GSB-26: Is Gas Station Still a Profitable Business? Do They Make Money? What is The ROI?

Gas Station Business 101 Podcast - How to Start, Run and Grow a Successful Gas Station Business

Once again I answer few more burning questions I have received from my newsletter subscribers when I asked via a survey about their biggest struggle in business. So here it is, I talk in depth about why and how gas station business model is still a viable business model and why people should invest in it, and why it is still so lucrative.

I look closely at issues like:

Why and how it is good business:

If you read my book, then you most likely know I spoke at length about how Gas station is truly one of the very few recession proof businesses out there. I am sure everyone remembers the big financial meltdown of 2008; we lost something in that disaster right? I know I lost a lot, I still remember that pain and heartache of losing so much that I worked so hard for over many years. I am sure all of you still remember that time; l am sure you all have seen businesses closing down around you, from restaurants to big name retailers at the mall. But honestly, how many gas stations have you seen closing down during that time? Most likely none zero. Even when we are broke and without a job, we still need fuel for our cars; we still need that gallon of milk for our kids, and if we are smokers we still need that cigarette and that beer right? Chances are we go the neighborhood store for all that.

During the recession this industry was one of the very few that have seen growth, meaning we actually have seen sales increased in some parts of the country. Now fast forward to 2015, according to Wall Street Journal US automakers sold 17.5 million new cars last year. An increase of almost 6% over the previous year. Last time this happened in the US was 15 years ago. We also sold around 40 million used cars at the same time. Not to mention fuel prices are the lowest in many years.

All these cars and trucks need fuel to run, and we are at the front line to provide them with that need. Good news is you can not order gasoline on Amazon, or any other place online, for fuel you need to go to a local gas station. Similarly, You can not order tobacco, beer or cigarettes or milk online you have to buy them locally.

In this ever changing the world of internet, many retailers are truly suffering from losing sales to online retailers, take a look at any of the office supply chains, you hardly see cars in their parking lots anymore as Amazon and other big online retailers took a lot of business from them. I am sure you also remember the death of Circuit City, as big as they were, they still had to go, simply because they were losing way too much revenue to the online competitors. But luckily we don't have that issue, GAs stations are unique we thankfully yet do not have to compete with online companies.

Why you should get into it

Well, you should get into it simply to make a living. But more importantly, a life expectancy of a gas station business is over 50 years or more, look around you, I am sure you will find stations that have been in that exact same location for decades, yes they may have gone through a few facelifts and remodeling, but they are still there.

Anytime we look into a new business. First, we often consider the viability of that business and that industry, and as you can see the viability of this industry is very solid and strong. Depending on location and state and city you are located at, often the investment is still not too high, especially if you are looking to lease rather than buy. Best of all you usually see a cash flow the very next day.

But don't get me wrong, not every gas station you come across makes money, so don't just go and buy the very first station you see for sale. I outlined a detailed gas station buying process that you should follow and see if a specific business is worth investing.

What it takes to get into it

If you guessed CASH, you are right! Yes, it takes some cash to get into the business. But along with cash, it takes few more things, like decent enough credit, good negotiation skill and lot of common sense.

Do Gas Stations Make money?

That is the biggest question I get asked more than any other question. To answer it simply, Yes gas stations generally speaking make decent money. I have made a decent living out of them for many years now. But again as I just mentioned not all gas stations are created equal, so not everyone is making money. It is your job to find out which one does before you buy one.

Let's now talk about a real life example and some basic calculation to figure out if a station that is for sale makes money or not.

I recently came across a station for sale by an oil company; they gave me some sales volume for the last three years. Now talk about this gas station and see if I should go forward with it or say no to the seller.

Okay I am better at calculating figured monthly, but most sellers provide yearly numbers, so I just broke them down by month, so for 2015 they had an average monthly merchandise sales of $37k I just took the average, even though they did less in the winter months and higher in the summer months. Monthly fuel sales were 63000 gallons. All other monthly income was $860 (ATM, Air, Vacuum, etc.) monthly.

Let's now first figure out their gross profit for each month. At 37k/Month Sale with 26% profit margin their gross profit is $37,000 X 0.26 = $9620

On fuel, I noticed they average around 7-9 cents on Regular grade, 12-15 cents on Plus grade and around 20-25 cents on premium grade fuel. I asked for a breakdown of their fuel sales, and this is how the calculation looked

Average monthly regular gallon sold 54,000 X.07 (cents) = $3,780

Average monthly Plus gallon Sold 4,000 X .12 (cents) = $480

Average monthly Premium gallon sold 5,000 X .20(cents) = $1,000

So monthly fuel gross profit is $5,260

Let's now add both fuel and merchandise profit $9,620 + $5,260 = $14,880

Next step let's figure out their expenses:

I calculated the mortgage/rent to be $3,500 (The price is $350,000) in any of these type of investments it is safe to calculate the rent to be 1% of the total investment

Next we have Payroll is $5,000 (the store is open 18 hours a day 365 days a year, single employee coverage so the math looks like this 18 X30 (Days) X 9 ($9/hour which includes payroll taxes) =$4,860, I just rounded it off to $5,000 (but there is no management salary in this payroll)

Next, all utility bills together are around $2,750

Tax and insurance are right at $975

Credit card fees are around $2,450

Then I added all the rest like license fees, shortage and loss, store supplies and maintenance together came to $1,116

I know I am mentioning a lot of numbers, and it can be confusing, so head on over to my blog and go to podcast #26 and see the attached Excel sheet where I did this exact P&L so that you will have a much clearer understanding.

Okay adding up all these expenses the total is $15,791

Now let's subtract the expenses from the gross profit so we can get to the net monthly profit dollar

$15,740 - $15,791 = ($51)

As you can see the store is doing little less than break, even point.

Now if I were new to this business and willing to work 10-12 hour days behind the counter and have limited funds, I would definitely buy this store. Because I know by working in the store I can build up the business and make it a profitable store, but for people who will run with hired help, this is not a business they should buy. I politely notified the sellers that I will not be moving forward with this store.

Lastly, let's talk about ROI or Return On Investment. Typically if you are leasing a business where there is not real estate involved your investment should come back within the first 3-4 years. I have seen stores that returned the investments in just two years. Say you leased a running gas station business for $200,000, and your monthly net profit is $8,500, in this case, you get your investment back in little less than two years; remember not to add the money you paid for the inventory into this investment calculation.

Now if you are buying a business with real estate, then the calculation is very different. Say you bought the same business like we just talked about but instead of leasing you bought it outright for $800,000, Now your calculation will be different, to buy the property you had to put some down payment towards the purchase price, so your loan payment will be lower than your rent payment, so, in this case, your monthly net will be higher. You will also get to write off the depreciation cost on equipment, fixtures and building every year which will give you a nice savings amount every year.

Once again as I mentioned in my episode 25 two identical stores with identical sales volume in two different cities can show a very different net profit or loss even. If you recall the two examples, I spoke about where one in Chicago and one in a small town in Mississippi. I just wanted to mention that again, so everyone is clear. In bigger cities the rent or mortgage is much higher, the property taxes are higher the employee cost is higher. So if you do the same math as we just did, both stores may look same when you take the merchandise and fuel profit, but will look very different when you calculate the expense part, and that can make all the difference in the world.

Since this episode again is answers to many emails I have gotten, I will not be answering any other email. But I would like to recommend a book this week again. I had a chance to catch up on my reading and here is a book Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks. I know you will enjoy reading this book because it is a financial thriller based on true story. I really enjoyed reading it, and I know you will too. Bill Gates said this is the best business book he had ever read.

Don't forget to sign up for my newsletter by clicking below, and if you like my podcast, I sure would love to see a review from you on the iTunes, this way I can reach more listeners and will be able to help more people.

Cheers!