Recently I was asked to give a presentation to a group of convenience store owners at a one of the State association conventions and the topic of the presentation was to share with the audience the state of the convenience store industry regarding the continuing consolidation that is occurring.
The theme of my presentation was very simple, because I think in simple terms. What I shared with the audience was that it has never been a better time to be a seller or a buyer of a convenience store.
Although this statement may seem contradictory it isn’t when you look at what is going on.
Let me explain why I think it is a great time to be a seller. To begin with look at the stock market. The stock market is now at an all-time high of over 21,000. Who would have ever thought the market would get this high? But in psychology we are taught that everything happens, because of cause and effect. Meaning the reason or the cause, the stock market is so high is because money is so cheap to borrow and there is no place you can park your money and make a return on it so by default it drove people to the stock market, which created higher than normal valuations. And the effect of this is a stock market in excess of 21,000. So, when you apply the same principle to a convenience store you get a higher than normal valuation for the business. Translated this means convenience stores are selling for more money now than I have seen happen since the early 2000’s. Which makes it a great time to be a seller.
OK, but why do you say it is a great time to be a buyer if convenience store businesses are selling for a higher price than normal? The same reason it is a good time to be a seller is the same reason why it is a great time to be a buyer. Cheap money. With cheap money, you can get more store for your money.
Think of it like buying a house. For example, if the interest rate is at 4% and all you could afford was $1,500 a month you could purchase a home for $300,000. But if interest rates were at 8% and you needed your payment to be at $1,500 you could only get a $200,000 house. Which means if you could afford a $300,000 house chances are you would be a in a better neighborhood and have more amenities than what you would get with a $200,000 house. So, take this same formula and apply it to the convenience store business. Chances are I am going to be able to afford a better convenience store with better cash flow and a better location with cheap money than if I had to pay more for money that would I borrow later.
Here again it sounds simple, but life is never as simple as we would like for it to be. My reason for saying this is that a buyer can’t just go out and decide they are going to buy 10, 20 or 50 stores today like they were buying them off the shelf at Wal-Mart. No, it comes down to supply and demand and there aren’t that many stores for sale and stores sell for different reasons. In my business, I may work with an owner of a store for years coaching them and working with them to keep them informed as to what is going on in the market place, because they are not ready to sell and it is only after I have had a chance to prepare them would I allow them to sell, because it is harder than what people think it is to sell one’s business.
Your business is probably the biggest financial asset you own and therefore there are a lot of issues that need to be addressed. And I am not just talking about the financial side of the business either. There are emotional and internal issues that need to be worked through and some people are not up to the challenge. Seeing all the issues that face a business owner especially with so many baby boomers such as myself selling their businesses is what prompted me to write my new book “Cashing In on the Hidden Wealth of Your Business” to give a business owner a template as what to expect and if they are really up to the challenge of selling their business.
So, with there being a limited supply of convenience stores for sale and cheap money the value of convenience stores is in their upper limit.
However, and when you hear the word however, you want to perk up, because something else is going to be added to the equation. And that something else is how to know what the value of a convenience store is? A lot of people think the value of a convenience store is based solely on the cash flow of the business and even though cash flow maybe the dominant factor in the equation there is more factors involved. For example:
1. What is the upside for a buyer?
2. Where is the business located? Urban locations generally bring higher values.
3. Is the store branded or unbranded?
4. What is the current competition?
5. Is the store a fee property or a lease property?
These are just a few of the factors that come in play when determining what the value of what a convenience store is worth.
Alas I am back to timing. We have all been told that life is all about timing and I believe that to be true. As the old saying goes “I would rather be lucky than good”. And you and I both know of many people who we look at and say. Really! How in the world did that guy make all that money? Most of the time it was because they were in the right place at the right time. I know that is how it always works for me and when I did get things right I thought I was smart, but looking back the truth is I was just in the right place at the right time. It always pays to be lucky.