Blue Diamond is my latest prospective business venture. I’m in the very early stages of due diligence and the feasibility of this venture. I say early but we have identified assets to buy, interested bank financing as well as a possible private equity fund to provide equity for the transaction. Financing obviously is a big deal in any transaction so the fact that we have interest in possible financing is a great start. There are a lot of moving parts at this stage so let me catch you up.
Blue Diamond’s business plan is to acquire existing convenience store assets and enter into a petroleum marketing/distribution agreement with major oil companies. The growth plan is continuously acquiring stores and integrating them into the blue diamond network. Growth of wholesale fuel distribution business is to brand and supply other fuel retailers and to supply corporate and government fleet operators.
I have identified 14 stores for the initial blue diamond acquisition. The stores are spread throughout seven counties in east Texas including, Smith, Wood, Angelina, Henderson and, Greg. Of the 14 stores to be acquired, 13 of the 14 are owned by a couple of brothers: one is from an unrelated seller. Seven of the stores are open and operating and seven are closed.
How did I identify these stores? Identifying opportunities and why you consider them opportunities is always interesting, at least to me. I’m a “me too” person, not anything to do with the abuse scandals but from the marketing and business prospective. I’ll do a blog post on what “me too” looks like.
I identified these stores by literally driving by a closed, raggedy-ass store. Having been in the convenience store business before, stores and locations closing or opening or under construction get my attention.
This store is along a route that I pass through often so when it closed, I wondered what happened and who owned it so I started my research. For me, researching real estate is easy. I own a mortgage company, have had a real agents license before and have owned multiple pieces and types of real estate. Real estate is the most organized and easiest to research of any “thing” in the United States. All you need is either a name or an address. Every county maintains location, ownership, and dimensions on every piece of land in the country. In the age of the web, almost all of this information is online and at your fingertips if you can Google and navigate the web.
Here’s what I did.
I got the address and looked it up on the Smith County Appraisal District website. On that website you can find the owner, owner’s address, site dimensions, the year the building was built, building size, tax assessed value, a brief legal description and much more. Once I got the Owner’s Name, I did a search looking for other property the owner might own. To my surprise there were many more properties in County. I look at the counties surrounding Smith County and identified even more properties. At this point I had enough information to know to do some drive-byes. Some of the properties and locations were surprises to me because I knew the properties and had been to several of them. What was apparent was that there was a lot of deferred maintenance AND that there we so many closed stores in good locations.
At this point, I had enough information to approach the seller about his interest/desire to sell these stores and any more he might own. Any time you see assets in bad shape, there is a reason. In almost all cases, an asset in shitty condition is due to neglect by a disinterested owner. These can be assets that can be bought in a lot of times at good prices. My deal with Conoco started this exact same way, the exact same!
With my Google searches, I was able to find a couple of phone numbers. I made the calls but no answers. The voicemails didn’t have any messages so I couldn’t tell if I was contacting the rightful owner. One thing what was consistent was the owner address on the appraisal district records. I checked with some state records and the company name and address matched the appraisal district records. So, I wrote the owner a letter. A brief letter and asked the question if he would be interested in entertaining a conversation about the sale of his stores.
Well, that didn’t work. This dude didn’t respond. I gave it about a month, then I did what I do. I went by the registered office address on file with the state. Bold move but what did I have to lose? The worst-case scenario he tells me to get the fuck out. Best case scenario, he says, let’s chat. I ended up in the middle.
The office was the registered office but it was the office of his accountant. I introduced myself, gave them a business card and told them why I was there. They were a little bit standoffish at first but were kinda nice. The looked through a bundle of mail that they had, I presumed the had saved for the seller because about halfway through the stack was my letter, opened and on top of the envelope. I talked to the ‘lady in charge’ for a few minutes. Turns out she was an insurance agent and looking for business. With me having the mortgage company I told her I would send some clients to her. Well, that exchanged worked. I got a call from the seller within a week or two.
The seller and I met and talked a few minutes about the prospective sale of his stores. He was (is) interested in selling. He gave me some additional locations that I hadn’t discovered in my research. There were six stores that his brother owns. The total number of stores he gave me was 17. The total stores in the possible acquisition package are now 18.
The next steps in the process are due diligence on the stores themselves, identifying financing options, and developing preliminary pro forma financials. I want to get to what an acquisition price might look like and what profitability might look like. Lotta work.
The starting point is trying to figure out the motivation for the willingness to sale and get information about the operation of the stores. The motivation for selling a business is the first indication of how a seller is going to value what they are selling. You can get an immediate feel if they are going to be crazy as fuck or if you might have meaning conversations going forward. I already knew that he didn’t give a shit about the assets themselves because of the shape they were in and the fact that some of the stores, including what I consider a prime store is closed.
The seller’s stated motivation for wanting to sell is that he wants to retire, cash out. He says the stores are virtually debt-free and he wants to get his “equity” or cash out and retire. One of his sons was with me when we met and he says his son wanted no parts of the business. The son smiled an acknowledged that he had no interest in inheriting the business. There are a lot of businesses that get sold for this very reason. These are the types transactions I look for and what are the easiest to pull together, in most cases.
Next, what’s the store with the business?
The business model of the current owner makes the transaction problematic. Ignore the fact the current ownership is kinda squirrelly. I’ll get to that later but let me explain the existing business model and why it is problematic first.
The seller’s business model is a tenant-landlord model. The sellers on the real estate and the fuel distribution equipment (underground storage tanks and the pumps). The lease of the real estate and equipment to store ‘operators.’ The sellers simply collect a rent check every month.
The sellers also have the fuel contracts with wholesalers, at least that the way it appears and what he has said. Don’t be confused, the wholesalers are middlemen. Wholesalers have marketing agreements with the major oil companies to sell fuel to retailers. In this case, the retailers are the sellers, not the operators. The rent the operators pay to the sellers includes the margin for the gasoline. Each of the stores has a different operator, a different tenant if you will.
This type of relationship is not the norm for a multi-location convenience store operation. Let me describe the typical relationships that you might see for a multi-location site owner, what our approach will be and how this seller’s operation poses a challenge that we will need to overcome to complete this acquisition as well as the benefit this kind of goofiness could possibly provide.
Typically, a multi-location convenience store operation has the following characteristics.
If a single company owns multiple convenience stores they would normally have petroleum marketing agreements with major oil companies. This will allow them to buy gasoline directly from a major oil company. Direct buying would increase profit margins. There are some specific requirements that the major companies will have of the wholesaler but we will get to that later.
Even if stores are leased to 3rd parties because the seller didn’t want the headache of directly ‘managing retail’ they would still have the fuel supply agreement. The wholesaler would either extract a margin from the price paid by the operator or the wholesaler would pay the operator a ‘cashiering fee’ to collect the money from gasoline sales. The lazy approach is to just collect rent from the ‘tenant.’
The other thing that’s more normal than not is that the owner of the sites will provide some type of binding for all the stores. It could be leveraging the operators buying power by providing an umbrella for either soda or grocery vendors or something like that. It’s not a requirement, obviously but, if the owner of real estate wanted to make more money they would do ‘something’ to justify charging more rent.
This guy is not doing a damn thing but getting and cashing rent checks. He’s a commercial slumlord and I do mean that. Most of the stores are in rural areas or small towns so it would be unfair to say that they are in low-income areas. They are stores in mostly minority areas that look like shit but so do all the other stores. All the parking lots are fucked up and most of the building need external repair and at the least, painting There is a complete lack of maintenance to the stores and the equipment.
Here are the challenges to trying to buy shitty assets from a seller with a shitty business model and shitty business operation. After this, I’ll go through why this could be an attractive opportunity.
The first major challenge is convincing major oil companies that you can renovate, and where required rebuild the stores, so the image meets their minimum standards. Branded, major oil company-branded, stores have a checklist of items that must be present at each store, over and above how the gasoline islands appear. They latterly have inspectors periodically come out and evaluate store appearance. In most cases, it’s a letter grade based on numerical points for various segments of the “image.” For fucked up looking stores you must present a plan and image that appeals to the MOC AND you must meet minimum gasoline volumes for the brand. That volume is total volume for the wholesaler but the volume of each individual store is considered for that store to be ‘branded.’
I’ve done this before, with my prior gasoline company, Kokelbug. Here are before and after pictures of my first store:
This 14-store package has an uphill climb, particularly on the image. Several of the stores have been ‘debranded’ because of the shitty appearance.
The next challenge is getting historical sales. This is more important for the financing than for the deal with the MOC. The MOC will have an idea of the prospective volume based on location and if they have other wholesalers that have been supplying the stores gasoline, they will be able to get the gasoline by store.
These stores are operated by 3rd party operators. They are not subject to any kind of volume reporting to the seller, neither on the inside sales nor the gasoline sales. There seems to be a bit of a conflict on the gasoline volume since he allegedly has the gasoline contracts. The operator is under no obligation to provide him that information and consequently, they are not obligated to provide it to me. Without historical reference, this could be a deal killer. There is no historical way to assess value. There are some other ways to do it but creating a fair price would be based on historical sales, at least in part. I’ll talk through the plan to get past this a little later.
Another big challenge the fact that the stores are leased creates a possible two-stepped transaction, purchasing the real estate from the seller then either canceling the leases or buying the operations from the operator. That’s two valuation issues for not only me to overcome but also for me to convince a bank and an equity investor that it makes sense. In one of my meetings with the seller we talked through this is there is a possible plan that we can make this work. I’ll share this later as well.
With all the deferred maintenance, there is the challenge of determining what the costs of renovating the stores will be. In some cases, in three cases for sure, we’re buying essentially just real estate. One store was burned and not repaired and once the store has been closed and boarded up for 3-5 years. These are really, good locations but with a lazy-ass owner, nothing has been done on the stores. So, what do you pay for them? Getting rebuild and renovation estimates are not that hard, not at all. We can get an estimate for replacing fuel distribution equipment via email if it came to that. The costs and installation of equipment are what it is. The biggest unknown is will there be any environmental remediation required.
Speaking of environmental remediation, these are gas stations. There is always a risk in buying gasoline stations or dry cleaners. Tanks and lines can leak. We can determine the exposure and build in some costs of remediation. If it’s bad, we can structure the purchase contract where we can walk those deals and no assume the liability for those stores. Of the stores I bought from Conoco, my very first store had an environmental issue. This wasn’t a big deal on this transaction because Conoco is a multi-billion-dollar company and assumed for responsibility for any cleanup, including the cost of remediation. I’d need a good attorney on my side to work through structure a limitation of my exposure. This is a concern but not really deal killer, especially since we would be buying 14 stores. If neither of the most profitable stores doesn’t have issues, I would be comfortable leaving some stores off the acquisition list.
Lack of corporate infrastructure is a concern, on many levels. Let’s hit a couple or three.
A corporate infrastructure needs to be in place Day-1. We won’t operate as a landlord and will need HR, controller/CFO, Operations Manager, and other folks functional Day-1!. These people need to be on board 30-45, probably as many as 60 days before completing the acquisition. So, having a firm deal in place as soon as practical is critical.
All the systems, accounting, banking, vendors, fuel suppliers, etc that are our vendors and systems need to up and running, Day-1. I call these Day-1 activities. All this shit must be up and running. I expect we will have some challenges with the transition but we need to have the people and systems in place so we’re functional, Day-1. We can fix problems on the fly but you can’t create shit on the fly. Think about this, we will have to cut payroll checks probably as early as a week but probably not longer than two weeks after closing.
We to start renovating stores ASAP. We won’t get branding until we have renovations done for the operating stores. That needs to begin, really the planning needs to begin before Day-1 so hammers and paintbrushes need to be ready, Day-1.
All of these are huge challenges that need to be addressed during the due diligence and structuring of a prospective transaction. Having ‘hair’ on a transaction is not that unusual. The upside is that if you have a plan to address the challenges, you also could extract maximum value out of the deal. Or, stated another way, you shoot to purchase or do a shitty deal cheaply, far below market value. Fourteen stores can create a huge platform for growth. Not to expose the value of the deal but look at it like this, initial gasoline volumes, my initial scrape, might be in 10-15 million gallons a year. Getting it right the 5-year growth plan would be to get to 50 million gallons a year. We would have to acquire shitty stores going forward and neither would we want to. We could get the infrastructure in place and integrate new stores easier. That’s the value that I see in buying shitty assets.
My plan is not without foundation. I didn’t buy 14 stores before, but the deal I did with Conoco was for 5ish stores, shitty stores. You can get more from the Chapter or Page on the Kokelbug deal…
Let’s talk about what I know now and set it up so the blog posts on Aspects of a Deal make sense.
Few acquisitions are done on a cash basis. To maximize the return on your investment, most deals are done with some amount of debt. The amount of debt varies from deal to deal. After I identified the there was a critical mass of stores that could be acquired, I wanted to find out about prospective financing options. There were three steps to assessing if this prospective deal was financeable.
First, putting together preliminary pro forma operational and financial projections is critical. Without any information from the seller, this was a tall task. I did this store by store with fuel volume and inside sales using a best guess approach based on location and store size/dimensions. Getting to a profit & loss statement together along with a business plan to share with prospective lenders as well as equity participants was the focus for about a month.
The business plan was developed with a more traditional approach to running a convenience store operation rather than the approach taken by the seller. Here are the key components
Establish a wholesale fuel distribution business. This operation is somewhat separate and apart from the convenience store operation. We’re able to do this because with 14 stores we should be able to meet the minimum volume requirement any major oil company might have. Oh, I said earlier that they were 17 stores between the two brothers and the 3rd party? Three stores fell out because they are either under contract to sell to someone else or have already been sold, so it’s only 14 stores. In any event, we would be able to get one or more marketing agreements with major oil companies.
The other line of business (LOB) is the convenience store operation. One of the major components to maximize value with the convenience store business is branding the store, separate from the gasoline brand. This is a relatively common practice and is very effective. Some examples of where this is extremely effective are 7-11 & Circle K. If you notice, 7-11 has multiple gasoline brands at their stores, including Exxon, Mobil, Shell, and Chevron. Circle K has done the same with their stores. As a side note, both 7-11 and Circle K have grown by either acquiring stores and converting them to 7-11 or Circle K or licensing stores to franchisees as 7-11 or Circle K.
Another line of business that we mention in the plan but didn’t provide financials for is the distribution/sale of petroleum products including gasoline, diesel, jet fuel, oils and lubricants to fleet operators. Wholesale marketing agreements with major oil companies aren’t necessarily restrictive to selling only fuel. We could grow the business by marketing petroleum products to others besides convenience store operators.
An extension of selling products to fleet operators is selling fuel to branded convenience stores. This LOB is convincing store operators to rebrand to the fuel brands we have agreements for then convincing them to buy fuel from us. This is an incredibly competitive business, one that will consider after our operations are stabilized. We did this effectively with our Conoco operation.
Finally, the LOB that was not included in our business plan but will be adopted should we get this deal done is transportation. With 14 stores and the projected fuel volume are forecasting we will have enough to support a fuel transportation business. We can transport fuel for our store operations as well as that of other store owners and fleet operators. Again, we didn’t include this in the plan. Our primary focus is on getting the store acquired and the operations up and running.
After getting the business plan and financials together, it was time to identify financing sources. I started with call some bankers that I know to see if they are a “specialty” business that focused downstream oil and gas or petroleum marketers. I knew this was a “thing” because of my previous company. That didn’t pan out so I did a Google search and to my surprise there we two banks that had a specialty lending group focused solely on fuel centers and convenience stores. The banks were BMO Harris Bank, an international bank based in Chicago and Citizens Bank based in California. I contacted both banks and both were interested in getting a copy of the business plan and discussing a prospective deal. I’ll get back to you on where we are with a possible deal with each bank.
The other important piece of the financing puzzle is finding equity to support the transaction. I, by no means, have a million or 2 or 3 dollars to put into a transaction this size. By the way, my initial calculation was that the total transaction would cost about $10 million to complete, that includes an $8 million purchase price plus renovations and working capital. Those were the preliminary numbers included in the plan for discussion purposes only.
What I know for certain, is that most reasonably thought through business opportunities can attract financing to get them done. The terms may not be ideal, sometimes, but the opportunities are there. What I did to identify prospective private equity funds that might support the acquisition was just Google “retail private equity.” A lot of sources popped up. I even got a list that had 2000 firms listed. There were a screen filter and service that allowed for screening of possible sources.
I don’t think financing is going to be the primary issue on this deal, not really. Getting the seller to cooperate is going to be the big challenge.