Gas Station Purchase - Newbie advice

[Michael Schaffer]

Hello, my name is Michael. I'm new to this community, and new to investing in general. 

I've recently saved enough resources to purchase my first business, which I'm considering to be a gas station.

I've done many of my own calculations, and have looked at numerous listings on many different sites. But I'm wondering if there's a chance that someone on here has some more information and would be willing to share with me?

I'm located in the Southern California area...Orange county to be exact.

I would love to see a copy of financial statements from someone in the industry, so I can simply see a example of what type of expenses & margins I can expect.. 

Thank you all very much!

[Charlie MacPherson]

@Michael Schaffer  Gas stations present some unique challenges.  Most significant are environmental issues centering around past or present leakage of petroleum products into the ground.  If you buy a polluted property, it's highly likely that the cost of cleanup is yours.

I've represented a few gas stations in Massachusetts, so from experience I can tell you that you'll need a current environmental survey.  Part of that means that the underground tanks and pipes leading to the pumps have to be up to current code.  In Mass, that means that all components are double-wall, non-corrosive (fiberglass). 

There are strict monitoring requirements to ensure that every gallon that goes into the tanks is either remaining in the tanks or has been pumped out.  Most use what's called a Veeder-Root system for that.

There are/were quite a few single-wall stainless tanks in use.  Those now have to be replaced - and your state may have similar restrictions, so check into that in advance. 

Replacing three 10,000 gallon tanks (hi-test, regular, diesel) can run $150,000.  (Mid grade is usually a 70/30 blend of hi-test and regular, not needing a 3rd underground tank).

You should also do a Phase I environmental survey.  If it's not satisfactory (or even questionable), a Phase II is in order - in fact, your lender will most likely require it.

Assuming that all the environmental pieces are good to go, you then need to evaluate the business itself. 

Are there gas delivery contracts in place that you're going to inherit?  If so, how long are you committed to buy gas from a particular supplier and at what rate?  I've seen deals that are "rack + $0.03/gallon" and others that get much better deals.  Some at a few cents less than rack rate.

If the station is pumping 60,000 gallons per month (or more), that few cents per gallon adds up quickly.

The stations who make the best profits negotiate price on a delivery by delivery basis - and they pay cash.  More work, but more profit.

What other income is there?

There are two basic models.  Gas + convenience store, where the gas sales are mainly a tool to draw customers into the C-store.  Many of these make more profit on a bottle of soda than on 10 gallons of gas.

The other model is Gas + auto repair / inspection / sales.  There, gas just adds profit to repairs and car sales.  Of course, you have to be certain that the town has issued a license for the number of used cars for sale.  These can make more profit on selling one used car than on 5 days worth of gas sales. 

Inspection stickers are another BIG profit center.  In Massachusetts, the number of inspection machines is limited by the state.  An inspection machine can be valued at anywhere from $75,000 to $150,000, depending on how busy the station is.  Other states are probable less insane than Massachusetts, which isn't saying much..

For valuation, think (ODI X 2.5) + land value + assets + inventory.  An especially prosperous location might go for (ODI X 3) + land value + inventory.  ODI is Owner's Discretionary Income.  And in the case of Massachusetts, the value of the inspection machine is added to all that.

Expect (and contract for) inventory to be transferred at actual cost, supported by invoices.

I hope that helps!