So how do we get to an arms-length transaction value starting with a 30% spread, or more, in the initial offer?
Much of the basis for a buyer's bid, and seller's ask, is based upon historical vision, experience, and market matrices that haven't been updated for today's business environment. The price paid for a business reflects the risk to the buyer of taking over the business. One of the most under-appreciated aspects of buying and selling a business is that the buyer is accepting some level of unknown risk that, in fact, is known by the seller. The seller's participation in clarifying the risks to the buyer goes a long way to resolving the price spread, as well as surfacing other terms and conditions that can be incorporated into the transaction. A knowledgeable broker or business intermediary provides a valuable catalytic function in this process.
Then how does the buyer secure the cooperation of the seller in supporting the activities needed to qualify and quantify the risks? Many sellers have had numerous unqualified, insincere buyers make a run at their business only to see them back away when they couldn't get a bargain-basement deal. Sellers are reluctant to get burned an nth time. Going on extra distance is documenting your qualifications as a buyer can be helpful, especially if presented in the right light. At MJG, we pre-condition our selling clients to be prepared to see the light, and to sept up when it shines. We can help present you as a qualified buyer.
When considering a prospective purchase you will clearly want to consider you own affordability limitations. Your capital available should be 20-25% of the purchase price if your anticipating using an SBA 7(a) loan. Plan on 15% if using an SBA 504 loan, and 35% if anticipating a conventional loan. Bear in mind that a conventional loan will apply to the real estate only; the business value will have to be considered separately. Acceptable financing will have to meet your acceptable criteria for leverage, as well as the historical cash flow of the business, or rents if you're an investor. (Blue sky deals might still be considered, but they're difficult to source.) Hard money loans for transition financing will typically take 50% down and apply only to the real estate value.. (Some lenders advertise up to 65%, but this level melts down quickly for single-use properties.) None of these percentages include closing costs, working capital, inventory or start-up costs if you're buying a closed station, although SBA loans can include some of these costs ... depending.
Want to look further into financing? Click here.
This may seem like an unnecessary question, but some recent buyer inquiries have indicated it's worth some discussion.
We identify 3 types of gas station buyers: those who have bought gas stations in the past, those who have never bought a gas station, and those who have never bought a business of any type. (There are sub-categories within these groups, but this will get us started.) Clearly the experience, or lack thereof, of buyers from these groups should color how they go about buying a gas station ... but surprisingly it doesn't seem to, at least in all cases. So how do you buy a gas station? Easy ... find one you like and make an offer! Let's start there.
In this age of the internet with instant access to information, most buyers begin looking for a gas station on any of the various websites brokers use to market their listings. Two of the more popular are LoopNet (accents the real estate component) and BizBuySell which focuses on the business. Once the buyer registers or logs in, selects the geographic area and identifies some additional parameters and clicks "send", there appears a list of stations available that match the criteria. (If there are no matches this suggests the buyer is not in tune with the market.) Next the buyer will scroll the list selecting particular candidates of interest. Within the presentation of the particular station of interest the buyer is offered to contact the listing broker for "more information". Many times a non-disclosure agreement is attached with instructions to complete this and submit to the listing broker in order to obtain confidential information. Herein is the beginning of the buyer's problem.
A word about non-disclosure agreements (NDAs), confidentiality agreements (CAs), do not disclose agreements (DNDs), and non-circumvention agreements (non-circs). The precise terms of these agreements vary among brokers, but essentially do a couple things: (1) they register you as a client of that broker for the property or business that you inquiry about, or possibly all the properties and businesses that broker represents, and (2) they pledge you to maintaining the confidentiality of the information you will receive. At some point in the process it may occur to you that you would like a broker to represent you - after all, the listing broker represents the seller. If fact, in some states dual agency (1 broker representing both buyer and seller) is illegal. However, if you've signed NDAs or equivalent with 3-4 brokers in one market (state), you may find that your ability to hire a broker to represent you and have the listing broker pay their commission (the co-broke commission) is exhausted. A co-broke commission is paid to a buyer's broker who brings the buyer to the transaction, termed the "procuring cause". Once you sign an NDA or equivalent with a listing broker you've closed the door to any other broker, typically your broker, from being that procuring cause. You've now got 3 choices: (1) pay your broker the commission to represent you, (2) represent yourself, or (3) find another property or business listed with a broker with whom you have not signed an NDA or equivalent.
For all 3 types of buyers you may want to start your search to buy a gas station by finding a broker who will represent you. (Thought: why would somebody who has bought a gas station before think they should need a broker this time around? Good question: In fact, owners of gas stations who have struggled through the acquisition, and possibly sale, of stations before recognize the advantage of having a broker represent them, particularly in a new market.) It should be a broker who understands not only the real estate and business brokerage business, but also the gas station business in the geographic market you select - in AZ that would be MJG (shameless plug!). The broker should profile you for the acquisition criteria you want and counsel you regarding your fit with what the market offers - can you reasonable expect to find what you want. They should also qualify you for capability - a requirement most seller's will require from their broker. (NOTE: In AZ dual agency is permissible.) Once you engage a broker to represent you the rest becomes easy.
When hiring a broker as a buyer you should expect to be offered a Buyer-Broker Agreement. This may or may not call for a retainer, typically non-refundable if you find nothing to buy, but refundable at close of escrow should you be successful in your acquisition. Like all contracts these should be read carefully and discussed for understanding as the terms of the agreement may very among brokers. (In commercial real estate and business brokerage the idea of a "standard agreement" should be dismissed.)
We hope this has been helpful, and thank you for visiting MJG.
What's it worth? This has been the central question on the minds of buyers when they inquire about a gas station for sale. Since the economic melt down in 2008-2009 the question has become more prominent. Seller's and lenders continue to get appraisals and BPOs (Broker's Price Opinions), and buyers continue to pour over historical financials and crunch numbers. The resulting bids and asks, however, continue to have spreads of 30-50%. Lenders who advertise debt service coverage ratios of 1.25-1.30:1 work up contingency scenarios that result in loans based on ratios of 1.6-1.8:1, and higher. So what's it worth?
The answer: Whatever a willing buyer and seller agree to without duress - an arms-length transaction.
When valuing a gas station it's important to recognize that, in most cases, you're valuing both business and the real estate. (Larger, more established operators will usually discount the business value to net asset value or lower - this will squeeze the on-going business concern value out of the equation, and from the seller's standpoint undervalue the package by this amount.) Even though the real estate is an asset of the business, whether owned or leased, it's value is determined separately from the other business assets. How this is done has a lot to do with what the total value becomes. You as the buyer, of course, have choices in how you determine the value. Typical sources for valuation are:
businsses and properties in acceptable geographical areas.
Want to check out some appraisers who know gas station businesses and real estate in AZ, Click here.
So, as a buyer, how do you go about working with a broker? Once again, you have choices.
If you contact the agent, business intermediary, or real estate broker that has a business or property listed for sale, it should be clear that the listing broker already represents the seller. That broker can also represent you as a buyer if they choose to do so - limited dual agency is permitted in Arizona. If that broker does not represent you, you should know that you are electing to represent yourself, unless you find a second broker to represent you. If you find a second broker to work with, that broker can represent you, in which case you enter into a Buyer Broker agreement with them. If you don't formally engage you own broker, that second non-listing broker is considered to be representing the seller also as a sub-agent to the listing broker. Note that formal representation is not synonymous with who pays a commission to whom. The incremental value of having your own broker as a buyer depends on the experience and skill level of the broker, the additional cost or commission you may be obligated for, versus your own experience, knowledge, and skills in buyer a gas station in Arizona.
To explore engaging MJG as your Buyer Broker, contact us to discuss your situation.
Q) Is it hard to get a franchise for a major branded station?
A) Major branded-stations are not franchises at all; they're only fuel delivery agreements. The only franchised stations in AZ are 7-Eleven and Arco AM/PM, and these are franchised for the convenience store. The fuel delivery agreement is part of the franchise agreement. These 2 franchises aren't particularly hard to get, or expensive, but there is a process and an initial fee. The continuing royalty fees, however, are a significant expense on the operating statement. Fuel delivery agreements for the major oil brands (Chevron, Shell, etc.) have no direct expense per se, although the graphics package for signing and color are material. From time-to-time the MOJ will pay this expense as an incentive to branding, but this is not a continuous feature of branding.
Q) Do major brand stations perform better than unbranded stations?
A) It depends on the market the station is located, what other revenue centers besides fuel the business offers, and of course, management. As a rule of thumb, a major brand is no substitute for good management.
Q) I've heard you can't make any money selling gasoline ... is that true?
A) No. People don't get into the gas station business with the idea of not making a profit. The fuel component of the gas station/c-store operation is only 1 of the revenue centers. It's sales and profitability is considered within the context of the overall business. Some dealers choose to use it as a loss-leader, believing if they price low enough they'll increase their customer count for other parts of their business, e.g., fast food, carwashes, or c-store items. Others price their fuel for a fuel volume (gallons) target relative to the trade area population or traffic count. In the end it comes down to management's ability to know the market (trade area) and competition.
Q) If I buy a major branded station, am I obligated to keep the brand as part of the acquisition?
A) No. This is just another point of the negotiations. In each case, there are reasons to keep a brand, change a brand, or put a brand on an unbranded station.
Q) Is there financing in the market for buying a gas station?
A) Yes, but the variables to be considered are beyond a simple answer in this FAQ section. Check out some of the discussions and information in our Financing section of the website. Go to Financing.
Q) As an international buyer/investor, can I qualify for an investors VISA by buying a gas station business?
A) Yes, this is a business like any other for qualifying for an investors VISA. We recommend you discuss this with your immigration attorney for compliance and procedures. If you don't have an attorney, we can refer you to several who specialize in immigration matters.
Q) What are some of the typical gas station & c-store operating expenses in Arizona?
A) Payroll: $6,500 - 18,00000/mo. (a 24/7 operation with a full-time manager and assistant manager)
Business Insur.: $4,000 - 6,500 (includes liquor liability and environmental hazard coverage)
Utilities: $2,500-3,500/mo. (Some rural locations will have private water wells and septic systems)
Credit card fees: These range from 2.5 - 3.0% for non-gas card (bank card) transactions.
Liquor license: Beer-n-wine only $1,500 first year; renew annually for $100. Hard liquor licenses are available only through the resale market and the
cost varies by county. These can only be used in the county in which they're obtained.
ADEQ UST fees: Tank, line & environmental monitor inspections are done by private contractors. Unless you have a CSLD card in your electronic monitor,
tank & line inspections are required annually. Tank inspections typically run about $300/tank; lines are
about $150/line, and environmental monitor inspections, e.g., VeedeRoots, are about $100.
ADEQ SAF fee: $.01/gal. for USTs only. ASTs and vaulted USTs are exempted. These are collected by the jobber as part of their regular fuel delivery