Buying a service station: fuel, the site and the checks that matter

A service station is usually two businesses on one site: fuel, which earns a margin on every litre, and a shop, which earns its money differently. Around them sit a supply agreement, underground tanks and rules that differ between states. This guide covers buying the business (not the freehold, unless noted). Read it alongside our general due diligence guide, and browse service stations for sale to see what is on the market.

Check fuel and the shop separately

Fuel sales can make turnover look large next to profit, so turnover alone tells you little. Fuel earns the gap between what the site pays and the pump price or, under a commission agency arrangement, a commission. The shop's margin differs from line to line.

• Fuel volume. Ask for litres sold by grade, by month, for at least a year, and compare them with supplier invoices and delivery documents.
• Fuel margin. Ask how the price the site pays is set, who sets the pump price, and how the margin per litre has moved.
• Shop sales. Ask for point-of-sale reports that separate shop sales from fuel, with gross margin by category.
• Other income. Car wash, ATM and other services should be shown separately, with the agreements behind them.

The fuel supply agreement

Branded sites usually operate under an agreement with a fuel supplier. The ACCC says the Oil Code of Conduct is a mandatory code covering declared petroleum products, such as unleaded petrol and diesel. It applies to fuel re-selling agreements, where the supplier grants the retailer the right to run a fuel business under the supplier's system and brand and the retailer pays a fee, and to some commission agency agreements. The ACCC adds that someone who resells fuel under a franchise agreement is covered by the oil code, not the Franchising Code.

The ACCC summarises what the code requires:

• Disclosure. The supplier must give the retailer a copy of the code and a disclosure document at least 14 days before the agreement is signed or non-refundable money is paid.
• Cooling off. The retailer can end the agreement within 7 days of signing or paying money under it, whichever comes first.
• Term. At least 5 years, subject to limited exceptions, with a renewal option where the retailer must buy fuel from a supplier that owns or leases the site.
• Low-volume sites. The code does not apply where the supplier reasonably believes average monthly sales will fall below a threshold the code sets, and gives written grounds beforehand.

Ask your solicitor to check whether the agreement transfers to you or the supplier will want a new one, the remaining term, how the fuel price is set, any minimum volumes or rebates the profit relies on, who owns the tanks, pumps, canopy and signs, and what the brand requires of the shop. Independent sites have their own supply contracts to check. If the shop is a separate franchise, see buying a franchise or an independent business.

Underground tanks and contamination

The NSW EPA says underground petroleum storage systems are most common at service stations, and can leak and contaminate land and groundwater. Duties differ between states. In NSW, the EPA says the person with management and control of the system must have procedures to detect and fix leaks early, documented in a fuel system operation plan. It is against the law to allow or ignore contamination from a leaking system, and pollution incidents must be notified immediately. Most sites are regulated by the local council.

Ask for the operation plan, loss monitoring and leak detection records, groundwater monitoring results, tank test reports, the age of the tanks, and any incidents or notices. Contamination may predate the seller, so ask your solicitor how the lease, supply agreement and contract deal with it, and consider an environmental assessment.

Dangerous goods

Rules differ between states. In NSW, SafeWork NSW says a site storing Schedule 11 hazardous chemicals (dangerous goods) above the quantities in the regulation must notify it and lodge an emergency plan with Fire and Rescue NSW, and must amend the notification when the site changes ownership. SafeWork NSW can also search its records for a premises, giving the example of a buyer checking an old petrol station for underground tanks. Ask for the current notification and emergency plan.

Fuel quality and price boards

• Fuel quality. DCCEEW sets national fuel quality standards and enforces them under the Fuel Quality Standards Act 2000, and states and territories can add their own. Inspectors engaged by the National Measurement Institute may visit a fuel supplier on any day to sample and test fuel, check delivery documents and inspect dispenser labelling. The Institute also checks that fuel is measured correctly, so ask for pump service and calibration records.
• Price display. These rules are state-specific. In NSW, the NSW Government says operators must register with FuelCheck, notify NSW Fair Trading of the standard retail price of each fuel and when a fuel is unavailable, and display price signs approaching motorists can readily see. The FuelCheck price must match the price advertised at the site.

Tobacco and liquor

Licensing differs between states. In Queensland, Business Queensland says retailers of smoking products must hold a smoking product supplier licence, that it is not transferable, and that a new owner must be granted one before selling smoking products. Where a licence does not transfer, the shop can lose those sales until yours is granted, so ask your solicitor how the contract handles timing. If the shop sells alcohol, check the liquor licence with the state regulator. ABLIS helps you find the licences and approvals a business needs.

The shop, stock and equipment

• Stock. Agree how shop stock, and any fuel you are paying for, will be counted and valued at settlement. See stock at valuation.
• Payment terminals and ATMs. Merchant facilities are often in the seller's name, and an ATM may belong to someone else. Find out what transfers.
• Car wash. Check its condition, service records and income.
• Finance and the PPSR. Equipment may be leased, financed or owned by the fuel supplier. A PPSR organisation search shows security interests registered against an organisation's assets. Make sure any are released at settlement.

Staff and awards

The Fair Work Ombudsman says the Vehicle Award covers the sale of fuel and oils and vehicle washing, and employees such as driveway attendants, console operators and car washers. Its Retail Award summary lists motor vehicle fuel retailing among the work that award does not cover. Which award applies depends on the business and the work, so confirm it with the Fair Work Ombudsman and check pay records for night and weekend shifts. See employees when a business is sold.

Long hours and security

Late-night and 24-hour trading bring night shifts, cash handling, drive-offs and robbery risk. Ask about incidents and insurance claims, cameras and security systems, whether staff work alone at night, and whether the supply agreement or lease sets the opening hours.

The lease

The site is often leased from the fuel supplier or the freehold owner. The ACCC says a supplier that leases a site to a retailer must give the retailer a copy of the lease within one month of signing. Ask your solicitor whether the lease lines up with the supply agreement, who maintains the tanks and forecourt, and whether make-good or environmental clauses require tank removal or a clean-up at the end. See assigning a commercial lease.

Questions to ask the seller

• How many litres do you sell each month, by grade, and how has that changed?
• How much of the gross profit comes from fuel, the shop and other services?
• Who owns the tanks, pumps, canopy and payment terminals?
• Will the supplier transfer the agreement, or require a new one?
• Have there been any leaks, notices or inspections?
• Are the dangerous goods notification and any tobacco or liquor licence current, and in whose name?
• Which award covers your staff, and who works overnight?