In most cases, the process of undertaking a gas station valuation can be a complicated endeavour. Far removed from the usual question of how you progress through the steps of the valuation itself, there are still quite a variety of variables to keep track of, including principally whether the property in question is leased or owned and whether it’s owned as part of a franchise agreement with a large oil company. First and foremost, always remember to apply a detailed process of due diligence and extend considerable attention to the financials when you’re working toward arriving at a top-notch value proposition.
As a buyer, you must be prepared to make certain assumptions and decisions yourself and not to rely on the often partial information supplied by the seller. It is up to you to determine the value of the business for you personally, as the amount the business owner thinks the gas station is worth has little if anything to do with its actual value.
Traditionally there are two different ways to look at gas station convenience store valuation, and these are either asset-based, where the income-producing assets are individually valued and totaled to make the purchase price, or cash flow based, which is the most popular. In this scenario, the overall profit is adjusted according to certain expenses, multiplied and used to establish a price. The multiple is essentially the premium placed on the business and can be anything from one, up to five times this figure.
Before you can arrive at a value that you are happy with, you need to have certain fundamental questions answered. If the business occupies rented property you must engage with the landlord. Many landlords are not interested in issuing a new lease unless they can be sure that the incoming person has experience running this particular type of business. However, they are almost always willing to negotiate as they do not want to see the property sitting around empty!
As an owner of a gas station and convenience store you will have many different suppliers and vendors, some of which are absolutely critical to the ongoing success of the business. Never assume anything and make sure that you can enjoy an ongoing good relationship and great trading terms with these entities.
When considering cash sales, if the seller can’t prove part of the sales they’re talking about, then you can’t include it as part of your value assessment. Often, gas station owners will speak with pride about the incredible volume of cash sales, and tell you about it almost as if it’s something magical. Don’t forget that they’ve been benefiting from avoiding paying taxes on this part of their income, can almost never actually prove that it exists and therefore can’t really expect to make a profit from it through selling their business.
Most often you will want to consider using the total owner benefit as a base to create a valuation for the business. This is defined as the net income of the business added to the owner salary, any perks, depreciation and interest less any amount that you might have to put aside for capital projects assessed. With regard to average business valuation, gas station or convenience stores that are full service will often command 2 to 3 times whatever the owner benefit figure it is. If it is a smaller establishment and self service, 1 to 2 times. Consider the volume of trade versus the amount of hours that you will have to put in. A 24-hour, seven-day a week establishment takes a lot of management and oversight.
While business financials and owner benefit multiples are primary to your decision-making process, remember to consider a host of other variables:
– During the process of observation, use a period when you actually count the number of patrons coming in and out of the station to enable you to come up with a good average for traffic.
– Remember that you should aim for between 25 and 33% return on your cash investment when purchasing a business such as this, although if you are going to be an absentee owner you should be prepared to accept a lower return.
– Watch out if the owner appears to be working excessive hours or is reliant on a number of his family members to help him staff the operation. Pay attention to employee records and costs and ask yourself whether you are prepared to be as hands-on as he appears to be.
– Consult with local authorities to see if there are any major road construction projects planned. Sometimes these are inevitable but can have major disruptive forces.
To really focus the attention of the seller as you establish a value for your business purchase, why not ask him or her to engage in an “earn-out” scenario, where a portion of the sale price is returned to them over a period of time subject to certain conditions. This will ensure that you have their full attention during the disclosure phase!