How do I underwrite shrink?

Read the waste logs before you argue a multiple. Shrink is theft, spoilage, error, and unrecorded waste. On a grocery file it shows up hardest in produce, meat, and the front end. Grocery Store Business Broker — HedgeStone Business Advisors, led by Jason Taken — treats unexplained loss as a reduction to SDE, not as a recurring add-back. Book a confidential intro with a produce log and the last physical if you want that hole priced on your file.

FMI’s 2.1 percent average net profit for food retailers in 2025 is why shrink is not a personality debate. Thin net plus an undocumented cooler is how a “healthy” independent misses payroll after Monday. The longer operating page is shrink, margin, and turns. This page is how you underwrite the loss.

Recurring loss stays in the earnings

A December “inventory adjustment” that appears every year is the business. Stop calling it one-time. Owner pay, a one-time legal invoice, and a personal auto can move SDE. Recurring shrink cannot. Recasting a grocery P&L is the earnings method. If the seller wants the adjustment added back, they need a named event: compressor failure with the repair invoice, a documented recall, a storm that killed a freezer. A plug is not an event.

BizBuySell grocery and supermarket sold businesses: 3.38 average earnings multiple in 2025; 2.66 five-year average; IQR 1.60–3.15 for 2021–2025. Those figures multiply recast earnings. They do not create a shrink-specific multiple. Unexplained loss lowers the earnings you are allowed to multiply. It can also move you down the IQR because risk is higher. Do not invent a “shrink discount percent” and call it a sourced standard.

SBA 7(a) can finance a change of ownership; the published maximum is $5 million. Lenders still underwrite the week you can prove. A recast that ignores the produce table will fail DSCR when the waste continues under new keys.

Logs, cameras, and the December adjustment

Ask for department waste logs that a closer can read without a translator. Produce should have a daily or near-daily pull. Meat should have a trim and spoilage story. Bakery and deli should have a day-part dump. A store that “just knows” has a speech, not a control. A missing log is a hole. You can still buy the store if you price the hole. You cannot pretend the table is clean.

Then ask for the last two physicals and the general-ledger variance. A physical that never hits the books is theater. A physical that hits the books only in December is a plug. Count variance — book versus floor — is a diligence instrument. Large unexplained swings are either theft, a bad cost file, or a room that was never counted. Read how inventory is counted at closing so you know what the close tape will and will not fix. The close tape prices the room you inherit. It does not rewrite last year’s shrink.

Front-end exception reports, void patterns, and camera coverage tell a different chapter. A cashier culture you cannot see is a first-ninety-days problem. Scan data voids that cluster on one drawer are not “training.” Price them or walk.

Perimeter waste is not a storewide blend

Department gross margin hides in a storewide number. Meat and produce can sink a “healthy” blend. Turns are not one number. Center store and wine do not share a clock. Underwrite shrink where it lives. A grocery aisle with tight turns and a produce table with no log is two businesses sharing a vestibule.

FMI’s $668,377 average weekly sales per supermarket in 2025 describes the Speaks channel. Your 8,000-square-foot box can still have a meat cooler that is a third of the inventory dollar and most of the spoilage. Count it as meat. Ethnic mix without language on the floor is a shrink plan — not because of the customers, because of the operator who cannot run the case. Read buying an ethnic market if that is the file.

DSD racks the vendor still owns are not your shrink until you own them. Confirm DSD ownership before you blame the bread aisle. Vendor credits that the seller pocketed and did not record are earnings fiction, not a shrink victory.

Count variance as a diligence instrument

Walk the back room as if you were already on the hook. Wet cardboard, a freezer log that died last week, a pallet with no invoice — those are exceptions. Photograph them. They become unsellable rules, a holdback, or a walk. They do not become “we’ll figure it out.”

Compare receiving to scan for a sample of weeks. If product arrives and never sells, you have either a hole in the book or a hole in the building. If scan exceeds receiving plus beginning inventory, you have a story that will not survive a lender. Verifying sales with scan data is the sales twin of this work. Shrink and sales fiction often travel together.

USDA FNS: SNAP authorization does not transfer. A high EBT mix does not excuse missing logs. It does change the first-week cash you need if authorization is down. Budget downtime separately from shrink. Do not blend them into one “risk percent.”

Holdbacks that match the story you found

A holdback exists because grocery has shrink and successor tax risk. Size it to the hole you found, for a window you can actually police, with triggers a closer can test. This pack does not publish a market-standard holdback dollar. A 60–90 day tax and inventory holdback is a negotiation, not a sourced law. Escrow, holdbacks, and earn-outs is the scoreboard. Earn-outs are hard because the buyer controls mix after Monday. Do not use an earn-out to paper over a produce table you were afraid to price.

Post-close, the first 90 days are vendor trust, shrink, and not changing the mix for sport. A buyer who dumps private label on Wednesday will invent loss the seller will be blamed for if a holdback is still open. Write the triggers. Read the 90-day plan.

Jason Taken and HedgeStone are not licensed business brokers in every state. Check the rule that applies to your deal. Buying the building always requires a real-estate licensee in that state. This page does not invent a national shrink percent or a CBP store count.

Mark the shrink lines in the buyer underwriting workbook. Book a confidential intro when you have a waste log, or when the seller has none and you want that absence priced. Bring the last physical and the department that scares you. That is a useful hour.

An illustrative recast on How do I underwrite shrink?

Use this napkin recast on How do I underwrite shrink? when you book the call. It is labeled illustrative. BizBuySell's 2025 grocery sold-business earnings multiple averaged 3.38, with a 2021-2025 IQR of 1.60-3.15.

Input or output	Illustrative figure
Weekly sales (illustrative)	$124,000
Annual sales	$6,448,000
Recast SDE	$264,368 (4.1% of sales)
Inventory at cost	$403,000 (~16 turns)
Occupancy check	$161,200 / year (2.5% of sales)
Low going-concern	$971,391 at 2.15x SDE + inventory
High going-concern	$1,156,449 at 2.85x SDE + inventory
Sketch DSCR on a note	1.45

If weekly sales or shrink move 8 percent, the SDE and the note move with them. That is why Jason Taken starts with scan data and the lease, not with a neighbor's rumor multiple.

Bring proof of funds or a lender pre-screen, your format, and geography. Jason will tell you whether a store like this can clear SBA or seller-carry math.