Gas Station Business Buy Includes Five Risks
It makes sense to buy gas station businesses for an investment that will do well even when the economy is struggling
. People in America will stop the spending on most budget items before they quit buying fuel for their cars.And the connection with a companion business, such as a car wash or convenience store, can return substantial profits to the entrepreneur with a 'buy gas station business' strategy. No special knowledge beyond basic business competency is needed to run it efficiently.
There are risks, however, particular to this kind of business, which a prospective buyer must understand. Understanding those risks and how to avoid them can help the entrepreneur enjoy success with a sound gas station buy.
1. Ground contamination is common among petroleum retailers who haven't upgraded to newer, leak-proof storage tanks. Most communities enforce environmental regulations for gas stations. Any business with petroleum leakage will be force to close down so 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 to buy gas station business opportunities is advised to insist that any purchase agreement require testing of soil samples, and that results show no contamination.
2. A related issue is condition of the storage tanks. Older steel tanks invariably begin leaking after years of use. Newly installed gas stations and those refurbished are outfitted with double-wall fiberglass tanks (referred to as DWFG in the industry). And the tanks are equipped with leak detection sensors. Any offer made to buy gas station businesses should include a provision requiring that up-to-date fuel storage is part of the deal.
3. The failure to determine who owns the property on which the station stands, before the purchase is complete, can lead to a terrible surprise. In many cases, even California's major oil company franchisors have posted their large, familiar signs on property they don't own. Imagine the distress for owners of name-brand oil company franchises who discover, the hard way, that the franchisor's rights to the property were "on a short fuse." A ten year sublease is meaningless if the sublessor--the oil company with the master lease--loses its right to conduct business at the locale.
4. While making offers to buy gas station opportunities, many entrepreneurs will not question the continued accessibility of a business for its customers. But what if the local government plans to bulldoze streets adjacent to the station for underground utilities repair or road improvement? Most business offers don't include a contingency about getting satisfactory information from the city's planning and development department. But a condition with that requirement ought to be included in any offer to buy gas station business assets.
5. The possibility of paying too much for an enterprise in this category is a major risk for someone ready to buy gas station business opportunities. It's a mistake to believe seller or broker claims that the appropriate price is determined by gross sales, or number of gallons pumped every month.
Like any small business, a gas station should be valued on the basis of the seller's earnings before deductions for interest, taxes, depreciation and amortization. Pump volume or gross revenues may have no relation to earnings, and should not be considered when determining a gas station's value. The buyer is safe using the earnings multiples applicable to most small businesses.
The top of the multiples range is about three times average annual earnings recorded the past three to five years, and it can be applied to a business with a seller ready to help finance, plenty of equipment in good shape and a long-term lease at market-competitive rates.
The purchaser who has "buy gas station business" on the to-do list, and is considering a company that doesn't offer these benefits, should consider the right price to be about twice the annual earnings average. And many opportunities in the industry have a value using a multiple somewhere between two and three.
The entrepreneur wanting to buy gas station business opportunities might invest in a company or companies that are very profitable and not too complicated to operate. But the benefits will only accrue to a buyer who is cautious to avoid the risks inherent in purchasing this kind of business.
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