GSB-04: 15 Steps Gas Station Buying Porcess

[spp-tweet tweet=”The complete gas station business buying process”] In this episode I want to go over every step you have to take to buy a gas station or a convenience store successfully. I go through a check list of 15 very important steps that you have to follow.

1. Finding a gas station business and doing the due diligence
2. Valuation3. Letter of Intent
3. Hire a commercial appraiser for an appraisal
4. Price negotiation
5. Signing a purchase agreement
6. Loan application
7. File your corporation
8. Apply for EIN number
9. Setting up the closing date
10. Setting up Business Bank Account
11. Setting up Payroll service
12. Applying for Business License
13. Meet the employees
14. The Actual closing

The Book I mentioned in this episode is Mastery By Robert Green.

Read Full transcript here

[spp-transcript]

In this episode I want to go over every step you have to take to buy a gas station or a convenience store successfully. I will go through a check list here today.

Let’s dive in to the list and I will explain each and every process as we go forward.

1. Finding a gas station business and doing the due diligence

First step I am sure you guessed it, you have to have a business that want to buy first right? So first find a business you like then do your due diligence and know the numbers and figure out if it is the right one for you, once you do that you are half way there.

Now for the other half you need to go few more steps before it is all said and done.

2. Valuation

As I mentioned earlier in episode 3 valuation is a very key factor when buying any business, so you follow the steps I outlined in the previous episode hopefully you have the right valuation.

3, Letter of Intent

4. Hire a commercial appraiser for an appraisal
5. Price negotiation

Now is the time to negotiate the price with the seller.

Remember your goal is to lower the asking price and the seller’s goal is stay closer to the asking price, so two things take place in a typical negotiation table. One, a smart buyer will point out all the negatives and shortcomings of that business while the seller will try to make you believe that there is nothing wrong with their business, and this is a deal of the century.

But before you go to the negotiating table first you need to find out how much your appraisal came back for. It is an important document for you and your loan application process. This is what the banks rely on heavily when it comes to approving your loan for the certain amount; that amount depends on this appraisal. Typically banks may say we can offer a loan 80% of the appraised value of the business.

From step two you also know the valuation number you found by doing your research, so you are well informed by now.

It is a good idea to go to the negotiation table all prepared. First you have to look hard all the numbers the sellers gave you such as the P&L, the balance sheet, etc. Then look at the notes you took when you first went to see the business location and come up with a list of negative items that you noticed about the business and write them down.

And they could be items like

Restrooms need upgrade

Sales floor has broken tiles, so you will have to redo the whole floor (which you may not do instead you may just fix the broken ones)

If it is an older facility, mention the building needs to be painted

If the dispensers look little-dated mention, you will have to spend money to upgrade the dispensers soon.

It is best not to mention 15–20 items but mention 2-5 items that you do think needs work and then come up with a dollar value for those repairs or upgrade and make sure the price you are offering reflects that. What I mean by that is

Let’s say the seller is asking 770k for the business, and you know the appraised value of the business is right at 735K, now your goal is to go below that appraised value number, the lower you can go from that number the better off you are. Let’s say you offer 670K, with that offer you can now also explain to the seller why it is lower than his or her asking price

The reasons you can give are

Number one, their asking price is higher than the appraisal value of the business.

Two, the 5 repair items that you mentioned to sellers before will cost around 65K, so what you did here is you took the appraisal value of the business and deducted the estimated repair cost and that is how got that magic number of 670K.

Often times the sellers will strongly disagree, in my experience some even disagreed with the appraisal value, but in most cities there are only a handful of these commercial real estate and business appraisers that are approved by most lenders, so it is hard to argue with their valuation

Some sellers use tactics like “we have other offers”, when you hear that, politely remind them every buyer has to go through this appraisal process and this the value they all will get and that banks will never loan you more than what the property has appraised for.

You may end up going up 10-15K higher on your original offer and may be able to seal the deal at around 685k, if you can do that you are already a winner.

 

6. Signing a purchase agreement

 

Since you both agreed on the price and terms, time for you to sign a purchase agreement and put up some earnest money as a deposit so the seller knows you are a serious buyer.

 

7. Loan application

Time for you to go to a local bank and apply for a commercial loan, there are many different options when it comes to loans, and I will cover all that in the next episode.

8. File your corporation

Here if you have to decide what and how you want to structure your company, it is best to get some legal advice from an attorney that is knowledgeable about business law. Often times you will see that is well worth the investment to pay an attorney to draw up your articles of organization, especially if you have more than one partner or member in your entity. If you have more than one business partner, then you may also ask your attorney to draw up a partnership agreement along with the articles of incorporation.

There are basically 3 types of company you can file for; one is S Corp. One is C Corp. and 3rd is LLC or LLP

I am not an attorney so I can’t advise you on which entity will be best suited for your needs, but I can tell you what I have, I have a couple of LLC’s and one S Corp. the way both of these work is …..

9. Apply for EIN number

While waiting for the bank loan to get approved, you can get couple of things done, like apply for an EIN number, if you have an accountant or a CPA ask them to apply it for you or you can do it yourself, it is essentially the social security number for your business, this is how IRS identifies your business, like they identify you with your SS number.

10. Setting up the closing date

Once you hear from the bank that your loan is done time to notify the seller and set up a closing date and time, in this meeting you need to discuss how you want to handle the transfer of inventory and how to count and pay for them.

Best practice is to hire a company that counts inventory, this way you get a real exact 3rd party count and know what you are paying for.

Also you both have to agree how to calculate the cost of that inventory, remember everything in the store is priced at retail, so you have to come up with the actual cost of that inventory if not you will pay too much.

There are many ways to do it, but some of the more common approaches are:

Get a total dollar figure of all merchandise and then take off 25-30% from top and pay that way, here if you recall the categories I talked about before and how much profit margin there was on each.

Well some sellers do not want to go through each categories and calculate each at a different percentage, they want to do it at one lump sum, and that is fine as long as you know you are not over or under paying for the inventory.

Some others offer cigarette, beer wine at actual cost and rest at 30% again it depends on the store and their selling prices and how much inventory they have, each scenario is different, so you have to figure that out before agreeing to any deals.

But one very important thing to remember, when doing the inventory, make sure to tell the copmany that is doing your counting to check for outdated and or expired products, so they can keep those products aside and not include in their count. You should not pay for expired, damaged or out of date products.

11. Setting up Business Bank Account

Time to open a business bank account and order checks and deposit slips, one mini advise on that, make sure to order deposit slips that has a duplicate copy, it will help you a lot down the road.

12. Setting up Payroll service

Talk to your accountant and figure out how to handle employee payroll

 

13. Applying for Business License

Ask the sellers about all the required licenses you have to apply for; there are some licenses that in some cities and state you have to apply for in advance.

Get a list of all the licenses you need to apply for. Remember in most cities, you will need a license from the city, the county, and the state, it is a good idea to go ahead and apply for the resellers’ Tax id or sales tax license as you will need it from the very first day.

14. Meet the employees

I usually meet the employees a day before closing. And let them know what is going on and assure them that their jobs are safe. Then I hand them each a new hire package with job application, w2 along with some checklist of job duties and responsibility. I also hand each an acknowledgment letter that states everyone is on probation for the first 90 days so I can review their work performance;

I have everyone sign that document. Some of the employees can be little shaky as they have a fear that you may fire them all and bring your own family to work, so try to put them at ease but this is also the time to explain what is expected of them.

I always mention 2 things I look for in employee; honesty and great customer service, these two are my top most priority when it comes to employees. I also let them know that I do prosecute if I find anyone stealing from me.

15. The Actual closing

Typically a closing usually takes place at a title company or even at a bank, again it will depend on your bank, but either case, this is when you and the seller meet and sign all the documents and the seller gets paid their money. I try to go and get the inventory counting part done before ehading to the closing this way I can pay the seller for the merchandise at the closing table.

If that doesn’t work then you can sign the closing papers at the bank then go back to the store and do the inventory and write him a seperate check for it.

Last but not the least, show up bright and early and be ready to work long hours first few days of taking over a new business as you need to learn so much of the new business.

Hope this was helpful.