CREJ - 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 regulation and is taxed higher than most consumer commodities sold nationwide. 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 consumers will pay a 100 percent mark up on clothing, furniture and beauty products 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 operator, but conversely hurts him when the price goes up. In this case, 5 cents per gallon goes to the credit card merchant. The 10 percent 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 looking to buy a gas and convenience store, here are a few tips. 1. Make sure your commercial broker 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 industry, 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 process 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. Sometimes 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 environmental cleanup from past contamination. 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 intimidating 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 understand or have experience in. However, 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.