By Stephen Bennett

Despite rough times for certain operators during the past couple of years -- times that have seen some high-profile bankruptcies -- some finance experts and consultants say that sound operators can get financing at favorable rates.

The failures of big-name operators generated a great deal of attention, but in reality that fate has befallen "a very few companies," said Betsi Lueth, president of Meridian Associates, a consulting firm in Weatherford, Texas, that advises retailers on financing and operational issues. "If you look at the rest of the U.S., (many companies are) operating profitably, companies are having record years," she said.

Money is available and rates are good, Lueth added. She reports talking to an operator who got financing with a rate of "LIBOR plus-one." The London Interbank Offered Rate (LIBOR) is the rate on dollar-denominated deposits traded between banks in London, and is a closely monitored international interest rate indicator. Typically it is lower than the prime rate in the United States, according to Lueth.

Industry observers also point out that mortgage lenders specializing in securitized loans have faded from the scene, and traditional lenders -- banks -- have again come to the fore.

Other finance experts are less sanguine about both the current state of affairs and the near-term outlook.

"The operating environment for c-store operators is daunting," said Mike Lederman, managing partner, Spectrum Capital Group, investment bankers in Albuquerque, N.M. "New competition, channel-blurring, unforgiving lenders, the compression of gasoline margins and reduced liquidity resulting from vendor demand and gasoline cost volatility are just some of the major landmines today's operators must navigate to survive and thrive."

Looking up

In a report it produced late last year, Spectrum Group wrote, "Although the convenience store industry appears to be at the nadir of a cyclical downturn, Spectrum is by no means pessimistic about its prospects."

In this environment, Lederman said, "What we would do is advise c-store operators to undergo an assessment of their business to determine from a strategic point of view whether they've got too much debt, whether they'd be an attractive candidate for another c-store operator, whether they could in fact grow and expand their own business through acquisitions and whether their business as it currently exists faces challenges like the ones referred to above so that strategies could be developed to meet them."

The Spectrum report advised operators to keep in mind five points designed to help them cope with challenging fiscal matters. The report offers guidance on how operators can determine whether they are headed for trouble. "Early warning signs of an operator heading toward a financial restructuring of some sort include: declining sales volume trends and margins, declining cash flows and debt coverage ratios, aging account payables and strained vendor relationships." Lederman and Joe Sands, another partner in Spectrum, wrote the report together. They note the dubious nature of short-term fixes they have seen, including "selling off non-core (and sometimes core) assets to make a debt service payment or two; deferring capital expenditures and repair and maintenance expenses; accepting a lender's version of a debt restructuring without proper knowledge of the customary bases and terms of such transactions; and reducing inventory below prudent levels. For the most part, these short-term fixes only serve to exacerbate a troubled company's financial problems and should not be pursued."

Instead, the authors advise operators to act early if there is a debt problem, teaming up with lenders "before Chapter 11 becomes the best alternative." Also pay close attention to marketing and merchandising strategies that can boost in-store sales, the authors say, thereby counteracting to some degree the squeeze on fuel margins.

Locations that are clear losers should be closed without delay, the writers add. "Establish firm goals and performance deadlines for marginal stores ... sell or shutter them when they fail to meet these standards. Use the cash and time you've freed up to improve your remaining stores." Such a move can enable implementation of technology that can help generate profits, the report notes. For an operator unwilling to take these steps, the authors advise, "the best alternative may be to exit now."

Another consultant, Mike Baskin, chairman of Petro-Consulting Inc., Vienna, Va., said, "We'd much rather do some mergers and acquisitions where a healthy company gets sold, but unfortunately there are a lot of companies changing hands right now that are not healthy.

"I'd like to put some sense of optimism into this (situation)," Baskin continued. "I don't want everybody to think it's totally gloom and doom and that it's going to be that way forever. I don't believe it's going to be. (Fuel) margins seem to be coming back. The important thing is everybody can make money when the margins are good. It's a question of a company keeping expenses under control to ride out the times when the margins are not so good."

Lueth of Meridian Associates said operators with manageable debt load, reasonable profitability and an eye toward expansion should be able to find the financing they require.

The rule of thumb that a lot of operators should have used and didn't in the past few years is to finance no more than 75 percent of a project, Lueth advised, "instead of trying to do a 100 percent or 110 percent financing."

Operating efficiencies determine, to a large extent, the health of an operator and greatly enhance ability to get financing. "(Fuel) margins at certain times of the year do get squeezed," noted Lueth, "and what it's doing is separating who's good and who's not."

A multi-store operator usually can find struggling individual locations in, or contiguous to, their markets, Lueth observed. "Often times there are less sophisticated marketers not doing very well in today's environment -- squeezed margins, high operating costs, (few) economies of scale," she said. "A larger marketer or a marketer that's growing can have better efficiencies, better buying power, an overall leaner operation and can buy ... an unprofitable store and turn it into something that is very profitable."

As an example, Lueth cited a company she has worked with that she says now is retailing 400 million gallons on an annualized basis, double the volume it was moving just 18 months ago.

The company achieved its growth largely through the acquisition of more than 50 convenience and fuel locations, with financing from its long-time bank, Lueth said. Fifteen-year notes provided the financing for 75 percent of the cost of the acquisitions.

"They're doing incredibly well," she said, and ticks off some of the reasons why: "They have a tremendous positive employee environment. They are constantly working on streamlining systems and getting (store-level) employee input on how to do that. They're totally customer-focused and yet with that customer focus everyone in that company knows that their goal is to be the most profitable marketer out there."

The company has a close working partnership with its bank that includes monthly meetings. "The bank knows exactly what the acquisition strategy is," Lueth notes. Having a proven track record with the bank helps immeasurably when the company seeks new financing.

The operator excels at preparing its pitch to lenders, Lueth emphasized. Companies that succeed in getting financing "package up their requests very astutely," she remarked. "They don't just go into lenders and say, 'Hey, I'm thinking about doing this.' They go in with a bid loan package and say, 'This is what I need, these are the kinds of terms I want and all the supporting documentation.' They're very business-like about going and getting that debt."

Teamwork

Taking a hard look at your business' strengths and weaknesses can be the first step to keeping it in good financial health.

Before conducting a three-day workshop with an operator's man-agement, Jeff Bernard, vice president of strategy for PetroConsulting, Inc., has members of the management team complete a questionnaire in which they are also asked to identify competing operators and their strengths and weaknesses. The executives are also asked to put down their goals, as well as the goals they think the company should be aiming for.

"Usually I try to send the questionnaire about a month before the workshop," Bernard said. He allows the managers two weeks to respond to the questionnaire; then he consolidates the information and presents it in summarized form in the opening session of the workshop "to get the discussion going."

The information generated in the discussions is used to develop nine objectives. Each objective has linked to it a series of 10 or so action items. By the conclusion of the meeting, then, the executive team may have a total of 90-plus action items, Bernard pointed out.

Each action item is assigned to a person on the team along with a timeline of when it should be completed. After that, follow-through becomes the crucial issue. Bernard said: "One of my clients meets every Friday with his management team and they discuss where they are in the action plan." Others hold monthly conference calls designed to help them stay on course.

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