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!
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.
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.
'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.
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.
$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.
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.)
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.
That is before salaries Richard - I should have been more clear about that -
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.
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.
Thank you all! Very informative and interesting!
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.
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.
Fantasyland.