It’s no surprise that many entrepreneurs want to buy gas station business opportunities. The industry seems to thrive whether the economy is strong or is ailing. Like a grocery store or energy provider, the gas station supplies something that most everyone needs.
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.
But a gas station prospect needs to know this type of business presents specific risks not as closely associated with other businesses. 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. The presence of these tanks also should be a condition of any offers made to buy gas station businesses.
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. It’s reasonable to expect when making an offer on a gas station that access to the property will continue to be as easy in the future as it was in the past. 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 stations.
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.
A gas station offering with appealing features, such as a long-term, market-competitive rental rate, a seller’s willingness to help finance and substantial amount of capital equipment in good condition is likely to be worth about three times average annual earnings over the past three to five years.
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.
About The Author: Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business. He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.
