False Expectation
Many prospective investors call us to discuss franchise opportunities and they express the idea of buying an existing gas station business that is listed for sale in multiple business brokerage websites for less than $200,000.
On a side note, I want to be clear that a gas station can be a profitable business that provides a steady cash flow month after month. They are not the cheap gas stations that attract the attention of so many prospective investors, as described above. These so-called “cash cows” are extremely well located in high traffic areas, which comes with high cost of occupancy and they typically resell for more than 1 million dollars and there are many, many aspects you should investigate before buying one.
Here are 10 reasons why you should not buy a cheap gas station.
1. Small Margins: Gas profit margins are about 2% according to NACS, the leading global trade association dedicated to advancing convenience and fuel retailing. With such thin margins, gas station operators have very little room for error. It is safe to say that a gas station must offer ancillary services such as a robust convenience store and/or auto services such as oil change or car wash in order to survive. Low margins prompt longer hours of operations, often 24/7, and force single-store operators to actively work in the business (owner-operator), not because they want, but because they need.
2. Location and Changes in Traffic Patterns: Gas stations are location-driven businesses and, as such, its success heavily depends on being located at high traffic areas with easy access to customers and, ideally, in a region with limited competition (frequently not the case). Do not overlook the possibility of future changes in the traffic pattern as result of road work that could compromise the route drivers use to access the gas station location. Those events may spam 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 is not right or if the access to the gas station 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 desired neighborhoods. “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.”, as noted by enterprisenews.com in its article entitled “Gas station clerks have a dangerous job”. Gas station attendant is ranked as one of the most dangerous jobs regarding 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 depend on being located at high traffic areas with easy access to customers. On busy intersections it is very common to see multiple gas stations competing for the attention of the customers which results in a price war that does not help any player. The website Marketwatch estimates in about 115,000 gas stations in the USA as of 2020. Just too many but the reality is that the number of gas stations has been decreasing for the past two decades. Ask yourself why! The decrease is attributed to the reduction in margins owners net and overall reduced fuel consumption. Do not ignore these market forces!
5. Environmental Issues: Among the costliest mistakes a prospective investor may face when considering buying an existing gas station is to only assess the condition of the installation above ground. In order to avoid the risk of buying a gas station that is leaking fuel, the prospective investor should contract a comprehensive soil testing, as a condition of purchase. The last thing you want is to endure the expensive clean-up costs of removing contaminated soil, and the loss of revenue during remediation and rebuild. So, if you want to do the transaction correctly, you will likely spend money in soil testing before you can determine 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 installation. Are the fuel storage tanks DWFG (double-walled, fiberglass) with leak detection sensors? What about the fixture, furniture & equipment (FF&E) on the convenience store?
7. Hard to Estimate Profits: It is important to point out that gas stations are subject to fluctuations both on the supply and demand sides, making it a tough business to estimate profits. Oil prices are traded as commodities, subject to geopolitical and economical forces at global scale, and the consumption pattern fluctuates with the price at the pump, economic scenario in general or even with the weather. It is common for gas station owners to see a decrease in net profit when the prices at the pump increase. Higher prices keep customers away from the gas station and its convenience stores, where the profit margins for pre-packaged food & beverages and convenience items tend to be higher than the fuel’s.
8. EV, Hybrid and Fuel-Efficient Vehicles: Advancement in fuel-efficient cars and electric vehicles is a notable driver of reduced fuel consumption. America is slowing but surely adopting EV, Hybrid and Fuel-Efficient Vehicles. More and more companies are adopting aggressive sustainability initiatives. A good example is Amazon’s pledge to be zero carbon by year 2040. In their sustainability webpage they announced having placed an order for 100,000 electric vehicles. Amazon is a trend setter. Rest assured that more companies will follow their lead.
9. Replacement Cost: How much does it cost to build a brand-new gas station with convenience store? Anywhere from $500,000 to $2.5 million depending multiple variables. So, looking from the perspective of replacement cost, why do you think you will buy a cheap gas station, and everything is going to 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 installation, known future change in traffic patterns, aggressive competition putting pressure on net margins or a possible environmental issue could be the reason, as above mentioned.
10. Lack of Financial Information: Many sellers of gas station businesses offer limited or no financial records and this is a major “red flag”. If you are an E-2 Visa investor, then it is a major No, No, No!!! Here is a great example, extracted directly from one of the major business listings websites. What a Bargain! Asking price is $30,000, no financial information whatsoever, established for at least 8 years, hence most of the productive assets have been stripped out of depreciation, and the owner claims it is an absentee operation (run by the employees) but the reason for sale is seller’s relocation…. Really?
If you are seriously considering investing in a franchise business or gain knowledge about franchising so you can later decide if this is the right type of investment for you, we can definitively help you. Prospective E-2 Visa investors are welcome, and we have a lot of experience with investment visas.
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