Retail wine business?

One of my nephews has an opportunity to buy a wine/liquor store in the Denver area.
I've been asked to help with the purchase, but I have no knowledge at all of how to value such a business.
Would anyone here know of someone who might be able to help evaluate this deal?
I'd expect to pay for this kind of advice.

John

I used to work for a SBDC.
Some caveats:
Get the owners written permission to "research" the operation

Age and quality of all the equipment. POS, Computers, HVAC, and the compressors on all the refrigeration.

What is the inventory you are purchasing? It will probably amount to all the previous owners mistakes with lots of dogs or stuff for which he over paid. Watch out for it's accuracy and how it is priced to you.

Look at tax returns and figure out if you could cash flow with those figures cited. Use only the tax return amounts as volume not "hearsay" from owner.

Talk to some of the sales people who sell to the operation. They will know the operation. Also see if you can find out what sort of pricing he received vis-a vis his competition.

Adequate convenient parking?

Local ordinances and state laws governing off sale. Take a critical look at them. It is hard to compete in one suburb when you have to close at 8:00pm and the store in the next suburb is 3 blocks away and open until 10!

Look at what the stores markup has been compared to it's competition in the area.

Evaluate the location. Is it a destination location? This means that the customers have to make a separate excursion to get to the store. Or is it nested with other businesses that have a lot of business. Chat with the neighboring businesses. How are they doing? How is the customer traffic?

Look at the location and figure out who are your customers. Then look at the demographics as to their number. What are your main products ? That is what do these people buy. Markups on liquor and beer is much less than wine. Then, what do you want to be known as? Is that going to attract customers or is the only attraction the close proximity?

hope this helps a bit.

Thanks, George. Your post reflects many of the points raised by another nephew of mine (I have more than a dozen!) and nephew Phillip is, I fear, somewhat inundated. He has experience working in the retail liquor industry, but buying a store is a whole different deal!

John

Good analysis by George.
Maybe Lou, Hoke, or someone else with real experience will chime in with ideas (or offer themselves or someone else who might be willing to do a real analysis as a consultant).
My only contribution/warning/comment is that if it is a business where the assumption of an established clientele/goodwill is part of the purchase price, look carefully at current owner and have your nephew compare himself. I've seen a few situations where someone bought an established business, and then realized that the goodwill didn't transfer. Whether because of previous owner's personality/charisma, or something else. -

Good advice already given. I could add that many people err when they don't tend to provide enough funds (or loans available) to maintain and purchase inventory. For some reason new owners almost always underestimate inventory flow and the ability to purchase effectively when needed. That's especially the case in CO, where you can buy discount in bulk to give yourself a competitive advantage.

So my advice would be not to go in undercapitalized. One of the first and most important things I learned in retail was "You make your money when you buy---you collect your money when you sell.)

Second problem would be to always remember you're really just in the customer service business. Surprising how a lot of retailers forget that simple fact.

All great advice (and more detailed than I could give). I think the bottom line is have they made money in the past three years? If not (or not enough) why do you think you'll improve on it?
Be realistic. I had a friend that bought a wine shop that wasn't making any money and he continued to not make any money for three more years until he sold it to someone else.

Thanks one and all!
I've extracted and forwarded much of your information to Phillip. My sister (his mother) does accounting, and she's taking a good hard look at the books. She and I have spotted the same couple of fudgy spots that appear to be an attempt to make things look better.
To my eye, neither of the shops he's considering right now seem to make the cut, but I'm not out there and looking at the nuances.
It'll be a few days....

John

You may want to consult with a business appraiser to find out what the industry standard is for pricing a liquor shop to determine if the price is in the ballpark.

Also, you probably want to do an asset purchase rather than purchasing the stock (or membership interest if it's an LLC). When you purchase someone's businesss interest you not only purchase the assets of the company but you also inherit the liabilities. Potential liabilities could exist in the form of old income tax or sales tax liabilities or suits against the company arising from someone who might have slipped and fell in the shop two years ago. Indemnification agreements are nice but try and go after the seller a year from now if an undisclosed liability hits you in the face. An asset purchase avoids all of those issues - you're just buying the inventory, fixed assets and maybe goodwill and putting them into your own company (an LLC is probably best). Make sure you get a noncompete agreement to prevent the seller from opening a new shop down the street from you and taking all of his customers with him. Bottom line - seek out an attorney that has experience in buying and selling businesses to protect you.