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Thursday, April 10, 2014

So, You Want to Make an Acquisition?

Source: Convenience Store News
By Dennis L. Ruben, Executive Managing Director

Convenience store owners and operators that are contemplating an acquisition need to address a number of considerations before deciding whether to move forward. Many of those considerations revolve around the size of the operator and the intended purpose of the acquisition.

For most operators, a strategic decision to acquire new stores may be based on a desire to eliminate a competitor, take advantage of a unique acquisition opportunity, acquire or build a store in a highly desirable and sought-after location, expand in an existing market, or grow into an adjacent or new market. Regardless of the reason, prudent convenience store operators will weigh the costs and benefits of any such acquisition or expansion, as well as their ability to absorb the acquisition without putting a strain on the company's infrastructure.

One of the most important issues facing operators is: How much should I be willing to pay to acquire a new store or group of stores? The answer to this question depends on a number of factors, including those surrounding the reasons for wanting to make the acquisition in the first place.

As leading industry observers have noted recently, purchase prices (based on store-level EBITDA multiples) have increased significantly in the past few years and show no signs of slowing or retreating. Having said that, the higher the price becomes, the harder it is to justify the acquisition and figure out how to make it profitable.

The larger industry players have a greater ability to pay higher prices than other medium-sized operators. They have a multitude of financial resources available to them and their cost of capital is extremely low. On the other hand, medium-sized operators that elect to pay hefty prices for convenience stores may find themselves forced to make a significant equity contribution to the transaction due to the limits on the amounts that can be borrowed in the current capital market environment for convenience stores.

Since most acquisitions involve a significant commitment of both time and financial resources on the part of an operator, the "feasibility" of any acquisition must be thoroughly researched and analyzed.

Feasibility Analysis

Operators need to ask themselves several questions. Why am I considering an acquisition? Why am I considering this acquisition? What will it do for my company, in both positive and negative terms? What strain will it put on the resources and staff of my company? Who will be responsible for