Due Diligence When Buying a Convenience Store

In all the excitement of cutting the ribbon on your corner shop, it’s easy to lose sight of the paperwork. Due diligence is critical to buying any type of business, and convenience stores are no exception. 

Today, the convenience store industry is booming, even in the face of the 58% of people who say the economy is declining. It’s a hardy industry reporting success after success, but before you get carried away, it’s time to discuss due diligence, what it means, and why it matters.

What is due diligence in retail? 

Due diligence is the process of investigating and auditing a business’s financials and operations. It’s where the seller opens up their books for the buyer to investigate and confirm that everything is present and correct. 

It’s also a chance to analyse any opportunities and risks you couldn’t have otherwise accessed during the initial stages of negotiations and proceedings. 

Ultimately, due diligence is where you answer the question of whether this business opportunity is right for you.

Why carrying out due diligence on a new business is so important 

You’re staking your time, money and future when purchasing a business. It’s essential to get this right, and that’s why due diligence matters. 

So, what are the benefits of taking your time when doing your due diligence? 

• Confirm what you’re buying into by verifying the numbers.
• Reveal any hidden problems.
• Avoid overpaying for a business that might not be as strong as it appears.
• Protect your investment and prevent future losses before it’s too late.
• Set yourself up for success by identifying potential opportunities.

Don’t make the mistake of getting carried away and skipping the due diligence stage. If you discover something after you’ve signed the final contract, caveat emptor or “let the buyer beware” comes into force.

How due diligence is conducted when buying a convenience store

Due diligence is something that the buyer and a team of professionals manage. Although nothing requires you to hire anybody, it’s wise to do it anyway, as their professional input is invaluable. They’ll spot what you won’t and explain anything that doesn’t make sense.

Generally, due diligence is conducted by multiple professionals. For example, you’ll work with an accountant to go through the numbers, whereas a solicitor manages the legal side. Some buyers also bring in business advisors to oversee the whole process. 

With 71% of the convenience store business run by independent retailers, you face enormous competition from established brands. Spend the pennies during due diligence, and it’ll save you pounds in the future.

Common due diligence issues for convenience stores

Due diligence can raise a plethora of issues that can either make you revise your offer or walk away entirely. Whether a due diligence issue is an issue largely depends on what it is and whether you consider it significant enough to influence your original plans. 

Here’s a breakdown of some of the most common due diligence issues to watch out for: 

• Inflated sales figures
• Undisclosed debts
• Undisclosed liabilities
• Short leases
• Non-renewable lease
• Poor equipment condition
• Staffing issues
• Overvalued/non-valuable stock
• Licenses are non-transferable/inactive
• Footfall misrepresentations
• Hidden operational costs
• Major repairs required
• Ongoing investigations

Sometimes, due diligence issues occur because a seller makes a mistake or your wires have been crossed somewhere. On the other hand, serious issues can break any trust you have in the seller, meaning you may want to walk away anyway.

Due diligence checklist for buying a convenience business

Due diligence covers every aspect of a business. It’s also the longest part of the business buying process. Although getting frustrated is easy, avoiding glossing over any part of the due diligence process is vital, or your corner shop ambition could become a nightmare. 

Let’s break down the due diligence process into distinct sections and some of the issues and questions you’ll want to address: 

Financial 

• Obtain the last three years of financial statements.
• Get the VAT statements for the last three years.
• Check for seasonal fluctuations in trade.
• Check the capital structure.
• Look at the business’s working capital.

Competition 

• Who are the business’s leading competitors?
• What unique selling points does this corner shop have?
• What’s the main value proposition?
• Is the shop’s success based on any specific trends?

Long-term assets 

• What’s the income per square foot?
• What’s the shop’s return on capital?
• Check the condition of the building.

Contracts 

• Who are the shop’s suppliers?
• How sustainable is the supply chain?
• Are there any exclusivity agreements in place?
• How much time do these contracts have to run?

Sales and marketing 

• What’s the shop’s sales process?
• How is the company currently marketing itself?
• Are there any opportunities to maximise its marketing potential?
• Is the convenience store positioning itself differently?
• What’s the target market, and is the shop reaching them?

Staffing 

• How many people does the business employ?
• How long have staff been working there?
• What’s the staff turnover rate compared to the industry average?
• Are all staff properly trained, and how are they trained?
• Are all staff fully documented and legal?

Technology 

• What technology is the company using?
• Does the shop work with any third-party platforms?
• Is the shop operating online?
• How is technology used to manage inventory?
• How does the shop process complaints?
• Has in-store technology been deployed to improve the customer experience?

Inventory 

• What’s the current inventory turnover?
• Is the cost of goods sold accurate?
• What are the shop’s inventory reserves?
• How much space does the shop have for storing inventory?
• Which fast-moving inventory does the shop rely on?

Note that this due diligence checklist is just a start and shouldn’t be viewed as an exhaustive list. It’s also vital to note that different buyers will approach due diligence differently. For example, in-store technology might not be something a buyer is concerned about. Likewise, you may place emphasis on different aspects of the due diligence process. 

Encountering a due diligence problem may turn an opportunity into a millstone around your neck. If you’ve already walked away from the deal and are seeking new convenience stores to buy, this is where Cogogo’s immense real-time database comes in. Check out which convenience stores for sale are available now to see what opportunities await.