Special Issues to Consider When Valuing a Gas
The valuation of a
gas station/convenience store presents a number of special considerations –
unique issues that ultimately affect the value or risk rate. Looking for insight
into this type of valuation, "Business Valuation Update" interviewed
Lynton Kotzin, who has significant expertise in the valuation of these types
This interview with Lynton Kotzin was published in the December 2010 issue of
"Business Valuation Update,"
a publication of Business Valuation Resources, LLC.
BVU: What changes have you seen in the gas station/convenience store industry over the
No business can be valued in a vacuum, as the performance of a business and thus
its value are impacted by economic conditions, industry trends and
characteristics, and other external factors. To properly value a gas
station/convenience store it is important to understand the significant changes
in the industry over the past decade. The retail gas station industry began with
a service orientation, providing routine and preventative maintenance.
Convenience stores emerged as an outgrowth of the grocery store industry. These
two types of retailers merged to create the gas stations with convenience stores
The number of retail gas station-only sites declined as both consumers and the
major oil companies developed a preference for larger, more modern sites that
had a convenience store attached. Over the period 1997 to 2002, the number of
gas stations with convenience stores rose by approximately 14% compared with a
38% reduction in gas-only sites. The industry became more consumer-driven as a
way to attract a wider demographic that included women and upscale customers.
Technological improvements and innovations, such as pay-at-pump technology,
credit and debit card payment options, touch-screen monitors, remote payment
systems, and automated fueling dispensers, also helped to increase efficiency
and entice customers. Many locations also began offering prepared food and
branded fast food options, expanded grocery selections, banking, money orders,
self-service carwashes, and other ancillary services.
Large retailers such as Wal-Mart and Costco began selling gas in 1997. These
companies had large buying power, which allowed them to operate on low-margin
business models and to use fuel as a loss leader, which forced gas
station/convenience stores to compete based on price and incur operating losses.
This blurring of distinction among retail channels has increased competition and
continues to pose a significant competitive threat to the industry.
There was also significant consolidation between the major oil companies, which
resulted in a rationalization of gas stations, either as part of a regulatory
requirement for the merger to proceed or because they wanted to focus on their
refining and drilling operations. This resulted in significant transaction
activity during this period.
Q: What are some of the unique issues involved in valuing a gas
There are several issues. These stores are special purpose properties, and the
underlying value includes the incremental value associated with the business
enterprise, which is distinct from the value of the real estate. Bifurcating the
real estate and business components is therefore a significant issue. Other
important issues include:
Number and type
of fuel dispensers and related payment technology
Site location and
regional growth trends
distance of competitors
of revenue streams
It is important to conduct a site visit to properly understand the strengths and
weaknesses of the subject location and ascertain the competitive threats. One
issue that people don’t really consider, but it’s an important one, is ingress
and egress and the barriers to access a location. The ease of being able to get
in and out of the property is going to have an impact on the valuation because
people want to get in and out quickly and don’t want to be inconvenienced by
required turning maneuvers, crossing traffic lanes, or having to make a U-turn.
They would rather access a station that’s in their direct path as opposed to
maneuvering into another station.
Q: Does the brand of gas make a difference?
Gas station/convenience stores are considered convenience businesses rather than
destination-type businesses, the implication being that motorists typically
purchase gasoline based on the price and convenience of a particular location.
Research indicates that most consumers see gasoline as an undifferentiated
product and buy it based on convenience and price. There is effectively no brand
loyalty, and the rise of self-service has also eliminated what site loyalty may
have existed in the past. Motorists will typically drive into the station that’s
most convenient for them and will not go out of their way and perform turning
maneuvers or cross traffic lanes to purchase a specific brand of gas. A lot of
companies have tried different customer loyalty programs and cards, but the
research will tell you that convenience is still the most important aspect.
Q: How do you handle a gas station/convenience store with multiple revenue
The diversification of revenue lowers the overall risk profile of the gas
station/convenience store and reduces the dependence on the lower-margin gas
sales. The inside sales or the convenience store aspect typically has much
higher margins than gas sales. The more revenue sources there are, the more
diversification there is in the business, which helps lower the overall risk
profile and related discount rate. A lower discount rate typically will
translate into a higher overall value. We typically do a weighting to determine
what the weighted or blended discount rate is for the entire business, taking
into account all these different revenue sources.
Q: What are some of the environmental issues that should be considered?
Traditional valuation techniques suggest that contingent liabilities be
considered, and these frequently result from environmental regulations. The most
significant in the area of gas station operations was the legislation passed in
the late 1990s requiring all gasoline storage tanks to meet strict new
guidelines for protection against corrosion, spills, and overfills. A number of
gas stations went out of business or changed hands as a result. Continuing
contingent liabilities in the industry affect the valuation process by reducing
the indicated “clean” value by the cost of satisfying the liability.
Additionally, environmental contamination often carries a stigma with it that
may prevent or inhibit transferability of the convenience/gas station.
Procedures may need to be performed with respect to identification and/or
quantification of costs to clean up any environmental contamination, should any
exist. The valuation should address the issue or disclose any expenditures
necessary for remediation and/or compliance with other environmental standards.
Q: Does the real estate have to be appraised separately?
Yes. If the real estate is owned by the entity that you’re valuing, you would
have to have a valuation methodology that would bifurcate the real estate and
business value components, and then you would add the real estate and the
business value component to arrive at the total value of the business. If you
don’t do that properly, you could end up with a significant over- or
understatement of the total value.
Real estate valuation methodologies should be developed to generate “standalone”
business and realty value conclusions. Rent paid to the convenience and gas
station owner/landlord is an operating expense to the business component and
rental payments are income to the real estate component. Before estimating the
value of the business component, rent must be explicitly considered and deducted
from business cash flow. These assumed rental payments are the basis for the
value of the real estate component.
Q: To what extent do you use public companies and guideline transactions?
The market approach attempts to establish value using direct comparison with
sales of similar assets in the marketplace and the analysis of publicly traded
securities of companies engaged in similar businesses. Because of significant
differences between the subject location and guideline transactions and the
guideline publicly traded companies, the valuation specialist should proceed
with extreme caution and not blindly utilize these indications without a
thorough analysis of the underlying data. Application of the market approach
involves considerations and judgments concerning differences in financial and
operating characteristics and other factors that would necessarily affect the
value of the subject company versus the value of the companies to which it was
compared. It is important to address differences in underlying business
operations, size, growth, profitability, ownership of underlying real estate,
timing of the actual transaction, and other qualitative and quantitative
aspects. These indications may ultimately be useful only as a reasonableness