The short story is I think I solved the price range for the purchase of the Blue Diamond stores. My offer is going to top out around $5-6 million. Here’s the backstory and why the range is so big.
First, let’s look at what I mean by offer price and why I couch it that way. If you’ve been keeping up you know that there are multiple components to acquisition costs of the stores including real estate purchase price, repair/renovation costs, fuel distribution equipment & installation costs and transaction costs. I don’t wanna spend too much time on the individual components of the purchase price but I have to explain the impact they have on the real estate acquisition price and my logic in coming up with the range. I’m going to have to use this in negotiating with the seller, although I won’t quite tell him all the stuff I’m about to share with you. He’s either gonna get it or not. Actually, I set him up already cause I told him the reason he was gonna get market value is that he was selling a bundle of shit. I was more diplomatic than that but he got the point. His comeback was that he would give me a discount cause I was buying all the stores. Whatever.
If you read prior posts you know my challenge has been how to determine the costs of replacing fuel systems and fixing the raggedy-ass stores. The ‘costs’ to fix shit has to be part of the total acquisition cause it represents the investment in the stores. You won’t be able to measure, at least effectively, the return on investment if you’re not including “all” of the investment. Pretty simple.
The other thing is there is a balance between the acquisition of the real estate, or what I will pay the seller(s) and the repair costs. Stated another way, I could afford to pay the seller more if I didn’t have to pay to fix shit. And, I would want to pay him more to ensure he sells it. Let me say it a third way. If the shit was not broken, he would expect more and I could afford to give him more.
The good news is I figured out how to make it work, given the estimated sales which I will get to later in this post.
Hang with me as I get through this.
I don’t know if I said this before but if I have you get to hear it again. If I haven’t, this will help you frame my point.
There are 14 stores and they vary widely in location, size and anticipated sales volume. The smallest store is less than 1000sf in size compared to the largest store which is greater than 5000sf in size. The lowest volume store will do about 40,000 gallons of fuel per month to the highest volume store which will do over 200,000 gallons of fuel per month. Some stores will have a fast food restaurant inside and most will not. Some stores located in a ‘big’ small town and there are a couple of stores that are the only store in their town. Point is all the stores are different. With the stores being that vastly different, the investment in the stores should vary, vastly
What I did was to go back and scale the investment to “match” the store, where I could. For example, for some of the lower volume stores, I’m assuming I don’t have to replace the underground storage tanks, just the aboveground fuel system components, like the pumps. We will expect the underground shit to be sure we don’t have to replace it and if we do, we will. We know we will replace all at some point, but if we can delay that investment, he better. One of the reasons for the range Is so I can include the replacement costs of all the renovation costs in my assessment of value. That sounded confusing. To make it plan, the less I have to spend upfront, the higher the purchase price can be and vice-versa. Gives me some negotiating wiggle room.
Here’s a key point, not just for this deal but for every acquisition, you don’t want to give away your return and the time of purchase. You make your money on the purchase. What I’m trying to say, awkwardly is, buy low, sale high, or higher or highest.
Bottomline, I was able to lower the costs of the fuel system repairs, upgrades or replacements. The equipment provider and installation company helped tremendously.
The building renovation costs are a little less scientific, particularly because we need actual building inspections and construction plans to nail down actual costs projections. We will giggle those numbers when we get to that point; however, by then, we will have committed to a real estate purchase price.
So, fuel system repairs/replacements costs are kinda nailed down and the buildings upgrades or replacement costs are kinda nailed down and the only other costs to nail down are infrastructure costs and transaction costs. The infrastructure costs, including the costs of the system, are next to complete which I can do over a couple of days. I have estimates for the system’s components, I just need to review to be sure I’m not missing something.
The transaction costs, like legal, financing, title is fairly easy to get my arms around. I do that with the mortgage company all the time. That won’t make or breaks the deal but I do need to get it put together.
For the last segment of this post, check out the page on Valuing A Deal.
The thing that is most important, probably, in valuing this the deal is getting good estimates for fuel and sales volumes. I really don’t have a deal until I get that but let me tell you what I’ve done.
As I mentioned on the Valuing A Deal page, you gotta have a good P&L. In this case, there is no historical information so I gotta make up and then support it with an independent study. My plan is to get the studies for the two highest volume stores first since those stores are the “plums” of this transaction. If those volumes are close, then they will get the studies for the other stores. I mean of the volumes for the highest volume stores are sufficient, we got a deal.
The last thing I did to put some lipstick on the P&L is I looked at the stores, closely and tried to figure how to better look at and manage expenses. If you’re not financial what I mean are operating expenses like compensation, insurance, utilities and shit like that. What I don’t mean is stuff like product costs, as the costs of candy-coated popcorn.
Here’s the big move that I did. I grouped stores by proximity and looked at that group or “district” as a profit center. What I did was to take away “store managers” and instead have a regional or district manager. In most cases, I can go with a senior associate in the area where the stores are physically closely “clustered.” In other “districts” where the physical proximity is a more spread out, I have “assistant” manager” and the local “in charge person. This district operating model allowed me to lower the store or “unit” operating costs. This doesn’t give me more money to pay the seller, it gives me more money to increase the value of the “enterprise.”
Here’s the wrap.
With all the changes and different looks at the deal, I was able to analyze the value or what I can both pay for the sites and what I should be able to ultimately sale the stores for. The deal looks very different now and a much more viable transaction. The big deal now is getting with the seller to agree on the price and structure of the deal before I spend any money.