Useful Suggestions For Properly Valuing A Gas Station For Sale

The actual process of valuing a gas station business can be quite tricky at times. Besides the question of how you actually go about the valuation itself, there are a variety of variables which need to be taken into consideration, including first and foremost whether the property is currently being leased - or is owned, and if it’s owned, whether it’s part of a franchise with a large oil company, for instance. Above all else, remember to conduct a proper process of due diligence and pay particular attention to financials when trying to arrive at a good value proposition.

As someone who is looking to buy gas station business, you need to be adequately prepared to make certain decisions yourself, some of which will even need to be based on assumptions, while remembering to never rely on the information provided by the seller alone. 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.

In a traditional sense, there are usually two principal ways of looking at gas station convenience store valuation, and these are generally asset-based, where the income-producing assets are valued and totaled individually to reach the buy business price, or cash flow based, which is by far the most popular. In this particular instance, the overall profit is adjusted in relation to specific expenses, multiplied and then used to reach 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 reach a value that you’ll be satisfied with, it’s essential to have certain fundamental questions answered in detail. 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 it comes to cash sales, if the seller cannot prove it then you cannot include it as part of your value assessment. Some gas station owners will pride themselves on the amount of cash sales and put this to you as almost something magical. Remember that they have benefited from not paying taxes on this income, almost always cannot prove that it exists and cannot expect to therefore earn a premium from it.

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 the gas station for sale, 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!

Richard Parker is the author of the How to Buy a Good Business at a Great Price series. As President and founder of Diomo Corporation - The Business Buyer Resource Center, his materials, seminars and consulting have helped thousands of business buyers realize their dream to buy a business.