Avoid These 5 Mistakes When Buying a Service Station

The Approval You Need Before You Make an Offer

You need conditional finance approval before signing anything, not after. Service station purchases move quickly, and sellers expect proof you can actually fund the deal. Without pre-approval, you're either making unconditional offers you can't back up or losing out to buyers who've already sorted their funding.

Consider a buyer looking at a branded franchise site in Riccarton. The asking price sits at $1.8 million including stock, equipment, and goodwill. They've got $400,000 to put down and assume the bank will lend the rest because the business turns over $4 million annually. They make an offer conditional on finance, then discover lenders want to see three years of financials from a similar business they've operated before. They don't have that, so the application stalls. The seller moves on to another buyer who had their business finance structured before viewing the property. The first buyer loses the site and the $5,000 they spent on due diligence.

Lenders assess service station purchases differently than other businesses. They want to see fuel supplier agreements, environmental compliance reports, tank integrity certificates, and council consent for fuel storage. If you're a first-time buyer without industry experience, expect lenders to ask for a larger deposit or a director's guarantee. Getting these requirements clear before you start looking saves you from chasing deals you can't actually fund.

Fuel Supply Agreements Control Your Margins

Your fuel supplier agreement determines how much you earn per litre and whether you can switch suppliers. Most service stations operate under exclusive supply contracts with major brands like Z Energy, BP, or Mobil. These agreements lock you in for five to ten years and dictate your wholesale fuel cost, rebate structure, and branding requirements.

A buyer purchasing an independent site in Hornby might assume they can negotiate better fuel prices by shopping around. They complete the purchase, then realise the existing supply agreement has six years left and includes a penalty clause of $150,000 if they terminate early. The wholesale margin they're locked into is 8 cents per litre, but a competitor two streets over is getting 12 cents because they signed a newer contract. Over a year, on 2 million litres sold, that's $80,000 in lost margin they can't recover without paying the exit fee.

Read the fuel supply agreement before you calculate projected income. Check the per-litre margin, the contract term, the renewal conditions, and any volume commitments. If the agreement expires within two years of settlement, factor in the risk that the supplier might not renew or might offer worse terms. Lenders will review this agreement as part of their assessment, and if the terms look unfavourable, they might reduce the amount they're willing to lend.

Environmental Compliance Costs That Appear After Settlement

Service stations sit on contaminated land, and you inherit the liability when you buy. Even if the contamination happened decades ago under a previous owner, you're responsible for any cleanup the council or regional authority requires. This can run into hundreds of thousands of dollars if underground tanks have leaked or soil testing reveals hydrocarbon contamination above acceptable levels.

Before signing anything, request a Phase 1 environmental site assessment and tank integrity testing. The Phase 1 report reviews historical land use and identifies potential contamination risks. Tank testing checks for leaks, corrosion, and compliance with current storage regulations. If either report flags issues, you need a Phase 2 assessment, which involves soil and groundwater sampling. In Christchurch, where the earthquakes damaged underground infrastructure across the city, older service stations may have shifted tanks or cracked pipework that hasn't been identified yet.

Some sellers will cover the cost of environmental reports, but others won't. Budget $8,000 to $15,000 for a full environmental assessment if the property hasn't been tested recently. If contamination is found, you'll need a remediation plan before most lenders will approve finance. Don't assume the seller's assurance that everything is fine. Get the testing done and make your offer conditional on satisfactory environmental reports.

The IRD Financials Lenders Actually Want to See

Lenders assess your ability to service the loan based on the business financials, not just your personal income. They want three years of profit and loss statements, balance sheets, and GST returns for the service station you're buying. If the seller can't provide clean financials, or if the numbers show declining revenue, expect the lender to either decline the application or reduce the loan amount.

A buyer looking at a site in Papanui sees the seller's financials show $6.5 million in annual turnover and $320,000 in net profit. The lender calculates debt servicing based on net profit and determines the business can support a loan of $1.2 million at current interest rates. But when they review the GST returns, they notice fuel sales dropped 18% in the last year and convenience store revenue is flat. The lender reduces the approved amount to $950,000 because they don't believe the profit level is sustainable. The buyer either needs to find another $250,000 in deposit or walk away.

Ask for full financials before you make an offer. Compare the fuel volume in the financials against the supplier's delivery records. Check whether the convenience store income is growing or shrinking. If the business includes a mechanical workshop or carwash, make sure that revenue is broken out separately so you can see whether it's profitable. Lenders will pick apart these numbers, so you need to understand them first. If you're not confident reading business accounts, get an accountant to review them before you commit.

What a Business Loan Actually Covers in a Service Station Purchase

The loan amount depends on what you're buying and how the assets are valued. Service station purchases usually include land and buildings, fuel storage equipment, point-of-sale systems, stock, and goodwill. Lenders will lend against property and equipment but often won't fund the full value of goodwill or stock.

If you're buying a freehold site, lenders will typically offer 60% to 70% of the property value as a commercial loan. If you're buying the business only and leasing the land, they'll lend against equipment and stock, but the loan-to-value ratio drops to 50% or less. Goodwill, which represents the value of the established customer base and brand, is the hardest part to fund. Some lenders won't include it at all. Others will lend 30% to 40% of the goodwill value if the business has strong financials.

A $1.5 million purchase might break down as $900,000 for land and buildings, $200,000 for equipment, $150,000 for stock, and $250,000 for goodwill. A lender might offer $630,000 against the property, $100,000 against the equipment, $100,000 against stock, and nothing against goodwill. That's $830,000 in total, leaving you to find $670,000 in deposit and working capital. If you don't have that much, you need to either negotiate a lower purchase price or look at alternative funding structures like vendor finance or equipment finance for specific assets.

Work with a broker who understands how lenders assess service station purchases. We structure deals across multiple lenders to cover different parts of the transaction, and we know which lenders will consider goodwill and which won't. Call one of our team or book an appointment at a time that works for you.

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