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Friday, April 24, 2015

1031 Exchange Case Study

Source: NRC Realty & Capital Advisors
By Evan Gladston, Executive Managing Director

Owner, Robert, has built his company located in a growing city in the Gulf Coast region from the original five stores he took over from his father into a thriving 20-store business. In addition to the 20 company owned and operated convenience stores, Robert has another 30 wholesale fuel accounts with contract dealers with an average 8 years remaining on each agreement. Total EBITDA on the company-operated convenience stores and wholesale supply was nearly $6 million in 2014, with 25 million gallons in fuel sold. Half of his stores have been fully depreciated (for tax purposes) and the other half were built within the past 10 years. His wholesale fuel supply agreement has less than two years remaining with the oil company. He has mortgages on 20 stores totaling $15 million and another $5 million in bank debt.

Robert is sixty-eight years old and has two children, neither of whom works in the business. He and his wife, who helps Robert run operations, took a combined salary of $600,000 in 2014 and paid $200,000 in federal and state taxes. They are both in good health but he works 50-60 hours a week. A number of their stores are over four hours from their home office and Robert visits his stores at least every other month. He would like to semi-retire and devote time to philanthropic work and his young grandchildren but figures he can work for another 5 or 10 years if he has to.

Robert has been approached by a large buyer who has verbally offered to buy the company for $48 million. Robert figures that if he accepted their offer, he would net about $18.5 million after paying off existing loans, costs of sale and capital gains taxes. Robert is very interested in this offer although he thinks a competitive bidding process, which would likely bring in more potential suitors, might result in a higher price. However, after meeting with his accountant, he determined that if he invested the net proceeds in CDs and stocks and bonds at an aggregate 4% return, his income would drop to $500,000. Further, some of the ‘perks’ of ownership, including company cars, travel and entertainment would go away. His dilemma is how to maintain his annual income in the event of a sale but he likes the idea of having secure passive investments in his estate versus burdening his family with operating the convenience store company.

To see a list of convenience stores for sale and gas stations for sale, click here.