5 Reasons to NOT Buy a Gas Station
Is Buying a Gas Station a Good or Bad Investment?
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Top 5 reasons not to Buy a Gas Station - By Robert Edwards
Here at Franchise City the vast majority of calls we get from investors are seeking a Subway, Gas Stations or a 7-11. All of us here are also franchise and business owners yet how many of us own a Subway, a 7-11 or a Gas Station? The answer is zero. I'll leave that to your imagination why.
Now I did once know a broker who owned a gas station in a great location. It was worth about 2 million dollars. So let me begin by saying if you can afford a gas station in a great location, and these don't come up for sale very often because they are good moneymakers, you could consider buying it. But good location and traffic gas stations are rare and typically sell for over 1 million.
What people are usually calling us about however is one of the "great deals" they saw on Bizbuysell or a similar website. You can see here how many are for sale some of them as low as $13,000. And armed with exactly zero business knowledge they speak with the seller who tells them how much potential there is in the business, and how they have to sell because of a sick parent back home, or how another business is taking up their time, but for the right person this location is a goldmine!
You, the buyers eyes light up and you write a check envisioning going on cruises as your gas station back in the USA pumps out the cash. Of course once you actually invest you quickly discover the downsides of running a gas station franchise. Well hopefully I can give you the other side of the story. We hear the downsides often from people who bought these franchises and now want to sell them, often at a loss just to get out. There is good and bad to every story, the seller gave you all the good now lets give you the bad and you can make a decision from there.
Lets start with an interesting statistic. According to the NACS 2017 Retail Fuels Report, 59% of gas stations in the U.S. are one owner-operated. They own one store and often that store is attended by the owner. That type of business is what we call buying a job. The owners aren't working in the business because it makes so much money they are working there because they have to. Also interesting to note is that most major oil companies have sold off all or most of their fuel station holdings. Do you think you as a small business buyer have more market knowledge than the best business minds hired by the oil companies? Big oil is getting out of gas stations that should be a warning sign as should the huge number of single store owner operators. Many of these are struggling business owners making a living on very small margins. Which bring us to the next point:
1. Small Margins. Here is a great infographic from the Orange County Register on where $50 spent at the pump goes. $30.75 to the oil company, $7.00 to the refineries, $6.00 on taxes, $4.00 to the delivery company, $1.25 on processing and transaction fees and finally right at the end of the chain you get $1.00. And that number can and does change sometimes even lower most owners suggesting an average of 1-3 cents net per gallon. If you speak with gas station owners as we do or even just visit forums and chatrooms with actual gas station owners most will tell you the gas is just a way to get people to the location and they actually make their money on cigarettes, soft drinks, coffee, and snack foods. But a huge problem today is more and more gas buyers are paying at the pump and not even entering the store making it even less profitable. But you will still have non driving walk in traffic leading us to reason #2 - rough customers
2. Most cheap gas stations are located in less than desirable neighborhoods and open 24 hours a day. And lets face it most gas stations are often frequented by some interesting people particularly in the late and early morning hours. We all watch Youtube and see some of the crazy stuff that happens in convenience stores and gas stations. That will also be happening to you - is that something you want to deal with? Ask your seller if they have ever had any issues where they had to call the police, and Google the address and see if any crime reports come up. There are over 7000 robberies each year at gas stations and 15,000 at convenience stores which is disproportionate in relation to other businesses.
3. Franchising. Now there are many situations where the franchising model works. In my opinion gas is not one of them. In fact if you are at the mercy of buying only one companies gas at a fixed price, being unable to shop for better pricing, stuck with every promotion they decide on as well as having to pay franchise royalties and fees with your already slim margins, being profitable can be difficult.
4. Environmental issues.This is a problem specific to gas stations. Are the tanks leaking? If so the cost of cleanup can be costly. Many unwary buyers found themselves on the hook for huge bills because they chose to survey only assets that were above ground.
5. At the mercy of potential construction. Some unethical sellers pull a fast one and after determining that weeks or months of construction will make their location inaccessible put it on the market. Always check with the local department of transportation prior to making an offer on a gas station. Or any business for that matter.
Now in closing yes I understand that gas stations and convenience stores CAN be a good business or franchise. In these videos I provide the negative side because as we all know the seller is only giving you the good side. An business decision that has considered both the bad and the good is an educated one.