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How to Value a Gas Station For Sale
In most cases, the process of evaluating a gas station can be a complex endeavor. Far from the usual question of how you progress through the valuation steps, there are still many variables to keep track of, including whether the property in question is leased or owned, and whether it’s part of a freehold. A franchise agreement with a major oil company. First and foremost, always remember to apply a detailed due diligence process and pay significant attention to financials as you work to arrive at a high-value proposition.
As a buyer, you should be prepared to make some assumptions and decisions yourself and not rely on partial information provided by the seller. It is up to you to determine the value of the business to you personally, because what a business owner thinks a gas station is worth has nothing to do with its actual value.
Traditionally there are two different ways of looking at the valuation of a gas station convenience store and these are either asset-based, where income-producing assets are individually valued and aggregated to form the purchase price, or cash flow based, which is the most popular. . In this situation, gross profit is adjusted by specific costs, multiplied, and used to establish price. The multiple is the premium placed on the business and can be five times this figure.
Before you can arrive at a value you’re happy with, you need to answer some basic questions. If the business occupies rental property, you should engage with the landlord. Many landlords are not interested in issuing a new lease unless they are sure that the incoming person has experience running this particular type of business. However, they are almost always willing to negotiate because they don’t want to see the property sitting empty!
As a gas station and convenience store owner you will have many different suppliers and vendors, some of which are absolutely critical to the ongoing success of the business. Never take anything for granted and ensure that you can continue to enjoy good relations and great trading terms with these organizations.
When considering a cash sale, if the seller can’t prove part of the sale they’re talking about, you can’t include it as part of your valuation. Often times, gas station owners will boast about the incredible volume of cash sales and tell you it’s something magical. Don’t forget that they are benefiting from tax avoidance on this part of their income, which they can almost never prove exists and therefore cannot expect to sell their business and make a profit from it.
Often you will want to consider using the owner’s gross profit as the basis for creating a valuation for the business. This is defined as the net income of the business added to the owner’s salary, less any allowances, depreciation and interest that you have to set aside for capital projects. In terms of average business valuations, gas stations or convenience stores that are full service usually make 2 to 3 times less than the owner’s profit figure. 1 to 2 times if it is a small establishment and voluntary. Consider the volume of trades versus the number of hours you need to keep. A 24-hour, seven-day-a-week installation requires a lot of management and maintenance.
Although the financials of the business and the owner’s profit margin are primary to your decision-making process, remember to consider other variables:
– During the monitoring process, use the time period when you count the number of patrons coming in and out of the station to come up with a good average for traffic.
– Remember that when buying such a business you should aim for a 25 to 33% return on your cash investment, although if you are an absentee owner you should be prepared to accept a lower return.
– See if the owner seems to be working long hours or relying on multiple family members to help staff run the operation. Look at employee records and expenses and ask yourself if you’re as prepared as it seems.
– Consult with local authorities to see if any major road construction projects are planned. Sometimes these are unavoidable but can have great disruptive power.
To really focus the seller’s attention as you establish value for your business purchase, why not ask him or her to engage in an “earnout” scenario, where a portion of the sale price is paid back to them over a period of time. Time subject to certain conditions. This will ensure that you have full attention during the manifestation phase!
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