Caveat Emptor



Guiding Principles
Practice Areas
Mortgage Finance
Firm Resume
Professional Bio
GLG Direct ©
Legal Links
Contact Us
Privacy Policy




May 22, 1995 27 th Year  Volume31/Number7

Legal Counsel
By Christopher J. Gulotta

Caveat Emptor

Buyer Beware: If you’re considering buying an existing convenience store business be sure to consider all the issues, obstacles and processes before closing the deal

AS THE PUBLIC'S demand for local convenience stores has increased, so too have the number of convenience stores and their value. Many investors and entrepreneurs interested in the food industry have recognized that convenience stores are an attractive, fast-growing and creative alternative to other conventional retail food formats.

Accordingly, as the demand for successful and well-run c-stores has increased, many retail owners have been able to command high purchase prices for their businesses. While there are many excellent opportunities, purchasing a c-store is a risky endeavor where:

Promises and seller assurances may not in fact be guaranteed or adequately secured;

Large amounts of capital are required up front (i.e., the down payment, cash portion of the purchase price, working capital, etc.) and over time (assuming a portion of the purchase price is payable via promissory notes); and

The buyer will be undertaking a Herculean physical, financial, emotional and psychological effort, in an attempt to ensure that his or her decision to purchase the store was justified.

The following is a brief overview of the issues and considerations involved in buying a c-store.

Phase One. When considering acquiring a c-store, it's vital you ask yourself the following questions to ensure success:

What are your short- and long- term goals (financial and personal)? Why do you believe that buying a store will serve to achieve those goals?

Do you understand the risks associated with buying and operating a retail food business? Have you ever worked in a c-store before?

Have you prepared a business plan that compels you to consider all of the relevant issues, thereby identifying in advance your strengths and weaknesses? (If you have a partner, ask these questions of him or her as well).

Are you currently in a position (financially, personally and experience-wise) to go forward and commence the due diligence process?

Author's tip: Before going any further, interview and retain the counsel of a competent accountant, business consultant and attorney (counselors); they have the professional experience and insight to assist you in your Phase One analysis. Further, consider having a meeting that all of the counselors attend. Their insights are far more valuable when they can brainstorm collectively. Lastly, consider having a third-party colleague sit in on the meeting and take detailed notes to help you recollect the details of the group discussion and, more importantly, they may raise issues you had not mentioned or considered.

Phase Two. Once you are confident you have a good perspective on the endeavor and are prepared to proceed with the preliminary negotiations, ask yourself the following questions:

On what basis has the seller determined the purchase price? How does he or she justify it?

How extensive was your due diligence (investigation) into the business in question?

What is the advice of your counselors?

Have you conducted a trial run in the convenience store you plan to buy?

Why is the seller selling the business?

Although every seller will have any number of seemingly acceptable reasons why he or she is selling and why you are getting a great deal, remember that the seller's job is to overvalue the business and possibly dispel any concerns that you have or should have about the value, profitability and/or viability of the business. Remember, owners are more likely to sell their business when it is troubled, rather than when it is thriving.

Author's tip: Once again, bring your team of counselors together and get their collective input at this stage. Have your counselors prepare a cumulative checklist of questions (for each prospective seller to answer) and a list of documents (such as tax returns, books, records) for prospective sellers to provide. Be careful! Do not negotiate or sign anything before consulting with your counselors.

Phase Three. It is imperative that you not narrow your focus to any one business. For negotiating leverage and added perspective, you will be well served to consider a number of other possible target convenience store businesses. Once you have narrowed your search to a few c-stores you can commence a more thorough and detailed due-diligence investigation. (See "Selecting an Attorney and the Due Diligence Process," Page 54 in the March 6, 1995, issue of CSNews.)

You, not the seller, are taking the biggest risk in this transaction! If the seller is reluctant or unwilling to address the questions posed by your counselors at this point, he or she may be attempting to conceal certain detrimental factors that could adversely effect the value, profitability or viability of the business.

Author's tip: Have your counselors arm you with a list of questions specifically tailored to the businesses you are considering. Once you have gathered the information from the prospective sellers, meet again with your counselors and have them critically evaluate the merits and detriments/risks associated with each potential deal.

Phase Four. Before going to contract, have your counselors conduct their respective due diligence. By doing this before negotiating the terms of the contract, your attorney will be armed with the respective insights of your other counselors and will be better able to identify and address the apparent and not-so- apparent risks associated with this business, which could significantly reduce your exposure.

At this point, you may be asking yourself, "At what point in the negotiations is the deal not worth proceeding on?" This is precisely why you must pursue a number of possible acquisitions. If you are being requested by a seller to make too many concessions, you will be able to make a comparative analysis and know when to walk away.

Author's tip: While a favorable con- tract is a prerequisite to going for- ward, guarantees and assurances stated in the contract are only valuable when supported by protections such as an escrow fund, which can be used to off- set any breaches or misrepresentations by the seller.

In the final analysis, the most essential consideration is basic: "Why is the seller really selling?" Another question you must ask yourself is: "How salable is this business?"

Remember, in addition to the stream of' income you hope to generate, you should also take into account the resale value, profitability and viability of the business and the potential capital gain you will realize when you decide to sell the business. Lastly, because entrepreneurs are often by their very nature over-confident, attempt not to taint your analysis of the business with any expectations of increasing the value of the business. The business must stand on its own two feet.

Many investors and entrepreneurs have recognized that convenience stores are an attractive, fast-growing and creative alternative to other conventional retail food formats.

WRITER’S NOTE: This article is intended for information purposes only and is not to be considered legal advice. Do not attempt to solve your individual problems based on the general information provided here.



Copyright © 2001 The Gulotta Law Group, PLLC

Home Up Next