When buying or selling a gas station, there are things you need to do and things you need to watch out for. As a law firm that has helped dozens of clients buy or sell a gas station all over New York, we are providing this article to share some of our experience. If you would like our law firm to actually represent you in the transaction, give us a call at (212) 233-1233 to discuss the details.
The buyer and the seller each have their own goals that they need to accomplish in the gas station sale.
What the Gas Station Buyer Wants
In buying a gas station, the buyer needs to strongly focus on his goals:
Problem-Free Operation – The buyer wants to make sure that he gets to operate the gas station without any issues.
Getting a Good Deal – the buyer wants to get the lowest possible price for the gas station from the seller, lowest possible price on all leases and the lowest possible price for the gasoline from the supplier.
Getting Value – it’s not only what you pay, but also what you get for your money. A gas station in excellent condition with a large volume of traffic is worth more than a station that is in disrepair and sits empty. Ownership of the property is worth more than taking over a lease. A gas station with a record of earning income is worth more than a new gas station or one with a mixed record of income.
What the Buyer Needs to Accomplish While the Station is in Contract
To accomplish his goals, the buyer needs to perform due diligence on the gas station. This includes a financial audit, environmental study, inspection and other things described below. As a buyer, you want to make sure you are getting the most out of your investment, so perform the following studies carefully and with the assistance of competent professionals:
- Financial Audit – Examine the gas station’s filed tax returns, books and records and statements from the gasoline suppliers to make sure that the price set in the contract is fair. If the price is not fair, it may be possible to renegotiate the contract.
- Environmental Study – a “Phase I” environmental study should be conducted by a professional. This includes a physical inspection of the gas station and a search for documents with the county, city, state and federal governments to make sure that the gas station does not have any environmental problems.
- Inspection – Perform a structural assessment of the buildings and the underground structure, including the tanks. It’s best that the tanks are double-walled, to avoid future spills and environmental-related shutdowns. Make sure the payment system is up to date and compliant with the new chip standard.
- Business Study – Perform a study on the long-term plans for traffic around the gas station. You don’t want to buy a gas station that is about to have a drop in traffic or re-routing due to a change in road layout or due to road construction projects. You’d also want to analyze the outlook for the volume of future traffic in the area.
- Mechanic Shop – If the gas station comes with an auto mechanic shop, check if the auto mechanic is an independent business or is being sold with the gas station. Look at the other aspects of the mechanic business as well, such as who is responsible for running it, is it paying rent and to whom and who is getting the income.
- Inventory – before the closing takes place, do an inventory of the merchandise in the convenience store. Make sure that they are only paying for the sellable products unless agreed otherwise with the seller. You don’t want to pay for inventory that you’ll have to throw out. Before paying for the seller’s inventory of gasoline, the buyer needs to check for the presence of water in the gasoline.
- Gas Supplier Audit – get in touch with the gas supplier and franchise and make sure that the gas station is in good standing and does not have a pending branding termination.
- Transfer Licenses and Accounts – Investigate the process or transferring licenses and accounts so that they can start operating the gas station right away. Make sure that the seller assists in transferring licenses and accounts
Components of the Gas Station Being Sold
Although a gas station is one entity, it is actually made up of several components. It is important for the buyer to pay attention to each one of those components individually:
Convenience Store – Savvy gas-station operators know that a large share of the gas station’s profit comes from the convenience store. This is because margins are low on gas sales but high on grocery items. It’s important to address the convenience store in the contract, to perform due diligence and check that the store is operating properly, and to conduct a thorough inventory.
Gas Delivery System – Perform your due diligence to make sure that the wells and the pumps are working correctly and are not in need of a costly repair.
Physical Premises – Make sure that the physical premises of the gas station are in good condition and don’t have any violations with the municipal, state or federal government.
Pumps and Tanks – Make sure you understand whether the pumps and tanks are owned by the seller and are included in the sale. If you are leasing, find out if the pumps and tanks are a part of the lease.
Set Up a New Corporation?
The buyer may want to form a new corporation and not take over the corporation of the seller. This way, there is a smaller chance of being on the hook for any of the seller’s past debts.
This should have been done before the contract was entered into. But if it was not done, it is still possible to form a new corporation and assign the contract to the new corporation.
It’s in the interest of the buyer to make sure that they avoid any responsibility for any of the seller’s prior debts. The buyer should execute the appropriate documentation to that effect.
Or Decide to Do an Asset Sale or Stock Sale?
When buying or selling a gas station, the transaction can be done as a sale of the stock of the seller’s corporation to the buyer or as a sale of assets to the gas station to the buyer. There can be serious tax consequences to not getting this right.
Seventy percent (70%) of businesses sold are asset sales. Most small businesses are sold as assets, not as stock. Usually, an asset sale would make sense in most partnerships or S-Corporation. However, ask your lawyer and accountant what works best for you.
What the Seller Wants
The seller should focus on his goal of getting paid as much as possible for the gas station with the least amount of expenses and make sure he gets out of all of the responsibility relating to the gas station once it’s no longer his.
Getting Paid – the seller needs to make sure he receives payment before or simultaneously with transferring ownership of the gas station.
End of Responsibility – The seller is either selling the lease for the gas station or the actual property which includes the land and the buildings. If the seller is selling the lease, he wants to make sure that he’s no longer responsible for the lease payments once the lease is transferred. The seller may want to look into dissolving the corporation under which it was operating as soon as that’s feasible, so as to avoid any future liability.
Keep the Promissory Note Payments Coming – If the seller is financing a part of the transaction, allowing the buyer to pay with a promissory note with a stream of payments, the seller needs to make sure that the promissory note is property made and signed and that it does not contain any conditions which will make it possible for the buyer to get out of paying the promissory note.
Although the buyer and the seller are the main parties to the gas station sale, a gas supplier is also involved, and sometimes a landlord.
What the Gasoline Supplier or Franchise Wants
A gas station’s gasoline supplier is often also the licensee of the brand. There is usually an exclusivity agreement. The buyer may or may not have to take over the responsibility for the exclusivity agreement upon buying the gas station.
In the alternative, the gas station can be a franchise that provides the branding and supplies the branded gas. Either way, the gasoline supplier wants to make sure that the operator of the gas station commits to buying gasoline exclusively from the supplier.
Either way, the company supplying the gasoline and the brand wants to make sure that the gas station is in a condition which complies with the gas station brand’s standards. If the gas station does not comply with the brand’s standards, the gas supplier wants to make sure that he gets a written commitment from the buyer to bring the gas station within compliance so that the gas station does not lose the branding.
The gas supplier may or may not impose a minimum purchase volume requirement and may provide discounts or rebates when a certain monthly purchased gas volume target is met.
What the Landlord Wants
If there is a landlord involved, they will be concerned with getting the rent paid. A landlord would want to make sure that the buyer, who will be their new tenant, is someone who is able to pay the rent. They may want to run a credit check on the potential new tenant. The landlord should also make sure that all of the past rent and other expenses are paid before the transfer takes place.
Documents that will be Signed at the Closing of the Gas Station Sale
There is a common set of documents which need to be signed at closing for buying a gas station or selling a gas station:
- The contract for Purchase of the Gas Station – The contract defines important things such as the purchase price, time for due diligence, time for closing, financing contingencies and seller-provided financing.
- Amendments to Contract – sometimes issues come up during the gas station transaction which needs to be addressed in an amendment to the contract. Amendments to the Contract usually come up as new parties or new lawyers get involved in the transaction.
- Gas Station Closing Statement – the closing statement sets forth how much the buyer is paying and how much the seller and other parties are getting paid.
- Assignment of a Gas Station Lease – if the asset being sold is a lease as opposed to the real estate, then the parties need to sign an assignment of lease, where the lease is transferred from the seller to the buyer and the transfer is approved by the landlord.
- Promissory Note – If the seller is financing a part of the sale, then he will need a promissory note from the buyer. The seller needs to make sure that the promissory note is solid enough that does not allow the buyer to get out of it.
- Mortgage on the Gas Station – If the gas supplier or someone else has a mortgage on the property, that mortgage will have to be reviewed.
- Exclusive Petroleum Agreement – There is usually an exclusive petroleum agreement or gas purchase agreement in which the operator of the gas station agrees to buy petroleum exclusively from one supplier, in exchange for a good price and the branding of the gas station. In a way, the gas supplier owns the franchise, not the gas station operator. The price of the franchise is included in the price of gas delivery.
Although those are the most important documents, more documents may be required to complete the transaction. When buying or selling a gas station, different parties have different intents and there are quite a few complex documents that need to be handled. For that reason, we recommend that a gas station closing in New York be handled by an attorney who has experience conducting gas station transactions and closings.
The information here is for general consumption and is not legal advice for your particular situation. If you would like to consult with us about buying or selling a gas station in New York, call The Law Offices of Albert Goodwin at (212) 233-1233.