At PetroCONNECT we often given advice on the process of buying service stations for sale in South Africa. Whilst others perceive this process as purely a means to an end, the process of buying a service station closely links with the core purpose of PetroCONNECT to ensure for industry sustainability to empower new entrants to enter the sector, and to offer meaningful guidance in the form of training and mentorship through our academy. This blog post offers a quick how-to guide for prospective new entrants to successfully enter and approach the fuel retail industry.
1. Types of Service Stations
Service stations in South Africa can be divided into two categories, namely:
- Those controlled or owned by the oil companies and
- Those controlled or owned by private individuals.
When purchasing an existing service station, you should find out in which category the site is and the potential relationship with the Oil Company and the Landlord.
In the case of oil company-controlled sites, the Oil Company owns the land or has a long-term lease on the property, invests all the capital required and appoints the retailer/franchisee/operator. These sites are commonly known as CORO sites – Company Owned Retailer Operated. The Oil Company has full control over the business through its various agreements, which compels the retailer to operate the site to prescribed standards and specifications. In purchasing a CORO site, only the operating business entity can be bought as the Oil Company owns the property or has the main lease with a Landlord over the property.
In the case of sites controlled by private individuals, the individual owns the land, invests most if not all the capital required, and operates the business or leases the station to another person who operates it. The operator enters into a Supply Agreement with the Oil Company that has no jurisdiction over the appointment of the retailer/operator. These stations are commonly known as RORO sites – Retailer Owned Retailer Operated, the operator is required to follow the specific Oil Company brand specifications and standards. Both the operating business entity and the property can be purchased if both are available for sale simultaneously.
2. How to approach the process of purchasing an existing service station
The purchase of an existing service station can be a very exciting but at the same time carries significant risk and due diligence must be taken to ensure that all the pros and cons have been thoroughly investigated and considered. It can also be a lengthy and time-consuming process.
- Availability and where to look. There are many service station businesses for sale at any one time in South Africa. Many of them remain undisclosed to the general public, as the sellers do not want to be overwhelmed by non-qualified potential buyers. The availability of these sites is normally only known about by word of mouth. PetroCONNECT however offers an industry-leading service station portal for buyers and sellers to connect. To visit our service station portal, click here.
- Due diligence. It is crucial, as with any major financial transaction, to complete a comprehensive due diligence study. A conditional offer is subject to due diligence. Keep in mind that you are not only purchasing the existing volumes and turnovers but also any future growth or possible decline in the business. For this reason, various elements must be considered in detail.
3. Elements of key consideration in the purchase process
Whilst your PetroCONNECT advisor will guide you on each of the following elements in the purchase of a service station,
- Historical and Current Business Performance. A detailed evaluation of the forecourt volumes and c-store turnovers should be done for at least 2 to 3 years of trading. If there are other income streams, these must be included. It is also imperative that the Income and Expenses Trading Statement and the Balance Sheet of the business be examined. This is not only required to determine the market related purchase price but also to project future cash flows, profitability and payback period for the capital invested.
- Oil company security of tenure. If you are purchasing a CORO site, you need to be aware of the terms and conditions of the oil company’s right to occupy the property. If the Oil Company has a head lease with a third-party landlord, then you need to know what the remaining term of the lease is and if the Oil Company has a right to renew the lease. A period of at least ten years is the minimum time recommended in order to provide an acceptable return on investment for the person purchasing the business. In the case of a RORO site where you are not purchasing the land, you need to investigate and understand the terms of the lease that you will be entering with the landlord.
- Oil Company Operational model and agreements. It is vitally important that a prospective service station buyer fully understands the various Oil Company operating models and the agreements that enforce and manage the relationship between the parties. This is more so for the CORO model where the Oil Company strictly dictates the terms of the agreement and the operating standards, as alluded to earlier. Similarly, should you be purchasing a RORO site, careful consideration must be given to the agreements and the deal that will be concluded? In this regard, it is vital that the current margin mechanism for petrol retailing, known as the Benchmark Service Station Regulatory Accounting System (BSS RAS), is fully understood and considered to ensure that the Oil Company is applying the correct petrol margin to the invoiced price. Read more about RAS by clicking here
- Potential Road Changes. One of the most serious negative impacts on a services station is a road change that diverts the current passing traffic away from the site. This must be investigated, and any risk identified and quantified.
- Trading area scan. A significant element in purchasing an existing service station is a thorough trading area scan. As previously stated, you are not only purchasing the current volumes, turnovers and margins, but also any future changes, some of which may have a negative impact.
- New competitor sites. There are numerous new service stations being developed around the country. A new site in the same trading areas can have a disastrous negative impact on volumes. Once again, this potential risk must be investigated, and the impact fully understood.
Contact PetroCONNECT Advisory for advice on purchasing a service station by clicking here