Day 927 — The Cash Cow Test
Lab Notes: A Real Due Diligence Pack, a Wage That Vanished, and the One Ratio That Matters More Than the Headline Number
Two weeks ago, I told you what brokers actually sell. Mostly Cash Cows, dressed in Star language. This week I got to test that theory against something real.
I signed an NDA to access a due diligence pack for a liquor store on a busy Auckland CBD street — the same listing I mentioned last week. Because of the NDA, no revenue, price, or profit figures here. What I can give you is every ratio I built from them, and what they taught me about reading a confidential information memorandum the way you’d read a set of annual accounts.
The headline the broker wants you to see
The information memorandum led with year-on-year growth in adjusted earnings of roughly 75–80%. That number does a lot of work in a one-page summary: it invites the Star Business reader to see momentum, a moat, and a motivated new owner who can push it further.
Koch — author of The Star Principle — would tell you to check two things before believing a growth number: is the market growing, or just this business’s slice of it, and is the growth durable or borrowed from somewhere it shouldn’t be. So I went looking for where it actually came from.
Where the growth was hiding
Three things stood out lining this year up against last.
The wage line. Last year, the company paid a meaningful shareholder salary. This year, that line was effectively zero, and total wages had dropped by something like 40%. That’s not efficiency — it’s the owner not paying themselves, with the difference going to profit. It’s the single most important adjustment in any small business due diligence, and the easiest to miss if you’re reading the bottom line instead of the components. Add a market-rate wage back in, and a meaningful chunk of the headline growth evaporates — not because anyone lied, but because “adjusted EBITDA” is doing exactly what it says: adjusting.
The channel mix. Delivery-platform revenue had grown faster than in-store sales, fast enough that it’s now a meaningfully larger share of turnover. Delivery platforms take a commission; in-store sales don’t. So revenue can grow while the mix underneath it quietly gets worse. Gross margin still ticked up slightly — worth asking whether that’s despite the mix shift or because something else (pricing, rebates) is doing more lifting than it should need to.
A legal expense line that appeared from nowhere. No explanation in the document. Could be a lease negotiation, a licensing matter, or nothing material — the point isn’t that it’s sinister, it’s that an unexplained five-figure cost is exactly what due diligence exists to chase, and exactly what a headline EBITDA number will never surface.
None of this means the business is bad. It means the growth story is doing more narrative work than the numbers support — which is the pattern Koch warns about with mature, broker-sold businesses. Real Stars don’t need their growth explained to you; it’s visible in the category, not manufactured in the addback schedule.
Running the test properly
Koch’s framework asks two questions: is the category growing, and does this business hold a dominant position within it?
