You Should Calibrate Your Expectations
Many prospective investors reach out to us to discuss franchise opportunities, often expressing interest in purchasing an existing gas station business listed under $150,000 on various business brokerage websites.
At first glance, this may seem like a great bargain. Many envision a ready-to-go business with semi-absentee operation, where an employee manages the convenience store and oversees customers at the self-service gas pumps. Meanwhile, the investor plans to dedicate just a few hours a week to managing finances and counting the money.
They usually assume that there’s endless demand for fuel, leading to easy sales and a steady cash flow month after month.
What’s wrong with this picture? Well… almost everything!
This article will offer you a different perspective on the “fantasy” of a cheap gas station business described above.
If you’re a prospective E-2 Visa investor, please read this article twice!
On a side note: It’s important to clarify that a gas station can be a profitable business that provides steady cash flow month after month. However, the profitable gas stations are not the cheap ones that attract the attention of so many prospective investors. These so-called “cash cows” are located in high-traffic areas, which come with high occupancy costs and typically sell for more than $1 million. There are many aspects you should thoroughly investigate before buying one.
Here are 10 reasons why you should not buy a cheap gas station:
1. Small Margins: Gas profit margins are around 2%, according to NACS, the leading global trade association for advancing convenience and fuel retailing. With such thin margins, gas station operators have very little room for error. It’s safe to say that a gas station must offer ancillary services, such as a robust convenience store and/or auto services like oil changes or car washes, to survive. Low margins often result in longer hours of operation, sometimes 24/7, forcing single-store operators to work actively in the business (owner-operator) not because they want to, but because they have to.
2. Location and Changes in Traffic Patterns: Gas stations are location-driven businesses, and their success heavily depends on being situated in high-traffic areas with easy access for customers and, ideally, in regions with limited competition (which is often not the case). Don’t overlook the possibility of future changes in traffic patterns due to road work, which could disrupt the routes drivers use to access the gas station. These projects can last for many months or even years. Could this be an undisclosed reason for the discounted sale of that business operation? In the gas station business, if the location isn’t right or if access is compromised by road work, there’s not much you can do to overcome it.
3. Personal Safety / Workplace Violence: Cheap gas stations are often located in less desirable neighborhoods. According to enterprisenews.com, “Occupational-safety advocates say the clerks, attendants, and cashiers who staff the counters at gas stations and corner grocery stores, often alone and late into the night, are among the most vulnerable to workplace violence and harassment.” Gas station attendant is ranked as one of the most dangerous jobs concerning workplace violence, not too far behind law enforcement officers, according to an article published by Hirewise under the title “Workplace Violence: High-Risk Jobs.”
4. High Competition: Gas stations heavily rely on being in high-traffic areas with easy access for customers. It’s common to see multiple gas stations competing at busy intersections, leading to a price war that benefits no one. MarketWatch estimates there were about 115,000 gas stations in the USA as of 2020. However, the number of gas stations has been decreasing over the past two decades. Ask yourself why! This decrease is attributed to reduced margins for owners and overall reduced fuel consumption. Don’t ignore these market forces!
5. Environmental Issues: One of the costliest mistakes a prospective investor can make when considering buying an existing gas station is to only assess the condition of the above-ground installation. To avoid the risk of buying a gas station that is leaking fuel, prospective investors should contract comprehensive soil testing as a condition of purchase. The last thing you want is to endure the expensive cleanup costs of removing contaminated soil and the loss of revenue during remediation and rebuilding. So, if you want to do the transaction correctly, you’ll likely need to spend money on soil testing before determining if the acquisition is viable.
6. Outdated Installation: Cheap gas station business listings frequently (and conveniently) do not mention any additional Capex (Capital Expenditure) necessary to upgrade outdated installations. Are the fuel storage tanks DWFG (double-walled, fiberglass) with leak detection sensors? What about the fixtures, furniture, and equipment (FF&E) in the convenience store?
7. Hard to Estimate Profits: It’s important to note that gas stations are subject to fluctuations on both the supply and demand sides, making it a tough business to estimate profits. Oil prices are traded as commodities, subject to geopolitical and economic forces on a global scale, and consumption patterns fluctuate with the price at the pump, the overall economic scenario, or even the weather. It’s common for gas station owners to see a decrease in net profit when prices at the pump increase. Higher prices drive customers away from the gas station and its convenience store, where profit margins for pre-packaged food, beverages, and other items tend to be higher than for fuel.
8. EV, Hybrid, and Fuel-Efficient Vehicles: Advancements in fuel-efficient cars and electric vehicles (EVs) are notable drivers of reduced fuel consumption. America is slowly but surely adopting EVs, hybrids, and fuel-efficient vehicles. More and more companies are embracing aggressive sustainability initiatives. A prime example is Amazon’s pledge to be zero carbon by 2040. In their sustainability report, they announced an order for 100,000 electric vehicles. Amazon is a trendsetter, and you can be sure that more companies will follow their lead.
9. Replacement Cost: How much does it cost to build a brand-new gas station with a convenience store? Anywhere from $500,000 to $2.5 million, depending on multiple variables. So, from the perspective of replacement cost, why do you think you’ll buy a cheap gas station, and everything will work just fine? Why would someone sell you a gas station “full of potential,” as they say, at a fraction of the replacement cost? Obsolete installations, known future changes in traffic patterns, aggressive competition pressuring net margins, or possible environmental issues could be the reasons, as mentioned above.
10. Lack of Financial Information: Many sellers of gas stations offer limited or no financial records, which is a major red flag. If you’re an E-2 Visa investor, then this is a major “No, No, No!” Here’s an example extracted directly from one of the major business listing websites: What a bargain! Asking price is $30,000, with no financial information whatsoever. The business has been established for at least eight years, meaning most of the productive assets have likely been stripped of depreciation, and the owner claims it’s an absentee operation (run by employees). Yet, the reason for the sale is the seller’s relocation… Really?
If you’re seriously considering investing in a franchise business or want to gain knowledge about franchising to later decide if it’s the right type of investment for you, we can definitely help. Prospective E-2 Visa investors are welcome, and we have extensive experience with investment visas.
Who We Are
Franchise Wizards is a franchise consulting business located in Carlsbad, CA. We work with 700+ franchisors across multiple industry categories and investment levels. The location where the desired business is to be operated can be anywhere in the USA or Canada.
By understanding your objectives and business preferences, we can present you with a tailored selection of franchises that meet your requirements and align with the qualities you seek in an ideal business opportunity.
We can also educate you on how to make the most of the discovery process offered by franchisors and share best practices for evaluating and comparing franchise opportunities.
Click the big green button below to schedule a free consultation. There is absolutely no obligation to invest in any of the franchises we suggest for your consideration.
