founder of a consulting business that we eventually sold. We thought about buying a small business to get started but decided to start from scratch. We learned that even the most careful valuation by experts can be off by an order magnitude for perfectly good reasons. I'm not familiar with the current business climate for wine shops (I did sorta work in the business for a bit), but I'd suggest taking a hard look at starting your own business vs paying for something as ephemeral as good will.

good luck!
Thomas, Jeff - good feedback/advice - I appreciate it!

I definitely am considering starting my own especially if the ask is too high.
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#28 Post by Richard Leland » December 23rd, 2016, 6:15 pm

Thomas Keim wrote:'Zackly. You pay for total inventory, fixtures/coolers/computers etc - and if the store is making money - three years of profit. If they grossed $350,000 a year, and brought in a net profit of $75,000, then $225,000 plus inventory/fixtures is the starting point.
$75,000 net profit on gross sales of $350,000 doesn't sound very realistic to me unless your rent is dirt cheap, it's a one-man show (i.e., no employees) and you didn't have to take out a loan to buy the business.
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#29 Post by Randy Bowman » December 23rd, 2016, 7:56 pm

Karl,

Over the 15 years we've owned our store, we have seen no less than 15 wine bars open in Napa. Most were downtown, (high rent), and a few on the outskirts of downtown. All but two are gone and both of those have become restaurants. Both started serving charcuterie, then within 3 years put in full kitchens and started serving off a menu.

One winery tasting room downtown added live music to bolster their sales and attendance.

Bevmo opened here in Napa about 6 months ago. We have noticed slower sales on certain wines, but it doesn't amount to much. Bevmo doesn't carry most of the wines we do. Surprisingly, Bevmo is more expensive on the higher end wines that we do carry.

Napa is about 80K population with a fairly large visitor population most of the year. There are 8 dedicated wine shops in the City of Napa. There are 5 liquor stores and every grocery store carries wine and spirits. There are 6 pharmacy stores that carry wine and spirits. Trader Joes, Whole Foods, Pier One Imports, five 7-11's, Wal Mart, two Target stores and three shops in the Oxbow Market all sell wine. Now add 10 tasting rooms in downtown and surrounding area.

We are one of the 8 dedicated wine shops and we hold our own. Not getting rich but as you can see, there's plenty of room to run a successful business. Think of it as auto row. Don't open a Yugo dealership. Open a custom car dealership.
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#30 Post by Karl K » December 23rd, 2016, 8:43 pm

Randy Bowman wrote:Karl,

Over the 15 years we've owned our store, we have seen no less than 15 wine bars open in Napa. Most were downtown, (high rent), and a few on the outskirts of downtown. All but two are gone and both of those have become restaurants. Both started serving charcuterie, then within 3 years put in full kitchens and started serving off a menu.

One winery tasting room downtown added live music to bolster their sales and attendance.

Bevmo opened here in Napa about 6 months ago. We have noticed slower sales on certain wines, but it doesn't amount to much. Bevmo doesn't carry most of the wines we do. Surprisingly, Bevmo is more expensive on the higher end wines that we do carry.

Napa is about 80K population with a fairly large visitor population most of the year. There are 8 dedicated wine shops in the City of Napa. There are 5 liquor stores and every grocery store carries wine and spirits. There are 6 pharmacy stores that carry wine and spirits. Trader Joes, Whole Foods, Pier One Imports, five 7-11's, Wal Mart, two Target stores and three shops in the Oxbow Market all sell wine. Now add 10 tasting rooms in downtown and surrounding area.

We are one of the 8 dedicated wine shops and we hold our own. Not getting rich but as you can see, there's plenty of room to run a successful business. Think of it as auto row. Don't open a Yugo dealership. Open a custom car dealership.
That is an interesting perspective.

I would say that Napa per capita definitely has more wine sales than a town of similar size (like mine), because people there (the visitors as well as residents) are in the mood for wine. So it could hold more stores.

But I get your point about auto row and specializing.

However, I was talking to my wife about it and she said, what is the value of having the "one" store in town. If I opened a second store (wine is sold in numerous grocery stores here but no other "bottle shop"), would wine sales in town double?

Unlikely. I might be able to push it to 120, 140%. Let's say it's 120% and I get 50%, to start. That's 60% of what I would get buying the business outright. Now of course I would say that I would eventually eat this guy's lunch, but that could take some time. So what is the value of buying what is a bottle shop monopoly - though one with limited barriers to entry (i.e,. not a fixed number of alcohol permits.)
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#31 Post by Randy Bowman » December 23rd, 2016, 8:56 pm

However, I was talking to my wife about it and she said, what is the value of having the "one" store in town. If I opened a second store (wine is sold in numerous grocery stores here but no other "bottle shop"), would wine sales in town double?

If you have what the other store doesn't have and/or broader selection, you have an edge. The locals keep you alive and the bonus is the tourists. College town? Cheapest kegs? or add wine education. Use you imagination. Wine sales in town could double if you can sell it. A number of wineries or reps would be willing to pour and tout their wines, (while you tout wine in general). The only issue I worry about is the people who only show up for freebies/cheapies. A tasting group gets together to share good wine and knowledge. You can offer that up at a price. Burgundy appreciation Thursday, 5 to 9 PM, $XX, (what will they pay), and you have to educate yourself or bring in somebody to do the talking. It's trial and error. You need to know what might work in your area and again, it's the locals that keep you in business.
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#32 Post by Thomas Keim » December 24th, 2016, 6:16 am

Richard Leland wrote:
Thomas Keim wrote:'Zackly. You pay for total inventory, fixtures/coolers/computers etc - and if the store is making money - three years of profit. If they grossed $350,000 a year, and brought in a net profit of $75,000, then $225,000 plus inventory/fixtures is the starting point.
$75,000 net profit on gross sales of $350,000 doesn't sound very realistic to me unless your rent is dirt cheap, it's a one-man show (i.e., no employees) and you didn't have to take out a loan to buy the business.
That is before salaries Richard - I should have been more clear about that -
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#33 Post by Tom G l a s g o w » January 4th, 2017, 5:10 pm

I think you're most likely "buying" yourself a job. That said, you need to find out more about the lease, how much remaining term, how much rent, are there renewal options? Is the rent above or below market? You don't want the landlord to be able to hold you hostage or have to move soon after you buy the business.

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#34 Post by M A T T H A R T L E Y » January 5th, 2017, 11:44 am

Tom G l a s g o w wrote:I think you're most likely "buying" yourself a job. That said, you need to find out more about the lease, how much remaining term, how much rent, are there renewal options? Is the rent above or below market? You don't want the landlord to be able to hold you hostage or have to move soon after you buy the business.
Outside of your operating agreement, your lease is the #1 most important document as it relates to your retail business.

You need to find a good real estate lawyer to look over the current lease (that will run you around $2,500 for someone worth it) and break down potential pitfalls. Could be anything from no renewal option and a center that is looking to re-purpose its tenant mix, to a % rent clause with a artificially set breakpoint that is going to get in the way of generating any type of meaningful cash flow. Might even be something as simple as the guy signed up for a space and is paying rents well above market.
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#35 Post by Tom G l a s g o w » January 5th, 2017, 7:12 pm

M A T T H A R T L E Y wrote:
Tom G l a s g o w wrote:I think you're most likely "buying" yourself a job. That said, you need to find out more about the lease, how much remaining term, how much rent, are there renewal options? Is the rent above or below market? You don't want the landlord to be able to hold you hostage or have to move soon after you buy the business.
Outside of your operating agreement, your lease is the #1 most important document as it relates to your retail business.

You need to find a good real estate lawyer to look over the current lease (that will run you around $2,500 for someone worth it) and break down potential pitfalls. Could be anything from no renewal option and a center that is looking to re-purpose its tenant mix, to a % rent clause with a artificially set breakpoint that is going to get in the way of generating any type of meaningful cash flow. Might even be something as simple as the guy signed up for a space and is paying rents well above market.
A lawyer can help you with some of that, the market part maybe, maybe not. You need a lawyer that specializes in liquor license, bars, etc.

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#36 Post by Randy Bowman » January 5th, 2017, 8:43 pm

Karl, since you brought this subject up and got me looking into it, another individual showed up at the store on New Year's day who had driven up to check out the local wine store/bar for sale. After a lengthy conversation there points beyond the basic cash flow that came into play. The store in question IS profitable and the current owner's vision and direction works well. He's probably ready to retire after so many long hours and he did most of the work himself.

BUT

The ad for the sale has "N/A" for current lease information. (He moved the same year we did and our lease is technically up this year, though we have options for additional years.) Is his lease expiring? Negotiating a new lease when rents down town have gone from $3.00 per SF to $6.00 per SF.

Downtown businesses pay a special tax for the "Downtown Merchant's Association."

The competing wine bar turned restaurant located across the street purchased the building on the next block, is tearing it down and building a three story building. Construction to take 2 to 3 years which means street blockage, traffic and parking issues during that time. During the 2 year construction of the apartment complex across the street from our store we endured road closures, blocked driveway, daily calls to have their employee's vehicles removed or towed from our parking lot and an "estimated" loss of sales of 100 K each year.

Beyond the asking price are sharks, wolves and sink holes you need to know about.
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#37 Post by Karl K » January 6th, 2017, 7:05 am

Thank you all! Very informative and interesting!
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#38 Post by Robert Dentice » January 20th, 2017, 11:49 am

I have never valued smaller businesses however when valuing larger businesses this is what I would do.

I would value the inventory at some discount to cost.

Then value the operating cash flow of the business using a multiple of earnings and discounted cash flow. To figure out the true operating cash flow I would use a market rate for a manager instead of what the owner takes and then remove unusual costs that you often see in small businesses (e.g., a car lease for the owner) that are not really necessary to run the business.

I would then do a sum of the parts.

Also in a situation like this I would highly recommend that the purchase price be divided into an upfront and then an earn out.

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#39 Post by Karl K » January 20th, 2017, 8:22 pm

Thanks.

Met with owner, he is not offering a realistic price. Store does 1.7m, net discretionary income some where around 130k, he's asking 1-2m. Has 200k inventory.

With 500k I could start up a store and get to that level of income, if not quite net sales, rather easily I would think. So why the hassle of buying a brand that's not me, having to fix 30 year old operational problems.

I can compete instead.

Or look for another store, which is what I am doing now.

Or stay in my current job.
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#40 Post by Richard Leland » January 21st, 2017, 4:51 pm

Karl K wrote:Met with owner, he is not offering a realistic price. Store does 1.7m, net discretionary income some where around 130k, he's asking 1-2m. Has 200k inventory.
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#41 Post by Karl K » January 21st, 2017, 5:23 pm

Yep.

He talked to some brokers who said they could get that price, do it by "bidded up" potential buyers.

I'm pretty sure this is the kind of broker who requires an up-front fee . . .

Moving on from that option, I am.

Would rather just compete against him.
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#42 Post by Randy Bowman » January 21st, 2017, 7:48 pm

Karl,

If you have a vision, an idea or even an inkling of business model that would do better than the existing store, by all means compete. After 30 years of operation, I would imagine the owners are my age or older and not promoting any changes in their business model, just business as usual.

The old saying, build it an they will come, works very well if you are innovative, different and active. The old saying, location, location, location, is somewhat true, BUT, in retail, the best locations are high rent. A "good" or "reasonable" location can work to your benefit too. Low overhead, lower prices.

A short version, we moved from 1100 sf in a bustling shopping center to an old 3600 sf carpet warehouse for the same rent, 3 times the parking and access for limos and buses. Yes, the build out wasn't cheap, but Carrie drove business to us on social media and interaction with limo companies, hotels, motels, B&B. Just pictures she has posted on social media has brought new business.
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#43 Post by Karl K » January 22nd, 2017, 8:26 am

Thanks for insight!
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