Top 7 Reasons NOT To Buy A Gas Station
As the trusted business advisor to many foreign nationals looking to move to the U.S. on an E-2 visa, we at Plan Immigration have received numerous inquiries regarding the viability of gas station investments like Chevron, ExxonMobil and Shell.
Many clients express interest in gas stations as many have owned or currently own gas stations that generate solid profits for them and their family back in their home countries. From our deep-dive research and conversations with various gas station brokers and experts, Plan Immigration strongly believes that there are other potential E-2 business visa investment options as well as EB-5 business visa investment options that are available and have significantly higher potential for return on capital.
1. Due Diligence Issues
Most available gas station investments involve existing gas stations that are for sale, which brings many issues with due diligence. Unless the gas station is in a rural area of the U.S., it is very difficult to find an available urban location. Therefore, many times the only option would be to buy an existing gas station business.
However, many due diligence issues arise with buying any existing business, especially an existing gas station. For instance, the financial figures in particular are likely to be inflated and fraudulent.
It is important to consider that if a gas station is actually earning money and a good return on investment then it would be extremely rare for the owner to want to sell the business. A good question to ask is – why would any want to sell a profitable, operationally simple business?
2. Cost And Time Of Due Diligence Process
If one does decide to buy an existing gas station, then they would be strongly advised to perform an in-depth due diligence of the gas station business. While gas station brands such as Chevron, ExxonMobil and Shell are well known and public companies, it is the individual franchisees that are the ones who would be providing the financial figures for a potential investment in an existing gas station. Performing a proper due diligence is a costly and time consuming endeavor. Costs can range in the thousands of dollars as the company or person performing the due diligence should be well-qualified with years of experience performing due diligences (generally an attorney or accountant).
3. Owner-Operator Model Of Gas Stations
The majority of gas stations in the U.S. are owner-operated businesses. According to the in-depth NACS 2015 Retail Fuels Report, 58% of gas stations in the U.S. are owner-operated. The driving force behind this has to do with gas station business model where it may be quite difficult for an operator to generate enough revenue and profits in order to hire a general manager. This means that the gas station owner needs to spend more of their time working at the station in order to achieve a better return on their investment. At Visa Franchise, many of our clients prefer businesses that they would start operating themselves before moving to a more executive role as the business matures, and gas stations typically do not present this opportunity to investors.3
4. Highly Competitive Market
Gas station operators must deal with the fact that they are competing in a highly competitive market in the U.S. We believe that at the base of it, the gas station business is a relatively simple business concept, especially in relation to other businesses. This simplicity has attracted a wide range of business owners from small operators to some of the largest multinationals like Wal Mart. The wide array of market players has turned the gas station industry into a highly competitive market landscape.
Many foreign nationals have already come to the U.S. over the years to open gas stations due to their familiarity with owning and operating gas stations in their home countries. While there might have been more opportunities in the past to open successful gas stations, many of those opportunities are no longer available in today’s market.
Here is a list of the most popular gas stations:
- Murphy (Wal-Mart)
- Sam’s Club (Wal-Mart)
Only some of the above brands franchise and the others are companies with revenues in the billions of dollars. As a foreign national entering the U.S., would you really want to enter this fiercely competitive market?
5. Gas Stations Are A Low Margin Business
By their very nature, gas stations are a low margin business in the U.S. The low margins of the business is due to the combined result of a few different factors. As previously mentioned, the highly competitive nature of the business pressures the profitability of the business. Additionally, the commodity nature of gas means that the price that the gas is sold for will be quite close to the purchase price, and thus acts as a downward force on gas margins. Another factor that decreases margins for gas stations is the lack of consumer loyalty to a particular gas station. When consumers do not feel any affinity towards one gas station or another, they will simply look for the gas station that is most convenient where they can buy gas for the lowest price.
One of the most interesting discoveries that Visa Franchise made during our deep-dive research into the industry is the fact that many gas station businesses make the large majority of their profits from the convenience store that they operate.
6. Environmental Issues
Gas stations bring with them a whole host of environmental issues, especially the older gas stations. A large number of existing gas stations have been and currently are in violation of environment codes. If an investor decides to buy an existing gas station. Then the investor would then inherit the environmental code liabilities. Which could range from thousands to tens of thousands of dollars. Even performing a due diligence on the gas station does not guarantee that there would be no environment liabilities and costs that the new owner of the gas station would have to deal with. As time goes on, the environmental regulations in the U.S. are likely to only become more stringent, which in turn increases the cost it takes to fix any environmental problems related to a gas station.
7. Changing Market Landscape
Many articles and research reports have been coming out recently detailing the changing car landscape. Due to ride-sharing apps like Uber and Lyft, battery powered cars, and driverless cars. There exists a strong consensus that in the coming years the gas market and demand will look significantly different from today. Many experts are forecasting that by 2020 driverless, battery powered cars will be on the roads. Which will have a significant negative impact on the demand for gas stations. All of the above trends combined will likely begin to significantly negatively impact the investment return of gas stations.