Buying a convenience store is an exciting entrepreneurial opportunity that offers the potential for financial success and business ownership. If you’re considering purchasing a convenience store, exploring options for buying one directly from the owner can be advantageous. By cutting out intermediaries, you may have more control over negotiations and potentially save on broker fees. However, navigating the process of buying a convenience store for sale by owner requires careful consideration and thorough research that normally would be done by the intermediary or broker. In this article, we will provide you with an in-depth review on buying a convenience store that’s for sale by owner, outlining some top tips to help you successfully navigate the journey.
1. Land the Deal by Being Approachable, Easy-going, and (Most Importantly) Sincere
Convenience store owners who are in the process of selling or are considering selling their business are bogged down by potential buyers with questions and data requests. Normally a broker or intermediary would handle these requests, but when the convenience store is for sale by owner, the seller will prioritize requests based on how realistic of a buyer appears to be.
Convenience store owners only need to make a deal with one buyer and they’re going to focus on responding to questions and requests from the most sincere and interested buyers. It also helps a great deal if you’re approachable and easy-going and the store owner can see themselves working with you to complete the sale process.
Other ways you can stand out include making sure not to ask for information in the public domain or that is already contained in information you’ve previously received (i.e. if you have already received the convenience store’s financial statements, asking what the Company’s gross margin is would be a quick way to show that you’re not taking this seriously). You should also consider offering to meet in person or agreeing to delay your diligence until after you have come to an agreement on the key economics of the sale. While these suggestions don’t cost you anything, acting on them would make you stick out from the pool of buyers and potentially land the deal.
2. Define Your Goals and Research the Market
Before diving into the process of buying a convenience store (whether it’s for sale by the owner or not), it’s crucial to define your investment goals and understanding of the market. Take the time to determine the type of convenience store you want to own. Consider factors such as whether you prefer a gas station with a convenience store or a standalone store. Additionally, research the neighborhood extensively to understand the current trends, customer preferences, and other competing nearby convenience stores in the area where you intend to operate.
One of the benefits of buying a convenience store that’s for sale by owner is that you will have direct access to the person who has been working in your target market for years! They are a wealth of information and any seller who is genuinely interested in transitioning their business to its next chapter will be very invested in answering your questions in-depth.
However, as mentioned above, try not to ask the stereotypical questions like what times during the day experience the most foot traffic, or what the neighborhood is like (you can find all that on your own by searching around on google). Consider asking questions like if there are any new products that the seller thinks will sell well, or how the seller would suggest you grow the business.
Lastly, when buying a convenience store, try to look for areas with a strong population base, high foot or vehicle traffic, and proximity to residential areas, offices, or schools. Understanding the market will help you identify potential growth opportunities and tailor your business strategy accordingly.
3. Perform Thorough Due Diligence
Conducting comprehensive due diligence is essential when buying a convenience store for sale by owner. Request all pertinent financial documents, including profit and loss statements, tax returns, balance sheets, and cash flow statements. Review these documents carefully and cross-reference them with eachother to verify their accuracy.
You may also want to consult with professionals such as accountants or business evaluators to validate the financial information provided by the owner. Additionally, thoroughly examine any existing contracts, licenses, permits, or legal obligations associated with the convenience store.
A few key things you should try to understand include if there’s any vendor concentration, what products & services are high margin, employee turnover, working capital dynamics, rent and key lease terms, and if there’s any upcoming large investments required (new refrigerators, broken AC unit, etc).
4. Calculate Your Best and Worst Case Return on Investment Before Making an Offer to the Seller
If you’ve done thorough due diligence, you should have a pretty clear idea about the key risks and opportunities associated with the convenience store you’re considering acquiring. It usually makes sense to run a few scenarios (this can be in excel or handwritten) and see what happens to your return if sales decrease or increase, property taxes change, you have to hire more employees to replace the prior owner, etc. There are a lot of situations to consider and I’ll outline a few key ones below:
1. If the prices of your inventory increases, can you pass those prices onto customers and maintain margins?
2. Is rent expected to increase in the coming years? Is the lease expiring soon and does it needs to be re-negotiated?
3. Are sales artificially high because of temporary spikes in sales from one or a handful of products? Or, is the revenue level your investment is based on sustainable?
5. Make Sure That The Inventory On The Balance Sheet Equals What You’re Actually Inheriting as Part Of The Sale
Convenience stores that are for sale by owner usually are RUN by the owner. While this indicates that the business is likely the owner’s primary income source and has been built to succeed over the long term, there are certain issues that arise when purchasing any business directly from the owner.
One potential (major) issue is that the inventory balance on the financial statements you’re seeing is not equal to the actual value of the inventory in the store today. Over many years of owning a store, it’s very possible that incorrect entries and accounting transactions could have been entered into the store’s POS system and/ or into its accounting software, ultimately inflating (or deflating) the value of the inventory. This difference can sometimes be in the thousands or even tens of thousands of dollars! Also, if the inventory is incorrect, then it’s also likely that your cost of goods sold and margins are incorrect.
Inventory valuation and margins are topics that delve heavily into accounting methodology, and when recorded incorrectly lead to incorrect calculations of income. 360 Retail Management always recommends that clients work with a reputable accounting firm to audit the inventory balances and financial statements for accuracy and correctness. You may also want to consider hiring an inventory counting company that will come in and do a physical inventory count and report to you the actual physical inventory value.
6. Evaluate the Store’s Infrastructure and Equipment
We talked about this above briefly, but make sure to thoroughly inspect the convenience store’s infrastructure and equipment to assess their condition and functionality. Pay close attention to critical components such as refrigeration units, shelving, point-of-sale systems, security systems, and other essential equipment.
Evaluate the maintenance history of the equipment and determine if any major repairs or replacements will be necessary. Consider the cost of these repairs or upgrades and factor them into your budget. Additionally, familiarize yourself with any compliance requirements related to food safety, health regulations, and environmental standards.
7. Make Sure to Read The Lease
Occasionally, there are what are called ROFR’s (or “right of first refusals”) that allow the landlord to refuse your offer if they can make a better offer to the seller. There are also sometimes other unexpected clauses in the lease. One common example would be that some leases actually stipulate that the convenience store’s inventory is actually collateral and that the landlord has an automatic lien on the inventory in the case that lessor doesn’t pay rent. These are just a few of the potential issues that may be buried deep in the back pages of your lease.
Make sure to read the lease and preferably have a legal professional read the lease. Your landlord is your business partner and rent is likely one of your largest expenses. Making sure you’re on the right side of the lease you’re entering into is critical to your convenience store purchase.
8. Negotiate the Economics Before You Negotiate A Binding Offer
Negotiating the purchase agreement is a critical step in buying a convenience store for sale by owner. Usually a broker will require you to provide a legally binding offer to begin to take you seriously. These legally binding offers establish clear terms, conditions, and contingencies that could be disadvantageous for you so early in the sale process.
However, when you’re working directly with a seller, you have a lot more control over how the sale process will unfold. Consider negotiating the key terms of the deal up front before spending money on lawyers and advisors and entering into some sort of binding offer. While you’re negotiating the key terms, make it clear that you’re offer assumes that all the information and data provided by the seller is accurate and complete. This provides two main benefits: 1) You can quickly lock up a deal with the seller before paying for lawyers and advisors, and 2) if you find during your due diligence that the information provided to you was incorrect, you’re “in the right” and have the upper hand in re-negotiating the key terms or exiting the deal completely.
Key elements to address before entering into any sort of binding offer include the purchase price, payment terms, lease terms (if seller will be landlord post-transaction), training from seller, and transition assistance, if a non-compete will be a part of the deal, and any seller financing arrangements.
9. Plan Extensively for a Smooth Transition
Once the purchase agreement is finalized, it’s essential to plan for a smooth transition to take over the convenience store successfully. Develop a comprehensive transition plan that includes marketing strategies to retain existing customers and attract new ones.
Make sure to be on the same page with the Seller on if you plan on having the seller continue to work in the store post-transaction, if you expect any training, and/ or the compensation to Seller for these services.
Additionally, consider hiring third party management staff, such as 360 Retail Management, to help turn your store into a passively managed asset. Third party retail management providers ensure that your financial data is correct, review your security cameras, handle your purchasing and inventory management and much more. Having professional staff on day one of your ownership will dramatically improve the chances of smoothly transitioning the convenience store from seller to buyer.
Conclusion
Buying a convenience store directly from the owner can be a rewarding and potentially lucrative venture. However, it requires careful planning, extensive research, and strategic decision-making, particularly because there’s not a broker who is preparing key acquisition information in advance. By following the above tips, you should be reasonably well-equipped to navigate the process of purchasing a convenience store for sale by owner successfully. However, this is no substitute for professional advice from your accountant, lawyers, etc.
Remember to define your goals, perform thorough due diligence, evaluate location and demographics, assess the store’s performance, understand the financial aspects, seek professional guidance, negotiate the purchase agreement, and plan for a smooth transition.
360 Retail Management has helped many buyers purchase their first convenience store or expand into new locations. If you’re considering growing your business or buying a new store, book a free consultation with us. 360 Retail Management provides a suite of services specifically for convenience stores that on average save them $25,000 per year and also allows owners to turn their stores into passively managed assets.