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Large numbers of entrepreneurs want to buy gas station business opportunities because the industry seems to be thriving whether the economy is strong or sick. Like a grocery store or power supplier, the gas station provides something that most people need.
And connecting with a complementary business, such as a car wash or convenience store, can generate substantial profits for the entrepreneur with a ‘buy gas station business’ strategy. No special knowledge is needed beyond basic business proficiency to run it efficiently.
However, there are particular risks to this type of business that a prospective buyer should understand. Understanding these risks and how to avoid them can help the entrepreneur enjoy success with a good gas station purchase.
1. Soil contamination is common among petroleum retailers that have not upgraded to newer leak-proof storage tanks. Most communities enforce environmental regulations for gas stations. Any oil-leaking business will be forced to close so that 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 gas station business opportunities is encouraged to insist that any purchase agreement require testing of soil samples and that the results show no contamination.
2. A related issue is the condition of the storage tanks. Older steel tanks invariably start to leak after years of use. Newly installed and renovated gas stations are equipped with double-walled fiberglass tanks (known as DWFGs in the industry). And the tanks are equipped with leak detection sensors. Any offer made to purchase gas station business must include a provision that requires updated fuel storage to be part of the deal.
3. Failure to determine who owns the property the station is on, before the purchase is complete, can lead to a terrible surprise. In many cases, even the franchisors of California’s major oil companies have placed their large, familiar signs on properties that they do not own. Imagine the anguish of branded oil company franchise owners who discover, in the harsh way, that the franchisor’s rights to the property were “on a short fuse.” A ten-year sublease is pointless if the sublord, the oil company with the main lease, loses its right to conduct business on the premises.
4. When bidding for a gas station, it is reasonable to expect that access to the property will remain as easy in the future as it has been in the past. But what if the local government plans to demolish the streets adjacent to the station to repair underground utilities or improve roads? Most commercial offerings do not include the contingency of obtaining satisfactory information from the city planning and development department. But a condition with that requirement must be included in any offer to buy gas station commercial assets.
5. The possibility of paying too much for a company in this category is a significant risk for someone who is willing to buy business opportunities at service stations. It is a mistake to believe the seller or broker’s claims that the appropriate price is determined by gross sales or the number of gallons pumped each month.
Like any small business, a gas station must be valued based on the seller’s earnings before deductions for interest, taxes, depreciation, and amortization. Pump volume or gross revenue may not be related to profit and should not be considered when determining the value of a station. Buyer is safe using the multiple earnings applicable to most small businesses.
The top of the range of multiples is about three times the average annual earnings recorded in the last three to five years, and can be applied to a business with a seller ready to help finance, lots of good equipment, and a lease. long-term at competitive rates in the market.
The buyer who has “buy gas station business” on their to-do list and is considering a business that does not offer these benefits should consider the correct price to be about twice their average annual profit. And many opportunities in the industry have value using a multiple between two and three.
The entrepreneur who wants to buy gas station business opportunities could invest in a company or companies that are highly profitable and not too complicated to operate. But the benefits will only increase for a buyer who is cautious to avoid the risks inherent in buying this type of business.