Several clients have recently challenged us to try to creatively refinance convenience mortgages tied to properties that were acquired over the last several years. These properties were purchased based upon high cash flow multiples of seven times or more–multiples that have become the norm with many transactions around the country.
When considered in light of the industry’s recent fuel margin difficulties, consistent profitability for sites purchased at these lofty valuation levels can be tenuous. In one instance, a client is even considering testing the divestiture waters for their entire chain rather than face the prospect of a lender default and loss of invested equity.
These diverse yet distinct situations may be symptomatic of a potential problem for traditional marketers who have been forced to abandon tried and true valuation standards in order to prevail in the current acquisition chase. In the past, the normal valuation range for fee simple c-stores was about five times EBITDA, adjusted to the estimated general and administrative expenses of the purchaser. However these multiples are a thing of the past as acquisition-hungry, publicly traded operators are contributing heavily to the spiraling prices. For these guys, owning real estate is not a priority and debt is a drag against share prices. Once they make an acquisition they typically resell the properties and lease it back from the new owners.
Leasing is the norm and they’re in the driver’s seat when it comes to setting the lease rate and terms. The sale or “flip” of the property after the acquisition into the 1031 market enables them to derive additional proceeds that makes a higher acquisition multiple quite affordable. In many cases, they derive the long-term use of the business for an insignificant sum. Marketers who wish to add real estate to their portfolios and compete against these publicly traded competitors in both the acquisition and operational arenas are forced to pony up added equity or unsustainable debt to stay in the game.

Fundamentally Sound    
Whether one utilizes a salary or dealer operational model it is imperative that the business be dedicated to retail network fundamentals including site rationalization analysis.
Sustaining higher acquisition investments during tough economic times necessitates the development of a cash flow contribution ranking of the entire chain from best to worst including adjustments for growth and higher-and-better use real estate potentials made for appropriate sites.
Sites at the bottom of the list that are neutral or a drag against earnings must be divested with the proceeds used for growth or to retire debt.  As part of my research, I took an informal poll of several successful salary operators to determine their site rationalization methods and found that although they approached the problem differently, they generally arrived at a consistent and proper result.
One utilizes a gross profitability formula that calls for sites to be sold or leased to dealers if they fall below one threshold. Those that fall below another lower threshold are deemed to be not appropriate for dealers and are totally divested.
Another marketer assesses gross monthly inside sales and considers divesting sites in a range of $50,000 to $60,000, with his minimum criteria of around $70,000 for a potential acquisition candidate. Other smaller operators rationalize each site individually based upon various criteria including rent, debt, G&A and the value of QSR and other revenue streams.
In all cases network optimization is a key factor for long-term business success. Thus given a probable future of inconsistent fuel margins, the rational viability of marginal sites with low to average inside sales may be bleak. Marketers  proactive in their handling of these situations will be the winners in the growth and acquisition game now and into the future.