To garner optimal value, a business should shine like a polished apple at the time of divestiture. This doesn't happen overnight or by accident, but with a well-executed divestiture plan, developed and implemented in advance of the targeted exit date. All business components should be positioned in their best light — from the real estate, facilities, store operations, dealer leases, agreements and the commercial side — to avoid red flags that detract from deal value and timing.
We recently assisted a marketer with their business divestiture in response to a state petro association referral. Considering the minefield of avoidable challenges that we encountered, it was agreed that this transaction would make a great topic for this column. Following are the myriad of teachable circumstances that we encountered while unwinding and thankfully divesting this "troubled jobbership."
Be Pragmatic With Your Business Value
Despite what one may personally believe or professional valuation yield, true business value is dictated by the market after a well-executed process that properly exposes the business to an adequate universe of qualified buyers. Once the process is deployed, seldom does a white knight buyer emerge willing to pay more than the defined market value. When perceived value conflicts with market value, business remediation time needed to garner market value must be weighed against the realities of age, health, current enthusiasm and family considerations. Unfortunately, current business value is a hard reality, making marketer pragmatism paramount.
Know Your Tax Consequences
Have a frank discussion with a tax advisor to understand the tax consequences and expected net proceeds of the planned sale before pulling the trigger on a divestiture process. Don't wait until the 11th hour after the entire divestiture process has unfolded and the Asset Purchase Agreement is about to be signed to figure out the tax consequences of the mutually negotiated deal. In the case of our troubled jobbership, the buyers weren't sympathetic to adjusting terms and conditions to mitigate our client's taxes.
Dealer Lease Structure
Dealer leases on marketer-owned retail sites should accentuate business value, not diminish it or complicate a sale. Some key considerations in this regard include:
- Avoid tenant Right of First Refusal (ROFR) options and clauses. Providing a tenant with a ROFR puts the future disposition of the property in that person's hands and will assuredly cause endless delays and complications, while eroding buyer confidence and harm overall business value.
- Dealer leases must have a defined term with lease extension options granted only by the marketer/lessor. Expired leases with month-to-month terms must clearly indicate that the month-to-month term is a temporary consideration and does not grant the tenant any rights contained in the original lease.
Dealer Supply Considerations
Valid supply agreements contribute tangible value to the fuel distribution side of the business when some of the following basic components are addressed:
- An established term, not an open arrangement that can be arbitrarily terminated.
- No environmental responsibility or ownership of third-party underground tanks.
- Little or no forecourt maintenance responsibility. Strive for maximum net fuel distribution margin with no offsets.
- Well-defined pricing formulas that mitigate marketer credit card expense.
- Clearly defined dealer responsibility for unamortized brand monies and mystery shop consequences.
- An assignment consent clause to enable seamless marketer agreement transfer in the event of a sale.
- Dealer assignment restrictions that require marketer consent to a desired agreement transfer.
Confirm Property Ownership and Boundaries
Prior to starting the divestiture process, confirm that the business actually owns the various subject properties and that their legally described boundaries match their physical location. Bulk plants generally pose the greatest risk of error given their age and long-standing existence. Numerous bulk plants that we have divested have been around since the Calvin Coolidge Administration, servicing customers with mule-driven tank wagons. Plants may also comprise several adjoining parcels, with one or more having long-forgotten, third-party ownership.
In the case of our troubled jobbership, the bulk plant didn't fully reside on the plot of land described in the legal description, causing significant headaches and delays to remedy, including having to notify the owners of the adjoining property that they unknowingly may own part of a 100-year-old petroleum fueling facility.
Hopefully, some of these simple considerations will help others to better prepare, and garner optimal divestiture success and value when they are finally ready to retire and sail the Caribbean or become a permanent nuisance around the house.
Mark Radosevich is a recognized industry advocate, possessing more than 40 years of continuous petroleum industry engagement. He is president of PetroActive Services and can be reached at [email protected] or 423-442-1327.
Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News.