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— Retail Properties Quarterly — May 2016
I
sell retail gas and convenience
stores, and I love it! I love the
industry, people and how it
changes every day. Its No. 1
inventory item – fuel – requires
lots of capital and infrastructure to
sell, is under strict government regu-
lation and is taxed higher than most
consumer commodities sold nation-
wide. The retail price is required to be
posted on the street for all to see and
judge and, trust me, the consumer
judges.
I’ve put together this article to
share my insights with other real
estate professionals who may be
interested in owning gas station
properties. The first thing to share
is that this specific industry takes
patience. As the owner, you’ll hear
from countless patrons objecting to
whatever gas prices you list.
You cannot vocalize your feelings,
but it amazes me that many consum-
ers will pay a 100 percent mark up on
clothing, furniture and beauty prod-
ucts without complaint, yet begrudge
the local gas station owner fighting
to make 3 percent profit.
Which leads me to my second
insight – profits are tight. Let me
give you an example. Let’s say the
retail price for fuel is $2 per gallon
and let’s be generous and allow for a
10 percent gross profit. That means
you can make 20 cents per gallon,
right? Wrong. Unless the consumer
pays cash, 2.4 percent of the sale
goes to the credit card companies as
merchant fees. This percentage does
not change, regardless of the price of
fuel, which means when gas price is
lower, it helps the gas station opera-
tor, but conversely hurts him when
the price goes up.
In this case, 5 cents
per gallon goes to
the credit card mer-
chant. The 10 per-
cent margin shrinks
to 8 percent.
In the case where
gas reaches prices
of $3 and $4 per
gallon, the gross
margin does not
stay at 10 percent
because the public
would not stand for
it. Margin quickly decreases. Where it
really gets fun is when competitors
sell fuel for less than you can buy it.
This happens more often than you
think, especially with the entry of the
grocery store hypermarkets.
Sound like a fun business to be in?
Well, I think it is fun. If you are look-
ing to buy a gas and convenience
store, here are a few tips.
1. Make sure your commercial bro-
ker is knowledgeable and capable to
help you understand the financials,
contracts and environmental impacts
associated with buying a location.
2. Have a good attorney. While your
broker is experienced in the indus-
try, he is not an attorney. You will be
signing legal documents and I highly
recommend spending the money on
legal counsel throughout the process.
3. Understand how the buying pro-
cess works. Many times, buyers want
all the due diligence upfront before
making an offer to a seller. This is
backwards! Buyers should make
offers based on the facts disclosed by
the seller. The buyer will have time
during the due diligence process to
verify and accept those disclosures.
Writing a contract and putting up
earnest money starts the transaction
off on the right foot and is the proper
way to handle any transaction.
4. Just because a store is for sale
does not mean it’s a bad store. Some-
times large companies or local chains
cannot justify keeping a store due to
its overhead costs. This same store,
run by an independent, could be very
profitable. A thorough analysis of
financials will reveal opportunities
for the independent to make money.
5. You can get a Small Business
Administration or conventional loan,
even if a site is undergoing envi-
ronmental cleanup from past con-
tamination. Your broker should help
banks understand environmental risk
and how the state remediation fund
works for the buyer and seller.
Environmental risk is a real thing,
but it does not have to be as intimi-
dating as it sounds. Having the right
broker/agent in your corner will help
you navigate this component of the
transaction.
6. Make sure you understand all the
dynamics of the business. Generally,
it is a good rule of thumb to never
go into a business you do not under-
stand or have experience in. How-
ever, if you are dead set on giving it a
go, I highly recommend investing in
a business-only transaction for your
first experience. This means buying
an ongoing business that has a lease
in place.
Generally speaking, these are less
money and, if bought correctly, can
provide a good living. The key is
negotiating or buying into a good
lease that protects your investment
interest. If you find you do not like
the industry, it is easier to exit and
the risk is mitigated by less capital
invested.
Although owning the real estate
can be a good option, it ties up more
capital, generally adds a debt com-
ponent and can really stress the net
profit of the store. You should be
comfortable with the industry and
how it works before owning the real
estate.
Owning a gas station can be a great
adventure. The key is to buy it right
and set yourself up for success from
the start. Having the right profession-
al help through this process is key, so
do your due diligence on the profes-
sionals to whom you align.
s
Michael Bright
President and CEO,
BRC Real Estate,
Highlands Ranch
Owner Insights
Environmental
risk is a real
thing, but
it does not
have to be as
intimidating as
it sounds.
