South African drinkers are among the world’s heaviest alcohol consumers, according to a 2018 report published by the World Health Organisation.
Allied to the fact that managing a liquor store requires no specialist qualifications, this strong, recession-resilient demand means that if you’re selling a liquor store, you can count on a decent pool of prospective buyers.
That said, it’s trickier to find a buyer if your reasons for selling are negative – like the business is failing or a rival store is set to open on the same street – rather than positive, such as wanting to retire or buy another liquor store in a different location.
In any case, a business broker with experience of selling similar retailers can help you target the right buyers to suit your business and circumstances. Business brokers and/or solicitors can also help you prepare the premises and paperwork for sale, value the business, conduct negotiations and draw up the contract of sale.
Preparing your liquor store for sale
Readying the business for sale involves getting the premises as presentable as possible – possibly including a refurbishment if they’re looking a little shabby – and your paperwork up to date and stored in one place.
Once negotiations have reached an advanced stage, the buyer will want to see documentary evidence of profits and losses, financial forecasts, liabilities and debts, asset valuations, staff contracts, and property deeds or lease documents.
Getting your financials properly documented is particularly vital – if you can’t prove your earnings, then the buyer won’t meet your income-based valuation.
You should also prepare a sales memorandum that sets out the day-to-day tasks involved in trading, the terms of the lease, the business’s advantages and opportunities, your reasons for selling and anything else useful to a prospective buyer.
A healthy balance sheet and a high-footfall location with few nearby rivals are major pluses to advertise.
Perhaps you also get a great deal from your suppliers in terms of prices and replenishing an eclectic range of beers (by far the most popular alcoholic drink in South Africa of course). A long-term lease is another selling point.
On the technology front, high calibre security systems – such as locks, alarms and CCTV cameras – are an attractive feature in a cash-handling business, especially in high crime areas. A modern point-of-sale system that effectively suppresses the shrinkage rate, meanwhile, is worth championing too.
Liquor store valuation
An appropriately qualified solicitor or business broker can help you value the business.
Liquor stores are often valued according to a percentage of annual revenue – perhaps 35%-45% depending on factors like local demand and competition – or a multiple of maybe 2.5-3.5 times EBITDA (earnings before interest, taxes, depreciation and amortization).
They might also benchmark the store against the sale price of other similar, recently sold liquor stores. The value of the inventory and – if you’re selling the property – the premises are added to the asking price too.
Transferring the alcohol licence
You will be legally responsible if your name is still on the licence and the store is run illegally by an unlicensed new owner after the business changes hands. It’s therefore wise to ascertain at the outset of negotiations whether the buyer is likely to meet the criteria to inherit your licence.
The applicant must, for instance, have no criminal record. It’s also reassuring if the buyer has previously held an alcohol licence. Contact the relevant regional liquor board as soon as possible in order to begin the process of transferring the licence, which can take anywhere between 2-12 months.
Funding and ‘letter of intent’
Quiz the buyer at the outset about how they intend to finance the purchase. If they’re a credible buyer, and you’re keen for a quick sale, you could potentially plug any funding gap with vendor financing – essentially accepting a portion of the price in instalments.
You should also get a ‘letter of intent’ from the buyer – a non-binding agreement to the initially agreed price and deposit, payment schedule, terms, conditions and warranties.
The buyer may want to spend around three weeks conducting due diligence. Don’t try to rush them.
Buying a business is a huge financial investment and risk, so naturally the buyer will want to exhaustively verify all your claims about the business, from its financial performance to the condition of the premises.
As long as you’re honest, transparent and cooperative – a commercially as well as ethically shrewd approach – then there’s no reason why due diligence should put the buyer off. But if the process uncovers any hitherto undeclared problems, the buyer may try to renegotiate the terms of sale or even abandon negotiations.
If you do strike a final deal, then the terms are set out in a purchase agreement that contractually commits both parties to proceed with the sale.