When a gas station changes hands, each side has things to do and things to watch out for. We have handled gas station purchases and sales across New York, and this page sets out what we have learned from them: what the buyer wants, what the seller wants, what the gasoline supplier and the landlord want, and what gets signed at the closing.
The buyer and the seller each have their own goals in the transaction. The contract period and the closing documents are where those goals are protected or lost.
What the Buyer Wants
A buyer has three things to focus on: operating without problems, paying as little as possible, and getting value for the money.
Problem-free operation means the buyer gets to run the station from the day of closing without issues. Getting a good deal means the lowest possible price from the seller, the lowest possible price on every lease, and the lowest possible price for gasoline from the supplier.
Value is what you pay measured against what you get. A station in excellent condition with a large volume of traffic is worth more than one in disrepair that sits empty. Owning the property is worth more than taking over a lease. A station with a record of earning income is worth more than a new station or one with a mixed record of income.
Due Diligence While the Station Is in Contract
To reach those goals the buyer performs due diligence during the contract period: a financial audit, an environmental study, an inspection and the other reviews below. Each should be done carefully and with competent professionals, because the contract period is when a price can still be renegotiated.
Financial audit
Examine the station’s filed tax returns, its books and records, and the statements from the gasoline suppliers, to confirm that the price set in the contract is fair. If it is not, it may be possible to renegotiate the contract.
Environmental study
A professional should conduct a “Phase I” environmental study: a physical inspection of the station and a search of county, city, state and federal records, to make sure the station has no environmental problems.
Inspection
A structural assessment of the buildings and of the underground structure, including the tanks. Double-walled tanks are best, to avoid future spills and environmental shutdowns. The payment system should be up to date and compliant with the chip standard.
Business study
Look at the long-term plans for traffic around the station. Nobody wants to buy a station that is about to lose traffic to a change in the road layout or a road construction project, so the outlook for the volume of traffic in the area needs to be analyzed.
Mechanic shop
If the station comes with an auto repair shop, find out whether the shop is an independent business or is being sold with the station, who is responsible for running it, whether it pays rent and to whom, and who is getting the income.
Inventory
Before the closing, take an inventory of the merchandise in the convenience store and pay only for sellable products unless the parties agree otherwise; the buyer should not pay for inventory that will be thrown out. Before paying for the seller’s inventory of gasoline, check the tanks for water.
Gas supplier audit
Contact the supplier and the franchise to confirm that the station is in good standing and has no pending branding termination.
Licenses and accounts
Find out how the licenses and accounts are transferred so the buyer can operate from the first day, and make sure the seller assists with those transfers.
Components of the Station Being Sold
A gas station is one business but several components, and the buyer should look at each one separately.
| Component | What to check |
|---|---|
| Convenience store | Experienced operators know that a large share of a station’s profit comes from the store, because margins are low on gasoline and high on grocery items. The store should be addressed in the contract, checked in due diligence, and inventoried thoroughly. |
| Gas delivery system | Confirm that the wells and the pumps are working correctly and are not in need of a costly repair. |
| Physical premises | Confirm that the premises are in good condition and carry no violations with the municipal, state or federal government. |
| Pumps and tanks | Find out whether the pumps and tanks are owned by the seller and included in the sale. If the station is leased, find out whether they are part of the lease. |
A New Corporation, or the Seller’s?
A buyer will usually want to form a new corporation rather than take over the seller’s. That lowers the chance of being on the hook for the seller’s past debts. Ideally the new corporation is formed before the contract is signed; if it was not, the contract can still be assigned to a newly formed corporation. Either way, the buyer should sign the documentation that makes clear it is not taking on the seller’s prior debts.
Asset Sale or Stock Sale?
The transaction can be structured as a sale of the stock of the seller’s corporation to the buyer, or as a sale of the station’s assets to the buyer. Getting this wrong can have serious tax consequences.
Seventy percent (70%) of businesses sold are asset sales, and most small businesses are sold as assets rather than stock. An asset sale usually makes sense for a partnership or an S corporation. Ask your lawyer and your accountant which structure works best for you.
What the Seller Wants
The seller wants to be paid as much as possible with the least expense, and to be out of all responsibility for the station once it is no longer theirs.
Getting paid means receiving the money before or at the same moment ownership is transferred. Ending responsibility depends on what is being sold: the lease, or the property itself with the land and the buildings. If the seller is assigning the lease, the seller wants to be released from the lease payments once the assignment takes effect. In either case the seller may want to dissolve the corporation it operated under as soon as that is feasible, to avoid future liability.
If the seller is financing part of the price by taking a promissory note from the buyer, the seller needs the note properly drawn and signed, with no conditions that would let the buyer out of paying it.
The buyer and the seller are the main parties, but a gasoline supplier is also involved, and sometimes a landlord.
What the Gasoline Supplier or Franchise Wants
A station’s gasoline supplier is often also the licensee of the brand, and there is usually an exclusivity agreement. The buyer may or may not have to take over that agreement on buying the station. Alternatively, the station can be a franchise that provides the branding and supplies the branded gas. Either way, the supplier wants the operator to commit to buying gasoline exclusively from it.
The supplier also wants the station kept in a condition that meets the brand’s standards. If it does not, the supplier will want a written commitment from the buyer to bring the station into compliance so that it does not lose the branding. The supplier may or may not impose a minimum purchase volume, and may offer discounts or rebates when a monthly volume target is met.
What the Landlord Wants
A landlord is concerned with getting the rent paid. The landlord wants to know that the buyer, its new tenant, is able to pay, and may run a credit check. The landlord should also make sure that all past rent and other expenses are paid before the transfer takes place.
Documents Signed at the Closing
A common set of documents is signed at a gas station closing.
| Document | What it does |
|---|---|
| Contract of sale | Sets the purchase price, the time for due diligence, the time for closing, any financing contingency and any seller-provided financing. |
| Amendments to the contract | Address issues that come up during the transaction. They tend to appear as new parties or new lawyers get involved. |
| Closing statement | Sets out how much the buyer is paying and how much the seller and the other parties are receiving. |
| Assignment of lease | Where the asset sold is a lease rather than the real estate, the lease is transferred from the seller to the buyer and the landlord approves the transfer. |
| Promissory note | Where the seller finances part of the price. The note must be solid enough that the buyer cannot get out of it. |
| Mortgage | If the gas supplier or anyone else holds a mortgage on the property, it has to be reviewed. |
| Exclusive petroleum agreement | The operator agrees to buy petroleum exclusively from one supplier in exchange for a good price and the branding. In a sense the supplier owns the franchise, not the operator, and the price of the franchise is built into the price of gas delivery. |
Those are the most important documents; a particular closing may require more. Because the parties have different intentions and the documents are complex, a gas station closing in New York should be handled by an attorney who has done them before.
If you are buying or selling a gas station in New York, call us at 212-233-1233 or email [email protected].
