by Jake Pool
Owning a gas station is a business we think of when we imagine an entrepreneur realizing the American Dream.
According to the National Association of Convenience Stores, there are over 120,000 gas stations that double as a convenience store in the U.S. (out of over 150,000), and 62% of convenience stores are operated by a single-store operator.
That means most gas stations are not owned by multi-store corporations. They’re owned by individual proprietors who invested their own money into their business.
Have you ever thought about realizing your own American Dream and starting a gas station?
To guide you, we interviewed Punardeep Sandhu, who left his job as an IT Consultant 8 years ago to open a Chevron gas station. He helped us break down the process, so we can show you how to do it step-by-step.
Before we break it down, note that the terms gas stations and convenience stores (or “c-stores”) are sometimes used interchangeably. In this article, we’re focusing on opening a gas station that also includes a convenience store. You can read our article on How to Open a Convenience Store for great tips on that subject if you’re not interested in selling fuel.
1. Initial Planning
Like any small business, opening a gas station business begins with careful planning. A business plan is more than just an outline of your ideas and dreams; it’s the blueprint for your business and the key to securing the funds you’ll need to get things going. Your plan must include and account for things like:
- Initial and Ongoing operating costs
- Tanks, Pumps and Fuel
- Products and Inventory
- Location costs
- Insurance
- Accountant and Legal Fees
- Licenses and Permits
- Marketing
You can visit the U.S. Small Business Administration’s site for some great tools that will help you write a business plan. It’s important to get familiar with the SBA now as you’ll see them again in Step 3: Funding.
How much does it cost to open a gas station?
Speaking of funding, getting into the gasoline station business isn’t cheap. The initial costs of opening a gas station ranges on average from $250k to $2 million even for a small gas station.
Also, unless you have access to large stockpiles of motor grade gasoline, you must enter into an agreement with a gasoline supplier. And that’s the X-factor in figuring the initial price of a gas station.
Do you have the funds to open an independent location with your own supplier or do you need to leverage your funds by entering into an agreement with a gas station franchise?
Instead of opening a brand new gas station, you could buy one that’s up and running. Just make sure to research the area first so you know what kind of customer volume to expect in the location.
How to Open a Gas Station Franchise
Most station owners, including Punardeep, get into the business through buying a gas station franchise. Partnering with a franchise can ease some of the financial burden (but not all!), and an established brand can serve as your key marketing tool. Punardreep explains,
However, each gas station franchise has different financial requirements for opening a location (some in excess of $1 million!) and some mandate a background in management or entrepreneurship before they’ll consider you.
Here’s a list of some of the top gas station franchises (there are many more), so you can check the qualifications based on your business plan:
Gas Station Products and Services
When planning your gas station, you need to consider the products and services you want to offer beyond gasoline. Gas stations have gasoline as revenue to keep the business in operation, but it’s the sales inside the convenience store that make the business profitable. Punardreep says,
Also assess services other than food and drinks that gas stations typically offer such as:
- Car Washes
- Air Stations
- Tobacco
- Lottery Tickets
- Restrooms
Each of these services have their own costs (permits and maintenance), but have become fixtures at gas stations around the country.
Your gas station franchise agreement can also directly affect the list products and services you provide. It’s best to work with a lawyer who specializes in franchise law in this situation.
2. Choose Your Gas Station Location Carefully
Open a Gas Station 101: Your location is the prime determiner of the amount of traffic you will attract.
It’s so important that when we asked Punardreep, “What are the top 3 tips you have for others who are opening a gas station business?” He answered,
Choosing the location of a gas station isn’t exactly like choosing the location of a used car dealership, though we covered that in section 3 of our article on How to Start a Used Car Dealership.
You need to invest a lot of time and perhaps even some money into market research about a potential location of your gas station. Here are some factors that help determine whether a location is prime for a gas station business:
- Easy accessibility from a highway or main intersection
- Is it located on a main route for general work commute?
- Is there a lot of competition?
- Are there wholesalers around like Sams Club or Costco?
- Is there existing construction or future construction in the area that would affect your permits or accessibility?
- Assessment of state and federal location and environmental laws for a gas station
You can read more detailed information from ConocoPhillips regarding these factors, but it’s ultimately up to you, the business owner, to carefully assess your location.
A great tip is to find a gas station location in a new and developing neighborhood. Ideally, try to find a spot just outside the city before the area is fully established.
Many people in this type of neighborhood will have to commute to the city and need gas to get to their jobs. Plus, you should be able to find cheaper real estate in these areas.
Who Owns the Tanks and Pumps?
Study this section as it is the most important element can make or break your gas station business aside from the actual location.
Obviously, gas is the life blood of gas stations. It’s the core revenue source and marketing tool you need to stay in operation and generate profits. That means you must assess the ownership of the tanks and pumps at a potential location before you purchase or lease.
Many gas station owners don’t own these assets and instead lease them from a franchise or the owner of the property. If you’re buying a gas station, check whether or not the tanks and pumps are included in the sale. If you’re leasing a station, have a lawyer thoroughly review the terms of the tanks and pumps agreement.
And most importantly, check the history of the gas station tanks and pumps. Many owners have lost their business because of purchasing or leasing tanks and/or pumps that are defective or not in compliance with state regulations.
Environmental Assessment
Business owners looking to open a gas station need to obtain a Phase 1 Environmental Assessment of their location. This assessment must be completed by an Environmental Professional (geologist or engineer) who will determine the environmental history of your location and adjacent properties.
Here is an example of a real assessment.
This document is essential for two key reasons:
- The Phase 1 Assessment is a requirement of the SBA (pg 384) if you want to obtain a loan for a gas station business.
- It will allow you to back out of a purchase agreement if the assessment is unfavorable and your agreement includes an environmental contingency clause.
A qualified real estate attorney with experience in dealing with gas station agreements should know this clause. However, it’s up to you to make sure it’s in the purchase agreement as it is the only way you’ll be able to legally withdraw from a sale and keep any deposits.
3. Registering the Gas Station Business
Forming a business entity is the next step in starting a gas station. However, before forming your business structure, make sure and consult with your attorney to see which type of business is best for you (limited partnership, sole proprietorship, limited liability company, or corporation).
It’s not recommended to operate as a sole proprietor if you’re going to open a gas station. There are many legal risks that would be tied to you personally if something happens at your location (robbery, leaks, accidents, etc…).
Most gas station owners opt to form a Limited Liability Company (LLC) because it gives them the some of the tax and business advantages used by a sole proprietorship and a corporation. Plus, they usually play lower fees. However, it may be more difficult to get a loan.
Last, you need to choose a business name and apply for an employer identification number with the IRS and your state.
4. Funding Your Gas Station
To start a gas station, you need money, and lots of it. Construction of a gas station alone can run over $350k (and that’s in Idaho!), and if you’re going to buy a gas station, the price tag can run the same or more based on the location.
When asked how he funded his gas station Punardreep said,
SBA Loans
The Small Business Administration has loan programs to help small businesses, like gas stations, get started. They won’t lend money directly to you, the business owner. Instead they work with other institutions to reduce their risk on a loan by backing it by as much as 85%.
The benefit of taking a loan for your gas station from the SBA is that it has low down payments and lengthy payment terms with reasonable interest rates. However, you may be required to put down a substantial amount of collateral on the loan, and the loans can be difficult to secure and include a lot of paperwork and a long wait time for approval.
Business Loan from a Bank (Conventional)
With good credit, you could apply for a traditional business loan from a bank. However, because the bank takes on the entire risk of the loan, so they have high standards with their requirements.
This means you’ll need around 15 to 20% of the initial funds to start with a credit score over 700, or be willing to put up other personal assets (property, equipment, etc…) as collateral.
The good news is that small business loan approvals at large financial institutions hit an all-time high last year.
How Profitable are Gas Stations?
Your ability to pay back these loans will be contingent on the profitability of your operation. And a quick search may show horror stories about gas station profitability that can seem off putting.
However, we spoke with Punardreep about his margins and he said,
So, two things determine gas station profitability: you and your location.
There are many owners out there who didn’t do their due diligence when they went into the gas station business and are now suffering the consequences of margins in the 1-2% range. However, many others, like Punardreep, are making anywhere from 5 to 30% profit each month.
Gas stations can be profitable if they’re set up for success.
5. Setting up for Success: Gas Supplier Contracts, Technology, and Employees
Knowing the elements that will either increase or decrease your gas station’s profitability are key to starting a gas station. You will need to negotiate supplier contracts, outfit and update your location with the latest technology, and continually assess your ongoing costs to set your station up for success.
Gas Stations Supplier Contracts
We mentioned suppliers earlier, but it’s important to understand how to manage refilling your gas supplies and the factors that determine gas prices.
It’s up to you to research local wholesale fuel suppliers (or petroleum marketers) in your area to see who has the best prices for your fuel because gas suppliers often make money from the percentage of your sales. You need to compare rates to maximize profits.
For example, if your location is near Dallas you might contact SEI Fuels or Martin Eagle Oil.
However, if you’re in a franchise agreement, you may be required to purchase from select vendors because they have a prior agreement. Punardreep owns a Chevron location and therefore has to supply it with Chevron gas at their set rates.
Gas is more of a revenue stream for gas stations and is not your key profit maker, but if you can bump your margins from $.01 per dollar to $.03 or $.05, it will add up in the long run.
Technology
Punardreep explained to us,
Before you start a gas station, remind yourself that technology isn’t going away, and it’s best to use it to your advantage rather than skim on cheap devices and software in your location. Eventually, it will start to negatively affect your profit margins.
Here’s a list of the top POS systems for gas stations:
This is a list of the top camera system providers, but work with a trusted security camera company to help set everything up.
Employees and Customer Service
says Punardreep. If one of your biggest expenses is on the front line interacting with customers every day, be sure you hire someone who is going to reflect your values and provide amazing customer service.
In fact, it’s one mistake Punardreep said he wished he avoided when he first started.
If someone isn’t willing to help and take care of your customers, then you have to be ready to make some cuts. Otherwise, you could see a direct affect on your profit margins.
6. Permits, Licenses and Insurance
Now that you know the aspects of opening a gas station, let’s look at the permits, licenses, and insurance coverage you need when actually starting a gas station.
How Do I Start a Gas Station?
Permits and licenses for a gas station differ from state to state. However, gas station business owners are responsible for making sure everything is in compliance. Some standard permits and licenses include:
- Building and Fire Inspection
- Tank and pump inspections (Also, each state actively inspects them at random, usually conducted by a state’s Department of Agriculture.)
- Water discharge permit if required by your state. You don’t need an NPDES Permit.
- Alcohol, tobacco, and lottery ticket licenses
- Food and Beverage distributor licenses
- Certificate of Occupancy
- Health Inspection
Each state —and sometimes county and/or city— has its own licensing laws and fees. A quick search of your state and/or county with the desired license should direct you to the correct page.
Most importantly, each state requires that you apply for a Motor Fuels Retail Outlet License when starting a gas station. It’s the tax license you need to sell motor fuel in your state. The title may differ a little by state (it’s just called a Motor Fuel License in Massachusetts), but check on your state’s government website for the proper application.
Here’s Michigan, Virginia, and New Jersey if you live there!
Last, you want to check with a qualified insurance agent about business insurance before you begin gas station operations. A gas station is a business known for having a lot of financial risks like robbery, injury (employee or customer), equipment malfunction and property damage. In any of those unfortunate situations, you want your gas station to be covered to protect your assets.
8. Marketing
Getting your gas station noticed by customers is essential to growing your business. Even with a prime location, gas stations need lots of marketing and promotions to keep their profit margins high.
Get Noticed!
A great way to get your gas station noticed is through signage. You’ve seen the giant gas station billboards all over the country, and there’s a reason for it. Many potential customers just drive to the nearest gas station, so you want them to know that your gas station is near and ready for business.
Here’s a list of the top Outdoor Advertising Companies in the U.S.
Offer Promotions
As you know, just because you stop at the gas station, it doesn’t mean you’re going to purchase anything other than gas. But as we learned, your highest profit margin is not on your gas. It’s in the convenience store. To entice potential customers, offer promotions to get them to spend more money. Punardreep suggests,
Online and SEO for Maps
Most people don’t think of having an amazing website when opening a gas station. But the primary goal of having a website isn’t to be visually appealing (though it helps!); the goal is to rank as high as you can on google maps searches.
When someone searches for a gas station on their phone, you want your store to be the one that appears first and most prominently. It may be in your interest to work with a qualified webmaster if you’re not knowledgeable on things like web marketing and SEO.
Finding a webmaster who specializes in Google Maps is easy nowadays through the power of the internet. Use this guide to help with your search. It lays out all of the steps and helps you determine a fair rate.
9. How Much Does a Gas Station Owner Make?
Once you develop a business plan, secure the funding, and secure all of your permits, your gas station is ready for action! We already spoke about the profitability of the gas station, but you may wonder how much of that profit is going into your pocket.
Most gas station business owners understand that they’re the last person to be paid after expenses and their salary is contingent on how well the business does. Because of that, there isn’t much data tied directly to the title of gas station owner.
However, Salary.com has statistics on the salary of a gas station manager. The good news is that they make over $100k annually on average from their gas station. You can use that information accordingly with your ideal profit margins to make a rough estimate of your potential earnings.
Whether you intend to buy a gas station or open a gas station through a franchise, opening a gas station is one of the classic entrepreneurial endeavors that has provided many Americans with their path to realizing the American Dream.
On that, we’ll leave you with one last piece of advice on gas stations from Punardreep :
Do you have any experience with gas station operations to share?
