Illustrations by Dave Homer
John Strickland Jr. did the numbers. Dollar General bought all the Walmart Express shops in his market.
Murphy and Sheetz were building ground-ups. His prime locations were already maxed out at 125,000 gallons a month, and, to make matters worse, key roads were about to be rerouted.
It was time to sell.
Last summer, Strickland, president of Wayne Oil Co., a 14-store retailer and fuel distributor based in Goldsboro, N.C., sold all but one of his retail locations, retaining his fuel-delivery business and repositioning his assets toward a more bankable future.
“A lot of factors came together,” Strickland says. “So we found out what the business was worth and extracted the equity.”
He was not alone. In just the past few months, several big names have sold, including former NACS Chair Sonja Hubbard, who handed the keys to her 273-store E-Z Mart chain in Texarkana, Texas, to Richmond, Va.-based GPM Investments.
Push past the headlines, and the real story isn’t about the big consolidators such as GPM, 7-Eleven or Couche-Tard. Since January, deals in the range of 50 to as few as eight stores went down in all corners of the country.
This shakeup at the small to midsize level can mean both uncertainty and possibility for retailers, shining a light on succession issues, competitive shifts and “breadcrumb” opportunities of stores falling loose from monster deals.
Amid all this fluidity, CSP turned its focus on asset management, particularly for those small and midsize chains. The editors identified the major moving parts and key tipping points tied to making money in the c-store business. Along that complicated road map, four imperatives emerged: assess store value, pick a model, fight headwinds and track ROI.
Table of Contents
Assess Store Value
Before retailers can command their own destinies, they need a keen sense of what they’re working with. That’s a numbers exercise, says Richard Browne, vice president of marketing for Patriot Capital, Atlanta.
Probably the biggest task in assessing store value is reviewing the numbers used to measure business on a daily, monthly and quarterly basis. Two of the most critical tools—especially when the sale or purchase of stores is involved—are profit-and-loss (P&L) statements and balance sheets, Browne says.
P&Ls are an indicator of cash flow, in which a lender can see if the borrower can keep up their monthly payments based on what the business takes in and pays out every month. “If you need to pay me $100 a month, can you pay it without affecting your business?” Browne says. “That’s cash flow.”
The balance sheet, he says, shows what assets and liabilities are tied to the business. Retailers must ask themselves: Is there any concerning liability that would raise a red flag?
Finally, profit (or loss) trends over at least the past two years are also an important barometer.
“Generally, the valuations for the industry are quite strong,” Browne says, pointing to NACS figures that show c-stores’ long-term, record-breaking profitability streak. “So one’s got to say it’s a good business, recession-proof and historically profitable.”
As a buyer, Ryan Razowsky, executive vice president of Rmarts LLC, Deerfield, Ill., says he and his team looked at a standard set of numbers when assessing the 10 Minute Man stores they purchased in December 2017: traffic counts; the ratio of tobacco sales to inside sales (which they suspected would be higher than industry averages); historical fuel volumes; and where they thought volumes and margins would go in the future.
Mathematically, purchase prices typically come from reviewing all those numbers, as well as the size of store, whether land is included and deriving a “multiple.” That multiple attaches to the store’s EBITDA (earnings before interest, taxes, depreciation and amortization) for the estimated value for that single site. Historic averages in recent deals have normalized in the 5x-6x EBITDA range for stores that include land, according to Gregg Budoi, a Cleveland-based consultant working closely with, among other companies, EZ Energy Fund LLC, Independence, Ohio. Multiples are closer to 2x-3x in cases in which sellers don’t own the land.
“A store level can go as high as 7x-8x, or 5x for a leasehold,” says Bill Trefethen, managing partner of Trefethen Advisors LLC, Scottsdale, Ariz. “I haven’t seen multiples this high in 20 years in this space. The market is quite frothy.”
Sometimes buyers and sellers may add the potential future earnings of a particularly good location into the price; that’s called “blue sky.” But Kevin Shea, founder and managing member of Shea Capital Group LLC, Colchester, Conn., and formerly with Jericho, N.Y.-based Getty Realty Corp., says he normally would add up all the estimated site-by-site numbers to come up with a portfolio price. “I don’t pay for blue sky,” he says.
A critical element of measuring business value is regular, ongoing evaluation, Shea says. “If you’re going to remain in business, you constantly have to look at your portfolio and rationalize it as needed,” he says. “I’ve seen a lot of folks hang onto secondary, even tertiary assets because they’ve been in the family and portfolio a long time.”
In other cases, a renovation may be in order. “If you’ve got a good corner, are judicious with improvements and your offering is competitive,” a reimaging may prove profitable and a more prudent choice over a new-to-industry (NTI) store, Shea says. “Many prefer NTIs, but with the permitting process alone you could wait two years, spend a lot of money and still get a ‘No.’ ”
In addition to permits, cash flow can take a while to build, possibly two or three years, according to a Midwest banker who spoke on condition of anonymity. On the other hand, with a new build, the retailer will end up with a premium location based on today’s demographics and traffic patterns. It’ll be a completely fresh store without heavy maintenance and upgrade costs or personnel issues. “In other words, you are not buying someone else’s problems,” the banker says.
Whichever way the numbers add up, if they tip toward reinvestment, then retailers will probably need access to capital. Regional and community savings banks are typically a solid source for loans, Shea says, especially where retailers have established accounts.
Typically, lending institutions will look at historic cash flows, projections going out five to seven years and environmental records, often hiring an expert to check underground storage tanks, lines and fueling equipment. Most likely, a retailer will have to come up with at least 30% of equity, with the bank lending the 70% balance, Shea says. Terms will probably be in the 15- to 20-year amortization range, with a maturity date in the five- to seven-year range, when refinancing would occur. Hopefully, Shea says, the interest rates at the time will be competitive.
Sale-leaseback financing may increase what the bank will lend up front, but that’s a decision retailers need to weigh heavily because that land is a bankable asset.
Another source of funding Browne cites is a Small Business Administration (SBA) loan. It’s an insured financial product, he says, but it’s more expensive than a typical loan in that the borrower pays into an insurance pool, which covers the loan.
In the end, retailers shouldn’t fear banks, says Terry Monroe, president and founder of American Business Brokers & Advisors, Effingham, Ill., and author of “The Art of Buying and Selling a Convenience Store.” “Banks are in the business of renting money,” he says. “Once I discovered that, it made sense.”
NEXT: Pick a Model
Pick a Model
Playing and winning in convenience ultimately falls back to what kind of business model a retailer lives by, says private-equity consultant Budoi.
The industry’s many operators are simply playing different games. When Jeff Kramer, managing partner of NRC Realty & Capital Advisors LLC, Chicago, sold his own c-store chain in 2012, most of his stores went to a single industry consolidator that operated under a traditional c-store franchisee model. But the remaining sites fell like breadcrumbs to individual entrepreneurs, mostly mom-and-pop types.
“If I sell a five-store chain to Circle K, their business model is that they will immediately put five points or more to the bottom line, because of the great relationships they have with their vendors,” Monroe says. “They’ve cut super deals because they have thousands of stores.”
And while highly regarded c-store chains are building “destination stores” with big lots, multiple MPDs, broad foodservice offerings and cutting-edge technology, Budoi believes the smaller gas-station kiosk isn’t going away.
“A consolidator can still reap the benefits of buying power an economies of scale, if that’s your strategy,” Budoi says. “If they’ve got cheap debt and can execute sale-leaseback deals, then that’s financially better than building stores and worrying about … planting trees.”
Other companies, including many with fuel-wholesale ties, construct models that focus on fuel delivery. In these models, securing contracts and either company-operating or leasing to dealers all factor into profitability.
Then there’s the headline-getter of recent years: the master limited partnership (MLP), which uses a financial construct tied to energy production to buy and sell c-stores. That corporate status offers MLPs a tax advantage that bulks up the coin they can dangle in front of a seller. “There’s still viability in buying chains of stores and using the financial markets to achieve your goals,” Budoi says. “We’ve been seeing that slow down a bit because the MLPs have consolidated, but there’s still a market for that.”
Of course, the last and greatest class of player is the individual entrepreneurs: the mom and pops. They add significant value to their operations by being hands-on, says Monroe. They have significant labor savings and are more responsive and knowledgeable about their neighborhoods.
“I used to operate 155 video rental stores around the country,” Monroe says. “I knew that I was losing 15% to 20% in every store because I wasn’t there.”
Every major chain, be it Casey’s or Walmart, is going to be a cookie-cutter to some extent, Monroe says. If a retailer is sitting on a good location, that’s the cornerstone. “Even a mediocre operator, if they’ve got a good location, will make money,” he says.
NEXT: Fight Headwinds
Retailers should feel confident about their businesses. Ultimately, as a channel, c-stores compare favorably against other forms of retail: They’re high-traffic, cash-rich and almost recession-proof. Yet even a stable industry can hit speed bumps. These challenges are often uncontrollable forces of nature.
Charlie Rose, owner of Charlie’s Chocolate & Cravings, St. Paul, Minn., has faced a light-rail opening and department-store closing that rerouted foot traffic, a new ordinance that will take menthol tobacco off his shelves and a potential $15-an-hour minimum-wage law. “Sometimes your environment is too much to combat,” Rose says.
For most retailers, the pervasive concern is labor. A Midwest retailer who spoke on condition of anonymity recently sold their chain of roughly a dozen stores. While growth over the past five years had been commendable, they reached a make-or-break point where labor costs were cutting into the benefits of achieving scale.
“We were no longer small, but we weren’t big,” the retailer says. “We were in … the ‘danger zone,’ where costs were high for operating a company that size.”
The banker who requested anonymity says any number of reasons can force a retailer’s hand: Individual stores need costly upgrades that the seller either can’t afford or doesn’t want to pay for; the retailer could be selling unbranded fuel and is tired of getting killed by a branded competitor; the business is losing money and the retailer can’t seem to find the right formula to fix it; or traffic pat terns could be changing. Or, what’s more common, the owner had no succession plan.
Competitive shifts are always a concern, Razowsky of Rmarts says. He has seen no fewer than five brands—Pilot, TrueNorth, Circle K, Bucky’s and Thorntons—open NTI or remodeled stores in his market area since 2014.
“We had no insulation from competition,” Razowsky says. “There was vacant land in lots of different places and plenty of opportunity for regional and national players to come in.”
Strickland saw Goodlettsville, Tenn.-based Dollar General as a big threat as it began stocking core convenience products such as groceries and tobacco.
On the upside, positive forces of nature can swoop in: an outlandish offer from a deep-pocket consolidator, local relationships leading to unforeseen opportunities, or a team culture thriving on the thrill of growth.
In a deal that closed in January, Kevin Smartt, CEO of Kwik Chek Convenience Stores, Bonham, Texas, bought eight locations from Cleo Bustamante Enterprises Inc., Carrizo Springs, Texas. Growth generates excitement within his leadership team, he says, which is continually developing its c-store brand using both newly built and acquired stores.
“We hope to balance both,” Smartt says, describing an ebb and flow of ideas between new and remodeled stores.
Razowsky also understands the value of talent. Concerned but not daunted by new competition, Rmarts did decide to buy those Minute Man stores from Texor Petroleum, Riverside, Ill. “[Texor] built an unbelievable team,” Razowsky says, having brought over many of Texor’s staff to Rmarts.
Both buyer and seller brought energy and talent to the table, Razowsky says. In addition to a seasoned management team, Minute Man had a strong tobacco business, successful loyalty program and dedicated customer base. “[Rmarts is] really good at putting in healthy sets and utilizing local vendors to change up the offering,” Razowsky says. “So we felt like we could lend some value there by changing up sets and tailoring the focus toward expanding the customer base.”
The Rmarts-Texor deal came about via industry contacts, another intangible factor in the buy-sell mix. Officials with Casey’s General Stores, Ankeny, Iowa, mentioned this when commenting on Alimentation Couche-Tard, Laval, Quebec, buying Holiday Stationstores, Bloomington, Minn., last year. “We wish we had been invited to participate,” says Bill Walljasper, CFO of Casey’s.
NEXT: Track ROI
For Strickland, the situation was obvious. “Our profitability level was not going to remain where it was,” he says. “They were all good sites, but the way we needed to operate [looking ahead], we didn’t see the ROI long term.”
Strickland is like many retailers who constantly evaluate their businesses to decide “best-use” cases for what resources they have.
“Even with my own money, I treat it as if it were coming from a bank,” Strickland says.
It’s about keeping your eye on the prize and knowing what a win looks like.
Take the example of a marginal convenience store, says Shea of Shea Capital. The store still makes money, but when fuel margins are tight, it bleeds when labor is factored in. Say the site makes, for argument’s sake, $20,000 a year. If someone wanting to build a Starbucks was willing to pay $1 million for that corner, the retailer would essentially be making 2% a year return on that store. But I
that retailer took Starbucks’ $1 million, razed and rebuilt another store elsewhere and bumped that business up by $200,000, then the return would go from 2% annually to 20%.
“You’re going to look at the highest and best use of an asset,” Shea says.
Here’s the equation for return on investment: (Profit – Cost)/Cost.
A lot goes into factoring both profit and cost, including taxes, interest, labor, insurance, utilities, inventory, waste and how equipment or facilities wear down or become obsolete (depreciation). But once those figures are calculated, a retailer can compare that return to other investments.
Generally, higher returns come with higher risk. To help establish a baseline, many investors look to U.S. Treasury bonds, considered to be one of the safest investments because they’re guaranteed by the federal government. Those rates are now 2.81% for a 10-year note.
Private companies are often more patient than public ones. James Pappas, managing member of investment firm JCP Investment Management LLC, Houston, is what some consider an “activist” investor. Speaking at CSP’s Outlook Leadership conference last fall, he said he generally expects, at minimum, a double-digit return on capital employed. (Failing to hit that target has triggered JCP and other investors to question management at major chains such as Cary, N.C.-based The Pantry and San Antonio-based CST Brands—both of which eventually sold under shareholder pressure in 2014 and 2016, respectively.)
Currently bringing the publicly traded Casey’s to task, JCP pointed out that the chain delivered seven consecutive quarters—just less than two years—of missed earnings targets.
(According to Shea and others, a NTI c-store can take at least that long to build up to projections.)
Of course, time is also a critical variable for privately held companies. Kramer of NRC says that when he was buying c-stores, he used a “back-door” calculation with an underlying 4.5-year payout. He operated a c-store portfolio for more than 20 years before selling in 2012. At the time, he had a number of investors—including friends and family—looking for a liquidity event.
“You’re not just trying to make decisions on numbers,” Kramer says, “but on things that are personally important.”
NEXT: 4 Tips & Warnings
4 Tips & Warnings
Most retailers have 90% or more of their assets tied to their business, says Bill Trefethen of Trefethen Advisors. You can separate the operations from real estate and take cash off the table. It’s the best way to hedge against losing value and avert risk.
WARNING: Beware of dual tax returns.
Sometimes sellers file one set of returns with the government and show buyers another. File a 4056 Form with the government to get the former, says Terry Monroe of American Business Brokers & Advisors.
TIP: Cash flow is king.
Cash flow is the main reward for buying a c-store business, even a “crummy” one, Monroe says. People who build from scratch are “hoping, wishing, even praying” for cash flow.
WARNING: Monitor healthcare costs.
While health insurance premiums rose only 3% in 2017 over the year before, they have risen 19% since 2012 and 55% since 2007, according to the Kaiser Family Foundation. On average, employers pay 83% of that tab, says zanebenefits.com.
- American Business Brokers & Advisors: americanbusinessbrokers.com
- NACS: convenience.org
- NRC Realty & Capital Advisors: nrc.com
- OPIS: opisnet.com
- Patriot Capital Advisors: patriot-capital.com
- Shea Capital Group: shea.capital
- Small Business Administration: sba.gov
- Trefethen Advisors: trefethenib.com