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Should I Buy a Gas Station?
Perhaps the most frequently asked question is: Should I buy a Gas Station? Keep in mind that historically, we have sold a LOT of Gas Stations. We know that market extremely well. But we have also moved away from dealing with them in volume, because of our concern over the future of the market.
First, we do not TELL you what you should or should not buy! What we are willing to do is to give you some of the positives and negatives about the businesses with which we have dealt, so that you have more information and can make up your own mind about what is best FOR YOU. (See our blog on determining what kind of business to operate: https://combrokerbusiness.wordpress.com/2012/01/06/what-kind-of-business-should-i-buy-or-start/)
Whether buying a Gas Station is a correct move depends on a LOT of things: The location; the Brand; the location; the Cash Flow; the location; the Competition – both now and foreseeable Competition in the future; the location; the Supplier; the location; the Price; the location; whether it includes a C-Store or Repair Bays, and if it has Repair Bays, are you a Mechanic?
Did you pick up on any themes in that paragraph?
As Prices rise, the dealers lose, in many markets. The average Pool Margin in our market is about 10 to 12 cents per gallon. (There are some that get as much as $.25 or so per gallon, but those are normally in highway access areas, with little or no competition. They are not the norm.) Most sales are through Credit Cards, and some Gas Companies charge as much as 3% on all sales. At that rate, when Gas is $2.00, if your Pool Margin was 10 Cents, you paid 6 cents of that in Credit Card charges, so your real Gross Profit on a gallon of Gas was 4 Cents. When Gas went to $4.00 per gallon, the margins were still in the 10-cent area, 3% of $4.00 is 12 cents, which means Gas Station Dealers with those circumstances lost 2 cents on the gallon! You could charge a larger Pool Margin, but competition made that difficult to impossible for some Dealers. In general, you make money on the C-Store anyway; when Gas was $4.00, it was the lifeline.
So, the Pool Margin has to be understood in relation to the Credit Card charges. Make certain you understand whether the Pool Margin being quoted is before or after those Credit Card charges, because Sellers will sometimes quote it differently. And know what those Card charges are, in very exact terms.
In terms of Competition, there are three (3) killer-Competitors in our market area, (WaWa, Sheetz and Royal Farms,) which each have extremely large C-Stores that almost verge on being full-fledged Supermarkets. Some people call them Superstations. They construct huge operations that may have 14 to 20 Gas Pumps associated with them. They make their big money on the C-Store and virtually give the Gas away, in order to lure people into the Store. (The Safeway and Giant supermarkets, BJs, Costco, Sam’s Club and others are also jumping into the market.)
What this means is that the typical, local Exxon Tiger Marts and similar operations can’t compete with them. Their C-Stores are too small and because of the wholesale prices charged to them, they cannot offer Gas Prices that are low enough to compete. In one county where these huge operators are most popularly located, we have had Dealers with BP, Shell and other, traditionally branded Gas Station dealers call and ask us to sell their stations. After analyzing the locations and the impact on their books after the Superstations came into the area, we were forced to tell them they had nothing to sell! They went to a variety of other Brokers, complaining about what we said, only to be told the same thing. In almost every case, the small station owners ended up just throwing their keys in and walking away.
So, the question is, do you have competition in your area that is similar? And how are the zoning laws in your area, regarding the construction of new stations and the potential for a Superstation to come into your market area?
It would appear that some Oil Companies are doing away with smaller stations, in order to accomplish two (2) objectives. First, by recruiting only huge Dealers and doing away with the small guys, the Oil Companies can deal with and manage far fewer Dealers. If the Oil Companies can deal with larger Dealers, who have more managerial experience of their own, they can reduce the Oil Companies’ field supervision personnel, and all the costs they represent. That means that Exxon and BP can become even more profitable!
(Oil Companies are also, increasingly ridding themselves of their own field supervision operations, and putting that responsibility on the shoulders of local or regional Distributors. This means you would never speak to an Oil Company representative, but solely with the Distributor. Depending upon the Distributor, this could be good or bad; but either way, it adds another several cents per gallon at the wholesale level, as the Distributor adds in its own costs and profit margin to the amount the Dealers pay.)
Second, the Dealers that are being recruited are developing on their own, or in cooperation with the Oil Companies, real competition to the Superstations. The average Station in the markets where the Oil Companies have done this costs three (3) to four (4) times what a traditional, smaller station would. (We worked on refinancing one such operation, and the average Superstation was valued at between $3 million and $4 million, per location.) In addition, these Dealers are real money guys, not the typical neighborhood operator you would normally see in smaller stations, and they may own every Gas Station for that brand, in a given city! This has already happened with some brands in Orlando, Phoenix and other cities, and is spreading.
A third – but unpublicized reason for doing this – is the fact that an Oil Company, working with one Dealer across an entire market such as a city, can jack up prices across that market, with far less muss and fuss. It would represent a bit of a monopolistic situation, again allowing the Oil Company to increase its profit margin.
In many, if not all areas of the Country, Oil Companies only provide a three-year Dealer Agreement, at a maximum. At the end of each three-year period, your Agreement comes up for review and, for no particular reason, your Agreement may not be renewed. If the Oil Company wants to get rid of smaller Dealers, it has the ability and every right to dump you at the end of your Agreement, and you have no way of arguing your case. The Oil Companies are not nice guys, and they play very rough!!!
They cannot necessarily, or will not necessarily do that if you own the Property. You have a lot of protections when owning the Real Estate that you do not have if all you own is the Dealership, which is essentially providing you with the right to buy yourself a three-year job!
You need to be very aware of what is going on, in your market. You need to look at who is opening what, where and with what size. That is what would tell you whether your market is creating a situation that would eventually make you extinct, as a Dealer.
If we were looking to purchase a Gas Station ourselves, we would be extremely hesitant to buy a Station any more that did not have the Real Estate as part of the deal. One brand in this area in particular has become notorious for jacking up the Rent on stations it owns, making it virtually impossible to earn a livable buck. Its system SEEMS TO BE to monitor the Gas Sales, Pool Margin and Volume of a given Gas Station, then charge Rent that just about equals the Gross Profit the Dealer earns in Gas Sales, in any given month. The Dealer then gets nothing out of the Gas Sales, at all. The C-Store earns any other money the Dealer needs to pay for all other Expenses, as well as his/her own Income.
In another situation, a Gas Station Dealer was renting from an Oil Company, and the Oil Company wanted him to change his Auto Repair Bays over to a C-Store. After two years of hesitating, he finally spend about $75,000 out of HIS OWN POCKET to reconstruct the bays ON THE OIL COMPANY’S PROPERTY, into a C-Store…then the Oil Company increased his Rent, because the Station was now an improved property. The Dealer invested the money in the Oil Company’s property, then charged him more Rent because he – the Dealer had improved the property!!!
Get any deals in writing!
DO NOT review their contracts yourself! Spend a dollar and have a competent attorney who knows Contracts to do that for you! (The Oil Companies have more attorneys than there are flies in a cow pasture.)
There are still SOME good deals out there for Gas Stations. There are SOME areas where the future can be bright. But in many areas, particularly those with the densest populations, the glory days for the small Gas Station Owner may be over.
(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.)