Gas station / convenience store / liquor store due diligence

[Joseph Stewart]

Hello! I am close to putting a gas station / convenience store / liquor store under contract. $8M asking price, $3M to business, $5M to the real estate. The sellers are requesting what I consider an unusually short due diligence period to evaluate the business side -- only 20 days. They are ok with allowing a 60-day DD period to evaluate the real estate itself (given that environmental inspections and whatnot will likely take that long). I'm concerned about evaluating the business that quickly, and of course the red flag inherent in a seller trying to "rush" things along. Supposedly the 20 days is non-negotiable at this stage. I'm willing to pay their asking price (if the numbers hold up, it appears to be around a 13% CAP rate with very little competition) and the other terms we've negotiated have been acceptable. I'm just debating walking away over this DD timeframe, but thought I'd reach out to see if anyone has any guidance here.

Given that the owners own some other similar properties, one of my big concerns is that they could easily be running expenses against a different business, to the benefit of the subject property.  For example, buy a case of product under Company B's books, but sell it through Company A.  Company A therefore appears more profitable.  Given the huge number of individual inventory items in a convenience store and liquor store, selectively doing this would presumably be pretty hard for me to track down.  Or using employees that are being paid by Company B, to work at Company A.  Etc.

I'm wondering if anyone has any suggestions for how to best conduct due diligence on this type of business, what other common trickery or red flags should I be on the lookout for?  I obviously plan to request detailed POS reports, purchase receipts, bank statements, payroll reports, tax returns, and all the rest, but I'm not sure I can dig into all that within 20 days.

Thanks in advance for any guidance!

[Alex K.]

See how they keep track of inventory once’s it’s purchased

The Key thing to to look for is How they account for inventory purchased on the books.

Are they listing new inventory on the books at retail price  or the price they purchased the bulk order for? 
compare your findings with what’s on POS. 

How often is POS updated and by who. 

Taxes for 10 years. P&L for 10 years. 
5 minimum. 

Check lottery and bill payment for sales and Any delinquent balances and if the same named entity matches for lottery licensing and business licensing for Liqour throughout the full period of ownership. 

The pattern they purchase fuel at. 

Have an attourney or consultant review and verify any and all contracts and accounts Including fuel supply contracts, Wholesale distributor contracts and other vendors such as  Frito lay, Pepsi etc. 

Make sure the Inventory coming in and going out is all aligned within the books at the true rate it’s purchased and sold. 

How long have they owned the property and business? How many times it changed names or franchises over the years. 

Phase I Esa 

Phase II esa 

who manages the business? 
are employees W2 or not? 

Check with local municipalities especially with Planning and zoning if there are any new proposals for grocery centers like Kroger or Meijer with fuel stations or any new developments being proposed in the local vicinity that would affect the business. 

Any road work or long term construction projects in the near future that would  affect traffic to the business. 

The pumps. 

Camp out the traffic for 20 days. Early morning rush, Midday, after work, weekends and evenings. 

Any Decent fuel station with Liqour should be a minimum of 1.5m+ or else you may be buying a full time job. 

A lot of moving parts and a lot of loopholes in that business especially if owners have been planning to sell. I’ve seen many inflate numbers and dump and repeat in my market. 

If you don’t know the business I would find someone that does Know the business. The ins and outs and pay them well for the due diligence process.