In most cases, the process of undertaking a gas station valuation can be a complicated endeavor, but the gas and convenient store industry is highly fragmented.
Gas Station valuation
The following are some trends within the Gas and Convenience store industry
- The people that brought the suit allege that when gas is pumped at temperatures greater than sixty degrees consumers get less gas than they should due to expansion. If successful, the suit would require retrofitting pumps which would be a significant cost for all gasoline retailers
- The financial performance of convenience stores that offer gasoline has been negatively impacted during recent periods of high gas prices. Reduced gasoline consumption due to high prices is not only impacting the volume of gas sold at retailers, but is also reducing the amount of customers that come in to buy food and beverages when they fill up their tank. Food and beverage sales offer higher margins than gasoline sales and the loss of these sales has had a negative impact.
- Credit card fees continue to be a significant and growing expense for convenience stores. The total industry credit card fees have grown at a rate of 27% over the past 5 years and are the second largest expense at the store level in US.
There are four different types of valuation methods that can be used to value gas and convenience stores, these methods are:
- Asset-based valuation.
The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity. This is approach also sometimes referred to as a cost based approach where the value of the business is equal to the cost of acquiring its assets with the same utility. This approach is seldom used for a gas and convenience store because the value of a convenience store is more closely related to its earnings and cash flow.
- Income approach to value.
This method is most the accurate for gas and convenience stores that have a constant growth of earnings and have a long history of operations. This method is equal to the cash flow projection for one year divided by the capitalization rate. The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established convenience stores with low growth rates as well as newly opened stores with higher rates of growth.
- Cost Approach.
is used to allocate going-concern assets by residual technique; if residual is positive business value is present, if negative no business value is realized and the subject likely suffers from functional and or external obsolescence.
- Gross Profit X GPM = $ Going-Concern Value
- NOI ÷ OAR = $ Going-Concern Value
- Going-Concern Value - Cost Approach = $ Business Value (Functional/External Obsolescence)
- Market approach to value
This method utilizes market indications of value such as publicly traded comparable company stock as well as acquisitions of privately held gas and convenience stores.
Availability of publicly Traded and Purchase
Many of the top convenience store retailers are publicly traded; however, most of these public companies are primarily oil companies and are not good comparisons to a convenience store with or without gas.
Stores that sell gasoline typically have a higher multiple than stores that do not. This range of market multiples is too variant to be useful without further analysis.
A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which obviously affect convenient stores as investment opportunities. Specific factors that are unique for each store or business must be considered.
Some of these factors include:
- Is the real estate owned or leased.
- The duration of the lease and landlord/tenant relations.
- The proximity of the facility to highly populated areas and freeway access.
- The condition of the store.
- The history of the operations and financial performance.
- The competitive environment of the local area.
- Franchise or Non-franchise.
- Economic Life Vs Physical Life
Unlike most commercial properties where it is commonplace to put aside replacement reserves, this is not the case with gas station and car wash operators. The wear and tear and these property types is perhaps greatest of all with expensive government regulations and compliances that often require significant upgrades and capital outlays that are unforeseen. For these reasons economic lives for car wash buildings, gas stations, and cstores are accelerated. This is proven by the appraiser relied upon cost manual published by Marshall and Swift that shows most commercial buildings with 35 to 55 year lives while gas station, car washes, and c-stores have reduced economic lives between 20 and 45 year lives.
- A final option when remaining economic life thresholds cannot be met though timely and costly is renovating or upgrading the facility such that economic life is extended to meet and or exceed loan maturity thresholds.