Frequently when people purchase gas stations and convenience stores, they are short on capital. If you have found some gas stations for sale and you intend to purchase one, it probably would be wise not to immediately sign a fuel supply agreement with a local supplier (jobber) unless as part of the purchase agreement you are supplied by a specific supplier.
Because fuel suppliers will make a profit off of the sale of your fuel that you sell, it is in both your and the supplier’s best interest to have the best possible fuel supply agreement. Frequently fuel suppliers will offer incentives in exchange for a long term fuel supply agreement, typically ten years.
Assuming that the buyer is purchasing the site for $1,000,000 and has 15% or $150,000 to put down as equity. The lender might require a lower loan to value (LTV) and might only want to finance 80% of the purchase. In this case, you may be able to approach the fuel supplier for $50,000 or 5% of the purchase price in exchange for the long term fuel supply agreement.
The way that the “incentive” is paid back is by earning less of a profit (or pool margin) on your fuel. Nationwide the average profit margin is 8-13 cents per gallon of gas, although this has fluctuated the past few years with the rise in fuel prices. Typically, operators and dealers will pay one to two cents over rack price plus transportation. The jobber might have them pay an extra penny over rack until this $50,000 is paid off.
Let’s assume that the station is selling 75,000 gallons per month and the fuel supplier (jobber) is requiring the dealer to pay an additional penny per gallon. 75,000 gallons or 900,000 gallons per years at a penny per gallon = $9,000. The $50,000 advance would be paid off in a little less than five years.
Frequently jobbers will also offer additional incentives to re-brand their station from one major brand to another. This might entail changing the entire image of the site and changing the flag or brand of the station.
Dealers can also frequently get jobbers to pass on their rebates from oil companies as incentives, but these are normally for higher volume gas station.
The pros of this is less money initially out of pocket and perhaps you will qualify for financing whereas without the equity you may or may not. On the flip side, an underwriter will also take this penny per gallon to see how it would impact the cash flow. There also may be some restrictive covenants in the fuel supply agreement if you elect to have the fuel supplier provide incentives or capital.
You should always consult a petroleum attorney to weigh the pros and cons of these arrangements.
Harold Jaynes is with PetroMAC, the premier source for financing gas stations and convenience stores nationwide. You can find out more information on the industry and financing this asset class at https://petromac.com