GSB-49: Buyers Be Aware – Listen Before Buying Your Next Gas Station Business

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Did you just buy a gas station business and now finding out that even with high sales volume the business is not generating enough profit for you? Are you struggling to just meet your basic business expenses? Or are you about to buy a business that will put you in the red? Some of our listeners have just found themselves in that exact situation, so stay tuned and let’s analyze all that in this episode.

Welcome to Gas station business 101 podcast, I am Shabbir Hossain, and this is episode 49. This is the show where we discuss how to start, run and grow a gas station business successfully and give you an inside look at many real life case studies so you can follow and be successful in this business.

This episode is a direct response to 3 of our podcast listeners and the issues they are facing about their new business venture. I won’t mention them by name since I didn’t ask for permission ahead of time, so I will just refer to them as person A, B, and C.

Here is the situation, Person A recently sent me an email where he mentioned he recently bought a business but now a month and a half later he is still putting money into the bank just to meet his expenses. Person B sent me an email with a lot of sales data from a store he is thinking about buying and asked for my advice, and lastly person C just sent me an email which said he followed my advice that I gave on various podcast and bought a business but now he sees two of the categories in his new business has less profit margin than what I suggested. The two categories are automotive and cigarettes, where he said my suggestion was 15-17% on cigarettes but he found out his new business has only 5% margin, in the automotive category my suggestion was around 50%, but he sees around 18% margin. But what is alarming is that his cigarette sales are around 37% of his total merchandise sales while the automotive is only 3%

Do any of you remember listening to episode #1 and #33, in these two episodes, I shared my own life story and how I failed miserably in my first gas station business venture, and how I was taken for a fool by the sellers. I am not suggesting that this is what is happening to this three gentleman, but as buyers, we do have to be aware and be very careful, so this does not happen to any of us, right?

Let’s start with Person A first, in his case, he is not sure why he is not making any money, in last two weeks we have shared a lot of sales and purchase data with me along with some of the selling prices on some of the products. Here are his numbers and since I am not sharing his name, I will share the numbers this way his privacy won’t be compromised.

Last month these were his sales:

Fuel: 67,457.23 gallons

Merchandise $71239.05

Out of the 67K gallons, he sold 61900 gallons of regular fuel and 5100 gallons of premium and plus grade fuel.

The breakdown on merchandise were (I rounded the sales figure off)

Cigarette $27,000 X 15% = $4050

Beer         $16000 X 23% =  $3680

Soda         $12000 X 33% =  $3960

Grocery   $9000 X 35% =   $3150

Tobacco   $3000 X 23% =   $690

Novelty   $2500 X 40% =   $1000

Auto         $1000 X 50% =   $500

Deli         $500 X 35% =   $175

__________________________________

Sales $71,000 Estimated Gross Profit $17,205. The gross profit margin here is $24%

For the same month, he purchased $62,500 merchandise, which seems high for 71K total sales.

If inventory level remained the same both at the beginning of the month and at the end of the month, then he should have ideally only replaced what he sold at cost right? If so then his purchase should have been$71,000 – $17,205 = $53,795, but he bought $62,500 which was $8705 more. But this is not always bad; this can also mean he may have $9,000 worth of extra inventory sitting on his shelves, but to find that out it is a good idea to have your inventory counted on the 1st day of every month. In his case, he hasn’t but he told me he doesn’t think he has that much extra inventory. Instead, he thinks he has less than what he started with.

Now if his inventory has decreased compared to what he started with while he bought extra $9,000 worth of inventory, which can mean three things:

1. His profit margins are lower than we estimated
2. His having massive amount of theft
3. Or a combination of both

After I had concluded these 3 outcomes, I asked him to investigate and to tell me what are his profit margin by each department/category, he came back a few days later and informed me that his cigarettes were off by 4%, Beer was off by 3%, tobacco was off by 5%, auto was off by 6% and novelty was off by 10%. Only deli margin was higher than my estimated, and it was at 45% instead of estimated 35% and rest of the categories were pretty much same as predicted.

So, the new calculation looks like this now

Cigarette $27,000 X 11% = $2970

Beer         $16000 X 20% =  $3200

Soda         $12000 X 33% =  $3960

Grocery   $9000 X 35% =   $3150

Tobacco   $3000 X 18% =   $540

Novelty   $2500 X 30% =   $750

Auto         $1000 X 44% =   $440

Deli           $500 X  40% =   $200

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Sales $71,000 Actual gross profit $15,210; the gross margin for him here is around 21%.

The difference between my estimate and the actual gross profit was $17,205 – $15,210 = $1,995.

Remember the difference of $8705 in inventory? Well that amount can now be reduced by $1985, so actually it should be $8705 – $1995 = $6710. He is still missing this much inventory in his store and now since we know the real profit margin, I can safely predict that he is having a serious case of theft in his store.

Person B sent me a lot of sales data, and since he hasn’t bought his store yet, I have decided not to share any of that here, but what I want to share with you is that he found a good store and the sales and profit margins both look great, the store is selling around 80,000 gallons a month while the merchandise sales are right around $75,000 with combined gross profit margin is around 26% and he has done some hard work analyzing numbers and the spreadsheet he shared showed the purchase is very much in line with the sales and as Is aid the store has great profit margin both in and outside. So I advised him to go forward with the purchase.

Now, let’s talk about person C, in his case he already bought the store, and he too analyzed his profit margin in each category and compared them to my suggestions and noticed that there are only two categories where he was off by big numbers compare to what I suggested.

1. Cigarettes my suggested margin is 15-17% he found out his was only 5%
2. Automotive category my suggestion is 40-50%, but his is 18%

The problem is Cigarettes represent 37% of total store sales while automotive at just 3%.

Do you see the problem here? Typically cigarettes carry anywhere from 20-40% of the total merchandise sales, but the since this is typically a low-profit margin category so if your store has lower sales in this category like 20-25% you are doing better than people with stores where they are having 40% of their sales coming from only cigarettes.

In his case, this is very unfortunate because let’s assume his store sales are at $70,000, if you take 37% of that sales which is $25,900 is cigarettes only, and at 5% margin he is making $1295. This is a serious problem, let’s assume he is making 30% combined gross profit on the rest of categories

$70,000 – $25,900 = $44,100 at 30% = $13,230 + $1295 = $14,525

But now let’s look at if his cigarette margin was at 15%, how this number would change

$70,000 – $25,900 = $44,100 at 30% = $13,230 + ($25,900 X 15% = $3885) = $17,115

The difference is $17,115 – $14,525 = $2,590

Typically when gross profit is this low, it is hard to meet all your fixed and variable expenses and still make a profit.

So once again before you buy a business make sure to check episode 40 and 41 where I spoke at length about doing proper due diligence. In a nutshell remember to always check their sales vs purchase, if the seller tells you they are doing $70,000 merchandise sales and 50,000 gallons you want to check their records of actual sales documents like daily close out that comes out of the registers and not what they entered in their bookkeeping system, because when you go to buy a business you have to assume the seller may tell you lies, so I always tell people to let the seller prove to you that they are honest and truthful by showing you actual sales and purchases for at least last 2 years. This way you can draw your own conclusion. Don’t look at their P&L; don’t look at their balance sheet or income statement. These documents mean very little to you when it comes buying a gas station.

3 Things matter to you when doing due diligence:

1. Verifying actual sales
2. Verifying the purchases
3. Verifying their profit margin by category

Once you are satisfied, then move on to other parts of due diligence like expenses, payroll and such, but do follow the list I outline in episode 40.

Let’s now talk about what if you bought a business like this person C did, how to fix this issue, how do you raise your margin so you can start making money? One advice is if you find yourself in this situation, please don’t start raising prices day after you buy the business, which can harm your business beyond repair. Instead, you have to take a smart but slow yet steady approach.

Here are the six steps I would take:

1. Check on competitor’s margin
2. Contact all three cigarette company reps and renegotiate the contracts
3. Raise price in at least three different increments with long intervals in between
4. Run 2 and three pack or even carton pricing special
5. Run at least two other promotion on other categories like Beer and maybe Soda
6. Start giving superior customer service and increase the WOW factor.

If you have any question, feel free to send me an email at shabbir@gasstationbusiness101.com, or you can post it on my Facebook group page by going to shabbirhossain.net

Lastly, If you are about to buy a gas station for the first time, make sure to read my book “Gas Station Business Smart Start-up” How to measure profitability, how to come up with a valuation, how to calculate ROI, how to write a business plan and how to get financing for your new venture.  You can find this book on most all retailers including Amazon, Apple iTunes, Kobo, Smashwords and Barnes and Noble.

For all our foreign listeners, if you are interested in learning about investment category visas and how to get one of those by investing in a gas station business, do check out my new book USA Investment Visa to Green Card, How to Qualify, Apply and Obtain EB-5, E-2 and L-1 Visa. You can find this book exclusively on Amazon for now.

Don’t forget to sign up for my very important newsletter; you can simply sign up for it by going to http://gasstationbusiness101.com/subscribe

Thank you once again for joining me in this episode; I will see you in the next one.

Cheers!