JobsBefore You Buy Gas Station Business Know The Five Dangers
Posted: Dec 08, 2009
It makes sense to buy gas station businesses for an investment that will do
well even when the economy is struggling. People in America will stop the
spending on most budget items before they quit buying fuel for their cars.
And the connection with a companion business, such as a car wash or convenience
store, can return substantial profits to the entrepreneur with a ‘buy gas
station business’ strategy. No special knowledge beyond basic business
competency is needed to run it efficiently.
There are risks, however, particular to this kind of business, which a
prospective buyer must understand. Understanding those risks and how to avoid
them can help the entrepreneur enjoy success with a sound gas station buy.
1. Ground contamination is common among petroleum retailers who haven’t
upgraded to newer, leak-proof storage tanks. Most communities enforce
environmental regulations for gas stations. Any business with petroleum leakage
will be force to close down so contaminated soil can be removed and storage
facilities improved. Finally, a new station is built on the site. What a
problem for a new station owner!??Anyone seeking to buy gas station business
opportunities is advised to insist that any purchase agreement require testing
of soil samples, and that results show no contamination.
2. A related issue is condition of the storage tanks. Older steel tanks
invariably begin leaking after years of use. Newly installed gas stations and
those refurbished are outfitted with double-wall fiberglass tanks (referred to
as DWFG in the industry). And the tanks are equipped with leak detection
sensors. Any offer made to buy gas station businesses should include a
provision requiring that up-to-date fuel storage is part of the deal.
3. There is a nasty surprise in store for gas station buyers who don’t conduct
due diligence about ownership of the property where the business is located. In
many cases, even California’s major oil company franchisors have posted their
large, familiar signs on property they don’t own. Imagine the distress for
owners of name-brand oil company franchises who discover, the hard way, that
the franchisor’s rights to the property were “on a short fuse.” A ten year
sublease is meaningless if the sublessor–the oil company with the master lease-
-loses its right to conduct business at the locale.
4. While making offers to buy gas station opportunities, many entrepreneurs
will not question the continued accessibility of a business for its customers.
But what if the local government plans to bulldoze streets adjacent to the
station for underground utilities repair or road improvement? Most business
offers don’t include a contingency about getting satisfactory information from
the city’s planning and development department. But a condition with that
requirement ought to be included in any offer to buy gas station business
assets.
5. The possibility of paying too much for an enterprise in this category is a
major risk for someone ready to buy gas station business opportunities. It’s a
mistake to believe seller or broker claims that the appropriate price is
determined by gross sales, or number of gallons pumped every month.
Like any small business, a gas station should be valued on the basis of the
seller’s earnings before deductions for interest, taxes, depreciation and
amortization. Pump volume or gross revenues may have no relation to earnings,
and should not be considered when determining a gas station’s value. The buyer
is safe using the earnings multiples applicable to most small businesses.
The top of the multiples range is about three times average annual earnings
recorded the past three to five years, and it can be applied to a business with
a seller ready to help finance, plenty of equipment in good shape and a long-
term lease at market-competitive rates.
The purchaser who has “buy gas station business” on the to-do list, and is
considering a company that doesn’t offer these benefits, should consider the
right price to be about twice the annual earnings average. And many
opportunities in the industry have a value using a multiple somewhere between
two and three.
The entrepreneur wanting to buy gas station business opportunities might invest
in a company or companies that are very profitable and not too complicated to
operate. But the benefits will only accrue to a buyer who is cautious to avoid
the risks inherent in purchasing this kind of business.
