Pay Me Now or Pay Me Later
Posted on 12. Oct, 2009 by Terry Monroe in Advice, Published Articles
“Make necessary capital improvements now and get paid later with a better return on investment”
When the time comes to make capital improvements, more convenience store operators are making the smart decision to remodel now, rather than wait to take care of the maintenance when it’s too late. Recent trends indicate this shift is a positive direction for owners who understand the importance of operational maintenance. In addition, industry figures show the gap between remodeling years is narrowing (9.8 years), while the percentage of stores that have been remodeled in the last five years is growing (33-plus percent), according to NACS.
When defining capital improvements, or operational maintenance, we’re really defining curb appeal. When assessing the quality of a store’s assets, c-store owners must determine if there needs to be maintenance done for issues including cracks in the parking lot; peeling or faded paint on the exterior; plumbing leaks or clogs; interior design; and any other issue related to the overall look and functionality of the store.
I often suggest to my clients that it’s better to take care of operational maintenance immediately when there’s an opportunity to earn a return on investment. The “pay me now or pay me later” theory suggests that store owners who put off making capital improvements are those who want to be “paid now.” The best scenario, however, is getting “paid later;” because that involves a return on investment, which usually yields financial gains. For example, during a sale process, a buyer will assess the assets of the store or stores for sale. If one is in need of capital improvements and maintenance, the buyer will deduct the cost of the improvements from his or her offer. In those cases, if the store owner paid for the maintenance when it was needed, he would have reaped the benefits – which many times include an increased store value – from the improvements. Unfortunately, however; not making the improvements when needed will lead to the store owner ultimately losing money at the time of the sale.
While making capital improvements is most often associated with preparing to sell a store, it’s also vitally important to the overall business function. Store owners that suffer from declining assets are often those who operate highly successful businesses. In actuality, the stores that are most successful are the ones that suffer the most wear-and-tear. The highs that come from consistent consumer traffic usually bring the lows caused by the overuse of gas pumps, restrooms, soda fountains and coolers. A new store becomes a well-worn store in a matter of years. The key is keeping the well-worn store from becoming worn-out.
Store owners should always keep in mind the idea of maintaining a positive public image. Think of the image a business is sending to its customers when the parking lot is full of potholes, the restroom is closed because of plumbing problems or a pump is bagged because it’s out of order. It is no coincidence stores that maintain their curb appeal also maintain a healthy business. Just like customers are drawn to new stores because of the cleanliness, shine and polish, they’re also drawn to old stores that are constantly maintaining the look and feel of a new one.
So You’re Thinking of Selling
Posted on 08. Oct, 2009 by Terry Monroe in Advice, Published Articles
The results are in, and according to the 2007 NACS State of the Industry report, convenience store sales rose to a record-high $569 billion last year, but profits plummeted by a record $4.8 billion. The staggering drop in profitability has hit multi-store owners the hardest, with many of them considering selling their stores. But thanks to a tax law provision known as the 1031 Exchange, costly tax consequences resulting from the sale of those stores can be avoided.
Terry Monroe, president of American Business Brokers, agrees that multi-store owners are seeking to sell now more than ever before, thanks to reduced profits resulting from rising prices at the pump and high credit card fees. The result has been an industry-wide drop in profits of nearly 24 percent. With the number of single-store owners continuing to increase (62 percent in 2006 according to the NACS/TDLinx Official Industry Store Count ), more multi-store owners are recognizing that selling their struggling stores to the ever present throng of potential single-store buyers is an attractive option.
Traditionally, once multi-store operators have identified that option, Monroe acknowledges that potential tax implications are usually a deterrent to sales: Paying capital gains taxes of 15 percent can make sellers change their minds. “Interestingly enough, a common IRS program like 1031 is not something everyone is aware of, and it could potentially save hundreds of thousands of dollars for the seller.”
The 1031 Exchange, also known as the “Like Kind Exchange,” is an IRS section that allows a seller to legally defer the profit or gain of a sale to a future date. The prevailing idea behind the 1031 Exchange is that since the taxpayer is merely exchanging one property for another property of like kind there is nothing received by the taxpayer that can be used to pay taxes. (What qualifies as like kind can include other retail locations, rental properties, etc. The term encompasses a broad spectrum of property.) In addition, the taxpayer has a continuity of investment by replacing the old property. All gain is still locked up in the exchanged property and so no gain or loss is “recognized” or claimed for income tax purposes.
“If a seller closes a deal without a 1031, he could potentially lose 21 to 37 percent of his sale in taxes, depending on whether he pays capital gains or federal taxes,” says Monroe. “With a 1031 Exchange, the seller rolls his profit into the purchase of a new property, thereby deferring the tax.”
“For example, a 1031 works for an owner who has a store that he bought for $200,000 ten years ago, and is ready to sell for $1 million today,” says Monroe. “In order to avoid paying a capital gains tax on the $800,000 profit, the seller can identify a like-kind property prior to the sale that he can purchase, thereby rolling his profit into the purchase and deferring the tax.” Keep in mind, however, that the like kind exchange under Section 1031 is tax deferred, not tax free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
The 1031 Exchange also lays down some guidelines for the proceeds of the sale. First, the exchange must be facilitated by a qualified intermediary or accommodator – not through your hands or the hands of one of your agents – who can structure the deal according to IRS regulations. Also, the replacement property must be subject to an equal or greater level of debt than the property sold or the buyer will be forced to pay the tax on the amount of decrease.
Overall, the tax dollars saved through the 1031 Exchange may be maximized to increase cash flow and overall net worth.
(This article first appeared in the September 2007 edition of NACS Magazine)
