Four Make-or-Break Questions You Must Ask Before You Buy a Gas Station or You Buy a Convenience Store
By Richard Parker: President of The Resource Center for Buying a Gas Station/C- Store™ and author of How To Buy A Good Gas Station/C-Store At A Great Price© .
When you buy a gas station or a convenience store, there will be dozens and dozens of questions that you need to ask the seller. They are covered in depth in our new program, How to Buy a Good Gas Station/Convenience Store at a Great Price, so don’t miss them.
But some of these questions are so critical; I want to highlight them for you here.
Question #1: “Do you have unreported income from cash sales?”
No matter how “normal” it may be for gas station/convenience store owners to take cash from the business without documenting it on their statements – or declaring it on their tax returns - that is THEIR choice. They cannot expect you to count that income as you evaluate the business and arrive at a price that you will pay for it.
They cannot expect to have it both ways. If they were cunning and dumb enough to hide income from the tax department, they certainly cannot expect to get the benefit a second time in valuing the business – and expecting you to pay more for it.
My philosophical approach – which has been tested by countless buyers of all kinds of businesses - has always been:
“If the seller can’t prove it, you can’t pay for it!”
You’re likely to encounter situations like these as you shop for your station/store! Don’t get drawn into the game of trying to estimate unverified income. It is up to the seller to document and prove the sales to you! Otherwise, how can you determine the real revenues or value?
Question #2: “Do any members of your family, or other individuals, work in your station or store without reported compensation or for less than competitive wages?”
There are several reasons you need to ask this – and need to be sure that the answer you get is true.
First of all, you need a realistic estimate of the work hours that are needed to run the business. Will you need to hire eight employees to work 20-hour weeks, two workers who will work 40-hour weeks – exactly what? In order to put a value on the business and know how much it will cost you to run it, you need that information.
A quick “ballpark” estimate can alert you to lies that the seller is telling you. First estimate how many employees it takes to run the business at any time. Multiply that figure times the number of hours the business is open. Do those numbers come close to matching up against what the seller is reporting for payroll hours?
Example: If the business requires a minimum of two people to be on site at all times and the business is open 112 hours a week (7 days a week from 7:00 A.M.-11:00 P.M.), that means you need a total of 224 employee hours. (Note that this might not include the number of hours you spend on the premises.) If the seller’s records show that he or she is only paying for 70 employee hours, the seller may not be telling you the truth. Here’s what the Seller might be doing:
- Practically living at the station/store and working round the clock.
- Using family members and not paying them a market wage.
- Employing illegal workers and paying them off the books
You ought to know that too!
Question #3: “Who is responsible for environmental compliance?”
If new state laws are enacted that require all stations to install a new kind of underground fuel tank, for example, who will be responsible for paying to have them installed? If a state inspector arrives and determines that your valves, pipes or vents need to be replaced, who will pay for that? If the state EPA determines that an underground spill is contaminating the soil under your station, who will pay tens of thousands of dollars to have that problem rectified?
There are many possible answers to these questions. If the business is a franchise that is located on land that is owned by a major oil company that company will generally be responsible for all environmental-compliance expenses. If the business is an independent station located on land that is leased from an independent landlord, that landlord will generally be responsible for clean-ups and compliance. (But make no assumptions! You need to get such critical issues clarified in your agreement before you buy.) And if you own the business and the land, you are probably on the hook for all expenses.
Because the costs of environmental compliance can be astronomically high, make sure to ask these questions – and have your attorney take steps to be sure you are protected by writing appropriate language into your purchase agreement.
Question #4: “Have you ever had a crime here, or been involved in a lawsuit?”
Be sure to have your attorney investigate this issue too. If a customer was injured on the business’s premises, you can get mixed up in an unpleasant legal situation – even if the injury occurred before you bought the business. And if the business was cited for an environmental infraction, you need to know that too, in case more problems arise in the future. An ounce of prevention, as they say, is worth a pound of cure.
In summary . . .
Ask, ask, ask – and then have your attorney investigate the seller’s answers too, to be sure there is a grain of truth in them. Also have your attorney write protections for you into all purchase documents.
Note: The questions covered in this article are only the tip of the iceberg where your protection is the issue. For in-depth coverage, be sure to read our complete guide, How to Buy a Good Gas Station/Convenience Store at a Great Price.
This article represents a fraction of what you’ll learn in How To Buy A Good Gas Station/C-Store At A Great Price© - the most widely used reference resource and strategy guide for anyone thinking about buying a gas station. Read a detailed listing of what you'll learn.