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Looking for a “Cheap” Business?

April 10, 2012

There are a number of people populating the Net, asking for “cheap” businesses.  One writer, as an example, posted a notice on a business site that asked for leads to purchase a Gas Station, costing under $20,000.  Are you kidding?  Filling the tanks with gas is going to cost more than that!

There are a number of ways to react to this kind of request:

1.  Since it was posted on the Net, it is possible the guy is just kidding…except that people   call us with those kinds of serious requests, as well.

2.  The writer knows NOTHING about Gas Stations and their operations.

  1. The writher knows NOTHING about business, in general.

It is one thing to say that the Buyer has $20k to put down; that would permit him/her to potentially take out a loan and buy a business with a purchase Price of $100,000 to perhaps $200,000.  But in so doing, you have to know that the Cash Flow would allow you to then make payments on a loan for $80,000 to $180,000, plus what you need to live on.

The point here is:  The smaller the Price, the smaller the Cash Flow.  Some people use “rules of thumb” to determine the price.  And the rule of thumb for a Gas Station CAN BE about 2.5 times Cash Flow.  If the Seller uses that multiple on a Gas Station that is priced at $100,000, that means you will have $40,000 in Cash Flow with which to pay yourself and the note you took in buying the business.  If you had $20,000, you took a note for $80,000, and on a 7-year loan at an interest rate of 7%, your monthly payments would be about $1,207 per month, or $14,489 per year.  That leaves you with $25,811 to live on.  And you have to pray like mad that nothing goes wrong that will adversely affect your business, because that leaves you nothing to fall back on.

Using that same rule of thumb, the guy that wanted a Gas Station with a Price of $20,000 is attempting to buy a business that pays an annual Cash Flow of $8,000!  What is the point!??!  You can earn more than that, working VERY part time at a Gas Station!  (You might want to also read our post entitled, “No Money Down!?!?”)  Whether the Seller uses that rule of thumb or some other methodology, a business of that kind will always be a reflection of Revenue or Profitability, which is why we say that the lower the Price, the lower the amount of Cash Flow or Profit.

Some criticism of this commentary may note that the Buyer is obviously trying to purchase a “turnaround” business.  But Gas Stations are normally not the type of business that is radically turned around easily.  The average Station that is having difficulty in generating Revenue is, in all probability either suffering from very difficult competition, or a terrible location.  You are not going to turn around competition from some of the giants, such as Wawa, Costco, BJs and others that we see in theMiddle Atlantic States.  And if it is location…are you just going to relocate a Gas Station?

Then, there is the concept of Inventory.  Gas Suppliers like BP and Exxon are going to demand deposits against future Inventory purchases.  Large deposits!  And if you have a small Station, you may have tanks that total 14,000 Gallons.  When filled to the legal amount of 80% of capacity, that means you could be filling them with orders of 11.200 Gallons.  At $3.50 per Gallon on the wholesale price – which as this is written in April 2012 would be VERY low – your COD payment for a full load would be $39,200.  That is almost double the Price of the Gas Station.  And that does not include any Inventory for the Store that may be attached.  (Although, at a purchase Price of $20,000, how big can the Store be?)

You might say, “I will not buy a full load of gas, and at settlement, I will ask the Seller to have the tanks at low levels.”  Well, that is great!  Except that, if you do that, you have nothing to sell.  We sold a Gas Station just last year, with that exact kind of scenario.  The original Buyers had no money, and their Operation Expenses sucked up all of the Revenue, so they could never catch up enough to keep a consistent Inventory.  This caused two problems.

First, customers never knew when the Station would have any gas to sell.  Frequently, they would pull up to the pumps, only to realize there was nothing to buy.  After several experiences like that, they simply assumed it was not worth their time to even try, and the regulars drifted away to the competition, quickly.

Second, gas suppliers got tired of the irregular ordering pattern.  The owners of the Station attempted to purchase partial loads of gas, but that meant that the suppliers were driving out of their way to sell only a fraction of what they could sell to more regular customers.  So the suppliers began to provide Inventory, only when they had no other customers that competed for their time and deliveries.  That meant the Gas Station had even more irregular deliveries, leading to greater spans of time when their tanks were empty.

When we sold the Station, we actually sold it only for the value of the Real Estate which, fortunately for the Sellers, they had also managed to purchase.  That was far more than a $20,000 deal.  But it is an apt example for someone looking to buy a Gas Station – or many other businesses – completely on the cheap.

There certainly are businesses that can be bought at a discount and turned around.  However, this is not to be undertaken lightly; you REALLY need to know what you are doing, you have to REALLY understand that specific business, in order to accomplish this feat.  And you have to have deeper pockets than just the Price needed to purchase the business, itself.  If it is sold at a deep discount, it is undoubtedly losing money.  You have to have the money to inject into the business to make up for whatever faults are inherent in the business, when you buy it.  If it is a Motel, it may involve huge investments in décor, in bedding, in a new roof, televisions, etc.  If it is a Convenience Store, it may mean new shelving, huge amounts of cleaning, signage, increased and more varied Inventory, and so on.  Some fixes, some businesses are more expensive than others.

But you have to have that money in your pocket.  Very few (if any) lenders will provide loans for turnaround projects.  (An exception MAY be if you already own a dozen, similar operations and have turned them around, successfully.)  And the money you may need is not just for the kind of fixes that need to be applied and the Inventory that may need to be added.  You also need to determine how long it will take you to fix what is wrong with that business, and how long it will take you to turn it around.  Because if the business is being sold at a discount because it is losing money, you will need to cover the losses until you can turn it around.

With a Business Plan, (see our two other posts on this subject,) you can develop a strategy to overcome all of this, and make a decision as to whether it is even worth your while to invest in someone else’s problems.  Be absolutely certain that the price you pay is worth the added difficulty you can experience in buying such a business.

All-in-all, sometimes the best deal you do is the one you walk away from.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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