18 necsema M2M Fueling Growth: How Thoughtful Financing Can Take Your C-Store Business to the Next Level Submitted by Webster Bank, N.A. Paul Black, Senior Managing Director, [email protected] Sam Pepe, Managing Director, [email protected] “EBITDA, EBITDA, EBITDA, what the heck is EBITDA” asked my 14-year-old as I ended a call discussing what has become one of the most ubiquitous terms in banking today. If you are considering borrowing money, it is a concept that you should be familiar with as your banker will ask about your business’ EBITDA. Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) is shorthand for a business’ cash income from operations and is analogous to Net Operating Income (NOI) in the real estate world. Your banker will generally allow you to adjust or add back one-time, non-recurring expenses and likewise require subtraction of one-time, non-recurring sources of income in determining Adjusted EBITDA. Despite bankers embrace of EBITDA, savvy operators should consider how they maximize their borrowing capacity. Borrowing Capacity: Cash Flow (EBITDA-based) vs. Collateral (Value of your sites) In some cases, particularly for multi-site operators, your ability to borrow may be measured as a multiple of Adjusted EBITDA. Most bank lenders will allow that number to be in the 3 to 4 times range (3X-4X). The lower your actual number, the more borrowing capacity you have. However, as an operator in the Convenience Store and Gas Station (C&G) business, your sites may provide more borrowing capacity than a multiple of EBITDA would. As part of your discussions with a potential lender you should clarify the lender’s approach to determining borrowing capacity. Try to understand the lender’s willingness to lend against the total appraised value of the sites (including business value) or whether it will only lend against the “dirt”. Lenders that are active in the C&G space will generally lend against the total value of the sites, as they understand the components of value. Further, active lenders will quickly want to get behind your company’s EBITDA. This is your opportunity to tell your story. We believe one of the most important topics you can explain is the differing cash flows and levels of control you have given the particular classes of trade you operate. Take the time to walk through the key elements of site level demographics: how many stores you operate and classes of trade, size of sites and stores, age, number of dispensers, and age and construction of underground storage tanks. The aim here is to connect a description of your sites to future cash needs for expansion or renovation and provide a glimpse of the cash return such spending will generate. Trends in gallons and cents per gallon margins, inside sales and inside margins, food service offerings and other sources of revenue are critical to any serious analysis of a C-Store business. Implicit in this discussion is that you have the systems to capture this data at the store level. Okay, we get it. Historical financial information can feel like yesterday’s news. But as you add sites and grow your business, good quality financial information becomes critical. We have seen too many owner/operators who have started with a site or two, and then continued to add sites while financing new locations on a one-off basis. At some point, this becomes inefficient both from an operating perspective as well as a source of capital. We all recognize that growth requires capital - which doesn’t necessarily have to come completely out of your pocket. Strategic, well-structured financing can help you take your business to the next level. Could you borrow more efficiently if you created a pool of collateral? Some operators have development lines that are based on a pool of collateral that allows them to borrow with fewer restrictions than otherwise might be the case for financing a New-to-Industry (NTI) store or a raze and rebuild project. Development lines of credit, also called delayed draw term loans, typically allow a one- or two-year interest-only draw period, before terming out after you have completed your project. Every C-Store company is different. Each has its own unique characteristics that will influence how to best finance yours. As you prepare to borrow, think about what specific aspects of your business reduce risk to a lender and how you best describe those. Reducing risk to a lender is more about the stability of cash flows than collateral. Financing shouldn’t be a burden. Done right, it’s a powerful tool that fuels growth, enhances resilience, and positions you for the future. Note: The opinions and views herein are for informational purposes only and are not intended to provide specific advice or recommendations. Please consult professional advisors with regard to your situation.
