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6 Factors To Consider When Buying A Gas Station

Gas stations are a great business to franchise because the demand for fuel in America is constant and not going anywhere. Our country literally runs on gas. People need to drive to work and trucks need to carry goods across country. Gas stations are a $250 billion a year industry. There are over 120,000 gas stations in the country. More than 80% also have a convenience store attached to them. This is a big business. Now is a great time to claim a piece for yourself.

If you are considering the purchase of a gas station or about to sign a gas station purchase or franchise agreement, there are a number of legal factors that you must consider and discuss with your business lawyer. In New York and New Jersey, although the purchase of a gas station represents a unique business and investment opportunity, a number of contract, legal, and business due diligence factors must be considered prior to signing a purchase agreement.

As a prospective purchaser, you must consider and evaluate the following issues:

Is the Gas Station a "Franchised" or "Independent" Operation?

Gas stations typically fall within the category of "franchised" or "independent" station. Franchised gas stations are owned and operated pursuant to a Franchise Agreement with a national supplier such as Exxon, BP, and Sunoco. Independent stations are not supported by any national supplier and, basically, sell "unbranded" fuel procured from an assortment of regional suppliers.

With the primary advantage to a "franchised" station being the name recognition, trademarks, trade design, and canopies associated with the national brand, owners of "franchised" stations are franchisees and parties to a franchise agreement. As a business purchaser, it is critical to evaluate the advantages and disadvantages of franchised and independent stations.

If the gas station you are purchasing is a "franchised station," some of the many issues you must consider and discuss with your lawyer include:

  • The terms of the franchise agreement and whether or not the franchisor will approve your purchase of the station;
  • Quotas / requirements for fuel sales;
  • Rebates that may or may not be paid to you for fuel sales;
  • Issues as to ownership and maintenance of fuel pumps and tanks.

Will Your Gas Station Also Have a Convenience Store?

Of course, selling fuel is the main business of your gas station. It is the one product that brings people to your business. What most people don't know is that margins are low, and gas stations make most of their money from selling other items. Convenience-store products like candy, sodas, and cigarettes bring in big revenue. This is why it's getting rarer and rarer to see a standalone gas station that doesn't have a store attached to it.

Does the Seller Own the Pumps and Tanks?

Station pumps and fuel tanks serve as the most critical assets that will affect the day-to-day operations and profitability of your business. Not every seller of a gas station owns the pumps and tanks, which may be owned by the national franchisor (for franchised stations) or the property owner (where the gas station is located on leased property).

If you are evaluating the purchase of a particular gas station, you must determine:

  • Who owns the "pumps and tanks";
  • Whether or not the sale includes the transfer of the "pumps and tanks":
  • If the property where the station is located is leased; the terms of the lease including the remaining terms, rent, and whether or not the landlord will consent to an assignment of the lease;
  • What is the repair history of the pumps and tanks; the remaining useful life of these critical assets and whether or not the pumps and tanks comply with current regulatory requirements.

What Is the Environmental History of the Station?

As the purchaser of a gas station, one of the issues you must consider and protect yourself from relates to the potential existence of contamination. Environmental concerns are critical, as any environmental contamination (especially if discovered after you buy the gas station) will require expensive remediation that may shut down or significantly limit the future operations and profitability of your station. For the purchase of a station, you must consider and evaluate the utilization of an "environmental contingency clause" in your purchase agreement and you must obtain a Phase I environmental site assessment. In my article, "The Importance of an Environmental Site Assessment," I discuss and address these environmental issues in detail. If you are buying a gas station, I strongly recommend that you review this article.

So, when buying a gas station, some of the important factors to evaluate include:

  • The results of an environmental site assessment evaluating the environmental history of the gas station property and, if needed, a sampling and study of the underground property;
  • The need to have mandatory double-lined tanks;
  • State-specific laws concerning gas stations;
  • Lingering environmental litigation that the current owner may have been involved with.

Know the Risks of Gas Station Investment

Investing in any business carries multiple risks, but gas stations pose distinct risks. More than just about any industry, the success of your station depends on traffic. Know the long-term plans for the area you want to open in: is it going through a lot of construction? Long building projects could hurt your business by blocking access to your station.

The environmental history of the station is important (see above), but the future environment is more important. Do some research and make sure your location has double-walled tanks to keep leaks and environmental problems from shutting you down.

Do You Have a Gas Station Business Plan?

Putting together a business plan will give you focus and direction. It will also make setting up your gas station business easier. Think of the steps below as things to check off when you're starting out.

  • Know the Products and/or Services Your Gas Station Will Offer – This is the most important step of the process. You know you're going to sell gas. But what else? Are you going to have a convenience store? Are you going to offer mechanic services? Know what you can do and what you can't before anything else.
  • Set Up Who Is in Charge – Every business needs an organizational chart. This helps people know who they have to report to (or even what their jobs are).
  • Think About How Much Staff You Need – After deciding which titles go where, you need the people to staff your business. In your plan, consider the number of staff you need to operate, which shifts they'll break down into, and salary ranges.
  • Plan Your Advertising Strategies – Most gas stations are franchises, so you already have a brand people know. But, you still have to get YOUR business out there. Make a list of places you'd like to advertise and how much money you can spend. If you run an Arco, 76, or Shell, commercials are for the national audience. Think local.
  • Remember Insurance, Taxes, and Other Expenses – Gas stations aren't like most businesses. You’ll have to pay for specific insurance, permits, and taxes. Your insurance will have to cover fires, explosions, and other liability concerns most business don't have.

Steps to Take

1. Make Sure Your Purchase Agreement Includes an "Environmental Contingency Clause"

When purchasing a business, you will be faced with a number of critical issues that must be decided in a relatively short period of time. However, when investing your life savings in a business, time constraints are not an excuse for shortcuts. An environmental contingency clause will allow you to sign a purchase agreement and still give you time to complete your due diligence evaluation of the property's environmental history. For example, an environmental contingency clause could be structured so that, after contract signing, you are given an additional period of time to obtain an environmental site assessment and complete your due diligence. If contamination is discovered, your contingency clause could be structured to let you cancel the contract and get your deposit back or require the seller to remediate the contamination. Keep in mind that your business purchase agreement is a "flexible" document that may be drafted by your business lawyer to protect your interests. Always discuss any concerns or issues that you may have with your business lawyer.

2. Obtain an Environmental Site Assessment

An environmental site assessment, also known as a Phase I study or "ESA," is a preliminary investigation and evaluation of a property's "environmental history." Typically viewed as the first step in the "environmental due diligence" process, ESAs focus on the documented history of a property and prior issues of contamination. ESAs typically do not include soil samples or testing but may uncover serious incidents of prior contamination. If the Phase I study indicates the potential existence of prior contamination, additional studies may be warranted.

3. Even If You Are Leasing the Underlying Property, Prior Contamination Must Still Be Evaluated

When purchasing a gas station involving only the lease of the underlying property (as opposed to the outright purchase), you must nevertheless be concerned about prior contamination.

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