Before you buy a gas station business, know the five dangers

A large number of entrepreneurs want to buy gas station business opportunities because the industry seems to thrive whether the economy is strong or sick. Just like a grocery store or an energy provider, the gas station provides something that most people need.

And connecting to a side business, such as a car wash or convenience store, can generate substantial profits for the entrepreneur with a ‘buy gas station business’ strategy. No special knowledge is needed beyond basic business proficiency to run it efficiently.

However, there are risks particular to this type of business, which a prospective buyer should understand. Understanding those risks and how to avoid them can help the entrepreneur enjoy success with a good purchase at a gas station.

1. Soil contamination is common among oil retailers who have not upgraded to newer leak-proof storage tanks. Most communities enforce environmental regulations for gas stations. Any business leaking oil will be forced to close so that contaminated soil can be removed and storage facilities improved. Eventually, a new station is built on the site. What a problem for a new owner of the station! Anyone seeking gas station business opportunities is advised to insist that any purchase agreement require soil sample testing and that the results show no contamination.

2. A related issue is the condition of storage tanks. Older steel tanks invariably begin to leak after years of use. Newly installed and renovated gas stations are equipped with double-walled fiberglass tanks (known as DWFG in the industry). And the tanks are equipped with leak detection sensors. Any offer made to buy gas station businesses must include a provision that requires upgraded fuel storage to be part of the deal.

3. Failure to determine who owns the property the station is on before the purchase is complete can lead to a terrible surprise. In many cases, even the concessionaires of California’s major oil companies have placed their large, familiar signs on property they do not own. Imagine the anguish of brand name oil company franchise owners who discover, the hard way, that the franchisor’s rights to the property were “on a short fuse.” A ten-year sublease is meaningless if the sublessor, the oil company with the head lease, loses its right to do business there.

4. When making an offer on a gas station, it is reasonable to expect that access to the property will remain as easy in the future as it has been in the past. But what if the local government plans to demolish the streets adjacent to the station to repair underground utilities or improve roads? Most commercial offers do not include the contingency of obtaining satisfactory information from the city’s planning and development department. But a condition with that requirement must be included in any offer to buy service station business assets.

5. The possibility of paying too much for a company in this category is a significant risk for someone willing to buy gas station business opportunities. It is a mistake to believe the salesperson’s or broker’s claims that the appropriate price is determined by gross sales or the number of gallons pumped each month.

Like any small business, a gas station must be valued on the basis of the seller’s earnings before deductions for interest, taxes, depreciation and amortization. Pumping volume or gross receipts may have no relationship to profit and should not be considered when determining the value of a station. The buyer is safe using the multiple gains applicable to most small businesses.

The top of the multiple range is about three times the average annual earnings recorded over the past three to five years, and can apply to a business with a vendor ready to help finance, lots of equipment in good repair, and a lease in the long term at competitive rates in the market.

The buyer who has “buy gas station business” on their to-do list, and is considering a business that does not offer these benefits, should consider that the correct price is approximately twice the average annual earnings. And many opportunities in the industry are valued using a multiple between two and three.

The entrepreneur looking to buy gas station business opportunities could invest in a company or companies that are very profitable and not too complicated to operate. But the benefits will only accrue to a buyer who is cautious to avoid the risks inherent in buying this type of business.