GSB-03: How To Come up With the Right Valuation for a Gas Station Business

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In this episode I discuss [spp-tweet tweet=”how to come up with the right  valuation for a gas station business”]( Business Valuation) and how much money can one make from operating this business.

When doing a valuation of a gas station business, it is usually not as simple as doing a valuation of a home. The standard practice for a home appraisal is simple, you look at:

• SQF of the home
• build quality
• the structure of the home
• age of the home
• location of the home

Time compare these factors with nearby similar homes that were sold in last 12 months and you can come up with a general idea where the value should be.

But when it comes to an gas station appraisal, it is not that easy, as there are two parts to a good valuation of any gas station business:

The real estate part and the business part

The real estate part of the value can vary widely based on its geographic location

A corner lot with an acre land can cost 3x-7x more in bigger cities like NY or Chicago compare to a small town in Kentucky.

Now as for the business part of the valuation also can depend on many factors

and I will address some of the main ones here now.

• Fuel volumes
• Number and type of fuel dispensers and related payment technology
• Site location and visibility
• Condition and age of the facility
• Size of the building
• Demographic and regional growth trends
• Branded versus unbranded
• Number and distance of competitors if big names retailers nearby or not
• Traffic counts
• Diversification of revenue streams
• Ingress and egress
• Profitability and trends
• With or Without Deli Restaurant

There are ways you can still find a good valuation for a business that you are interested in buying a business.The way I approach it is first I find out what is the value listed on the local tax assessors office, that is your county property tax office, they keep a valuation on every piece of real estate in your local county, in most areas you can just go online to your local county tax commissioner’s website and type in the address and find out what they are listing as the value of a property.

Now don’t get excited when you see that value, as it is usually much less than actual market value, sometimes even less than half or even lower, but at least this way I find my base point of the pricing.

Then if you are using a business broker or agent, ask them to find you a list of gas stations c-stores that have sold in last 2 years in your area, once you have that list with the selling price, go visit those stores. most times your brokers or agents can give you a list of those stores with sales data attached to them, this way you can do some calculation and find out which of those stores match closest to the business you are looking to buy, now this would give you a great indication if you where you stand and what the rough valuation should be for that business.

Remember now you have your base $ amount value from the tax commissioner’s office and now you have the high and average $ amount from previously sold similar businesses in your area.

As long as you can stay in the middle of those two numbers you are doing better then most.

Now let’s talk about how to find a value of a leased business or a business that is for lease, how do you know what the value should be of that business, when I say value I mean the goodwill amount.

There are plenty of theories floating around on this topic, some will tell you the selling price should be between 2 to 2.5 times the gross monthly merchandise sales of the store, some will say 3 times the sales, but again doing some research through your local brokers can be very helpful, ask them to show you some similar businesses that sold in your area recently and see if they are actually sold for similar value.

So for example if a store is doing 100k merchandise sales a month, mind you this number does not include fuel or gasoline sales, then the value/price according to that formula would be 250k-300k for you to buy the lease of that business.

But let’s say you found a business that is doing 100k in merchandise sales a month and the price was 230k to buy the lease, is that a good deal? Well it depends… it depends on many factors like what is the rent, how much fuel it sells, what is the actual gross profit margin of that merchandise sales, now if the rent is set at 10k a month the gross profit margin is very low in the store then at the end of the month after paying your rent, utility, payroll and all other expenses, you may lose money, so you have to look really at the whole picture and do some serious calculation first, just remember sales numbers only tell you half the story, the other half is what you have to find out on your own, no business brokers or agents will tell you that.

Then there is another method call the multiple method, in this method generally they take the net earnings of a business and multiply that number by anywhere from 1-3 and that is the selling price, so let’s say a business shows it made 100k in 2014, a seller can ask 3times that earning thus the price for that business is 300k. some experienced buyers usually can take an average of 3 years of earnings and then multiply that by 2x or 3x depending on the negotiation skill of the buyer, as it is beneficial to take a look at 3 years of earnings vs. just one year, this way you get to see a trend and not just a snap shot.

Now a little story time about my first gas station venture. I am sharing this to show you how asking price of a business sometimes has nothing to do with the earnings or even sales.

I mentioned on first episode that I bought my first gas station business in Tampa FL, well at the time I didn’t know anything about gas station business, I saw an ad in the newspaper that said a gas station was for lease for reasonable price, I went to visit the store, it looked big, bright and I saw some traffic coming in and out.

I sat down with the sellers and I was told that the business value was 40k plus I have to pay for all the inventory, I asked to see some sales data and they gave me last 3 months of sales data which showed the store was doing around 45k in merchandise sales and about 40k gallon in fuel, but the deal in fuel was that I would sell for the jobbers and get a commission only, which was I think around 6 cents a gallon. I did some calculation based on the profit margin they told me the store was making which was right at 30%, they also told me the rent was $4500 a month.

I then sat down with a pen and paper and did some calculation where I calculated the gross income for a month vs. gross expenses for the same month, so for merchandise gross profit, it would be 45k x 30% = $13,500, and for gasoline I would make 40k gallon x 6 cents = $2400 every month

 

Now add those two and my total gross profit for a month would be $15,900.

Then I looked at my expenses, and they were like this:

Rent $4500

Payroll $3500

Utility bills combined was $2500

So total expenses for a month would be $10,500

I was excited that I would be making around 5k a month that would translate into 60k a year for me that was huge. I even thought hey if I cut down on one employee and work myself daily about 8 hours I can save even more.

So I borrowed some funds from friends and family and took cash advances from all 4 of my CC and gathered up 35K, then I went and asked the sellers if they would consider financing the 5k along with the merchandise value for 12 months, they agreed, and I bought my very first business.

But here is the sad part, even with a business degree I failed to investigate a few minor but very valuable details, like the actual profit margin of the store, what essentially started happening was I was going broke, didn’t have money in the bank, and I was overdrawing my bank account, I was bouncing checks with even the utility companies and then I let 2 of the 3 employees go and started working myself from open to close 18 hours a day, I would only bring in one employee I still remember her name was Lorrie, a very sweet and honest lady, I had her come and work for 3 hours every day while I went and took care of bank deposit and picked up store supplies from Sam’s club and even went to take a shower and pick up some food for me.

Then I sat down and started to analyze my profit margin for each items I sold in my store, and found out I was working on very low margin, for example in cigarette I was only making 7% profit, while on beer and wine I was doing 12% and the rest was only around 18-20%.

By then I figured out the game the sellers played with me, they picked up stores that didn’t do very well and they came in lowered all the prices and build up the business with clients that were only driven by low prices, and once they saw the sales went over 40k they sold the business for a profit.

I started to raise prices one by one but very carefully, and in 9 months I went from combined gross profit of 15% to around 28%, but luckily I didn’t lose many sales as I was behind the counter, and I was making friends with most of the customers and right after that I sold the business and moved on. That was a very tough chapter in my life, but it did teach me some very valuable lessons about this business and I glad and thankful to the sellers for me putting me through that learning. It was hard I will agree but as I said that lesson became very helpful in my business life later.

Now coming back to the point of leasing or buying a business with the high sales number as you can see those number don’t mean a whole lot until you check the actual profit margin of the business.

Remember if you find a deal or offer too good to be true then it probably is.

 

How much money can a gas station business make a month?

I get ask this question a whole lot, “how much can I make from operating a gas station?”

Well once again the answer is it depends

Yes it does depend on many factors, let’s look at some of these factors

It can depend on

your monthly sales both of merchandise and fuel

It will depend on your COGS

it will depend on your total monthly expenses

One good example is you can have a 100k merchandise selling store making 5k a month Vs you can have a 70K merchandise selling store making 8k a month, why?

well the 100k selling store may have higher expenses, and lower profit margin compare to the 70k selling store. so yes it depends on all these numbers.

Every store is unique, and just learning the sales figure does not tell you the whole story, you always have to look at the whole picture to understand if any of them are profitable or not.

Then again you may find a store that you see is not making money but has high sales but it is not making money because of some other reasons like: Theft, or being mismanaged or by recklessness of the owner or by unnecessarily high payroll numbers or it could be number of other reasons that can be rectified easily. I have taken up stores many times where the numbers did show a loss but I did go through the deal because I knew what was wrong and knew how to fix it.

In these type of situation you have to have some experience under your belt but it is doable as long as you can properly indentify the issues that is causing the business not to show profit.

If you have any question, please feel free to ask me and I will try my best to answer them. You can reach me by going to my blog at gassattionbusiness101.com and go to the tab where it says “ask Me”, you can also reach me via Facebook facebook.com/csbacademy, if you rather use twitter, you can find me at @csb_Academy

I hope you can take away something from each episode and implement in your business and see some positive result.

Once again I want to thank you from bottom of my heart for staying with me, please feel free to contact me for any comments, suggestions or questions you may have as I would love to hear from you.

Until next time, take good care of yourself and remember to work smart and not hard

The book this week is The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change by Stephen R. Covey.