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    How will the merger of Reynolds American and Lorillard impact c-store operators?

    So, You Want to Make an Acquisition?

    By Dennis L. Ruben, NRC Realty & Capital Advisors LLC

    CONTENT SPONSORED BY NRC REALTY & CAPITAL ADVISORS

    Convenience store owners and operators that are contemplating an acquisition need to address a number of considerations before deciding whether to move forward. Many of those considerations revolve around the size of the operator and the intended purpose of the acquisition.

    For most operators, a strategic decision to acquire new stores may be based on a desire to eliminate a competitor, take advantage of a unique acquisition opportunity, acquire or build a store in a highly desirable and sought-after location, expand in an existing market, or grow into an adjacent or new market. Regardless of the reason, prudent convenience store operators will weigh the costs and benefits of any such acquisition or expansion, as well as their ability to absorb the acquisition without putting a strain on the company’s infrastructure.

    One of the most important issues facing operators is: How much should I be willing to pay to acquire a new store or group of stores? The answer to this question depends on a number of factors, including those surrounding the reasons for wanting to make the acquisition in the first place.

    As leading industry observers have noted recently, purchase prices (based on store-level EBITDA multiples) have increased significantly in the past few years and show no signs of slowing or retreating. Having said that, the higher the price becomes, the harder it is to justify the acquisition and figure out how to make it profitable.

    The larger industry players have a greater ability to pay higher prices than other medium-sized operators. They have a multitude of financial resources available to them and their cost of capital is extremely low. On the other hand, medium-sized operators that elect to pay hefty prices for convenience stores may find themselves forced to make a significant equity contribution to the transaction due to the limits on the amounts that can be borrowed in the current capital market environment for convenience stores.

    Since most acquisitions involve a significant commitment of both time and financial resources on the part of an operator, the “feasibility” of any acquisition must be thoroughly researched and analyzed.

    Feasibility Analysis

    Operators need to ask themselves several questions. Why am I considering an acquisition? Why am I considering this acquisition? What will it do for my company, in both positive and negative terms? What strain will it put on the resources and staff of my company? Who will be responsible for negotiating and completing the acquisition? What will be the “ramp-up” period before the new acquisition will be profitable?

    As part of that feasibility analysis, operators need to conduct in-depth market and demographic research about the location of the store or stores to be acquired, such as traffic counts; nearby businesses, industries and schools; ease of access to the stores; and the nature and location of direct and indirect competition (e.g. other convenience stores, gasoline stations, supermarkets, etc.). 

    In addition, operators should review at least three, and preferably four, years of historical store-level profit and loss statements. Corporate overhead should also be analyzed in order to verify that there are no general items that should be allocated to the stores themselves. Of course, operators should also conduct customary real estate due diligence on each store, including a review of an updated title insurance commitment, an as-built survey and all available environmental information (including a Phase I environmental site assessment).

    The Financial Aspects

    Assuming that the feasibility analysis and due diligence review are acceptable, the next important questions that need to be asked involve the financial aspects of the acquisition. In other words: How am I going to pay for it? 

    Astute operators need to evaluate all of the financial aspects of a planned acquisition. The starting point should focus on the source of funds for the purchase price. If the store or stores to be acquired are already in existence, will remodeling be required? Are the stores owned in fee or are they leased? These questions will dramatically affect the potential sources and types of financing that will be available for a given acquisition. 

    Obviously, an operator always has the ability to pay cash for an acquisition, but that is probably the least efficient way to fund it. Convenience store operators currently have a number of financing options available to them, such as senior debt financing, sale-leaseback financing, equipment financing and several others.

    In addition, operators need to consider the total costs of any acquisition and not merely the stated purchase price. If the store needs remodeling or reimaging, the operator needs to take that into account in his financial planning. In addition, operators need to quantify closing costs, as well as the cost of petroleum and merchandise inventory for the stores, plus any letters of credit or other credit support that needs to be provided to oil companies or other vendors.

    Assuming that the operator answers all of the foregoing questions to his or her satisfaction and does the necessary homework to determine when and how the acquisition will be accretive to earnings, the operator should trust his or her judgment and move forward with the transaction.

    However, if the answers to these questions don’t “add up," it is probably advisable to wait for another opportunity or restructure this one so that it makes more economic sense.

    Acquisitions involve a great deal of time and hard work. However, if operators invest the time and resources to thoroughly examine all aspects of a proposed acquisition, they should be able to reap the benefits of those efforts.

    By Dennis L. Ruben, NRC Realty & Capital Advisors LLC
    • About Dennis L. Ruben Dennis L. Ruben is executive managing director of NRC Realty & Capital Advisors LLC. He works out of the Scottsdale, Ariz., office, where he leads the financial advisory services group. Since joining the company in 2004, Ruben has supervised NRC’s mergers and acquisitions and financing practice, primarily involving the convenience store and petroleum industries.
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