Texoil
General Information and Confidential Information for Service Station Owner
Texoil, a large petroleum refining company, owns some service stations outright. For the most part, however, it contracts with individual service station owners to provide them with all their requirements of gasoline, oil, tires, batteries and accessories. One of the independent service station owners, who has been under contract with Texoil for 12 years, has recently put the station up for sale. In addition to notifying Texoil that the station was for sale, the owners put ads in the local newspapers, as well as in a national professional journal of service station owners. The ads said that they were selling for family reasons.
The service station is located on one of the main routes leading to the Port of Los Angeles. This port area is growing because of the consolidation that is occurring among west coast ports. The port is now
operating 24 hours per day, and all expectations are that it will continue to do so. There are several small shopping centers in this area and numerous warehouses. There are, however, only two other service stations in the vicinity, and neither is run by an owner-operator.
The station owners are a husband and wife, both of whom work at the station. They keep the station open 6 a.m. to 10 p.m., 6 days a week. The station is closed on Sundays. Their annual income has been approximately $75,000 (before taxes).
The service station owner and a Texoil representative are scheduled to meet to discuss Texoil’s possible purchase of the service station.
Role of Service Station Owner
It is imperative that you complete this sale promptly. You and your spouse have been working 18-hour days for the last five years in order to save enough money to realize your life's dream, which is to sail around the world. You are close to realizing that dream. Y ou have made a down payment on a beautiful, old boat and have begun to fit it out for a two-year around the world cruise. In order to pay the first $50,000 installment on the boat, you sold your condo. You put your furniture in long-term storage and you and your spouse are now living in a small rental apartment near the service station. It is not very pleasant there and you are anxious to leave and begin your trip as soon as possible. In addition, you are both nearly 50 years old and you want to take this trip while you are still young enough to enjoy it.
You estimate your expenses for the trip as follows. First, you owe another $230,000 on the boat, which must be paid in full before you leave. To get the boat ready to sail will cost another $68,000. You anticipate that your personal living expenses, food, clothing, insurance, etc., will come to approximately $75,000 over the two years and that you must set aside at least $40,000 for boat maintenance and repairs. These are really minimum estimates.
Additionally, you are convinced that you must have at least $75,000 in the bank for your return. You’ll need a car, a place to live, and ultimately a job. You are not at all sure what you will do on your return. Your spouse is on the edge of a nervous exhaustion (which is why he/she will not be attending this meeting with Texoil) and the doctor has told you that he/she cannot in the future work 18-hour days. Although you have held up under the long hours, the life of the independent service station owner is becoming more and more difficult, and less and less appealing. Your competition is now open 24 hours a day. You cannot do that without hiring more help, whom you won’t be able to supervise properly. In addition, you have concerns for the safety of any staff working alone late at night. A mini mart would give you a jump on your competition, but you have neither the capital nor the motivation to make such an addition. You want out, now. For all these reasons, you think it is crucial that you have $75,000 in reserve for your return so that you can explore various possibilities of earning a living.
In sum, then, you must receive at least $488,000 for this sale after taxes. (It is possible that you could sell the boat on your return, but you cannot count on being able to do so quickly enough to have cash to live on. Besides the equity in the boat is the equity you had in your condo and the station; if you sell the boat for living expenses, you will lose that equity.)
The tax situation depends on the selling price. You built the station over 12 years ago for a price of $100,000. You have put in $20,000 worth of equipment that has been fully depreciated. You estimate the equipment will be valued at no more than $20,000 upon sale (it’s getting old) so you will owe no tax on it. You must anticipate paying 15% on the capital gains on the property. Exhibit 1 illustrates the taxes due if you sell for $553,000.
You think you can easily justify a $553,000 selling price. Given the property values in the area, which have been soaring due to the activity at the Port, you estimate it would cost Texoil at least $650,000 to buy land and build a comparable station. Both of the other two stations in the area are owned by oil companies and neither is for sale. Your equipment, although not state-of-the-art, meets all environmental requirements. Your station has never had any difficulty in passing its annual environmental inspection. You have a loyal customer base who like the Texoil products, and who are unlikely to switch to another station if Texoil buys this one. Texoil could easily increase the profits from the station by keeping it open 24 hours a day, 7 days a week. In addition, Texoil could add a mini mart. The night shift from the port is an untapped source of customers and the mini mart should appeal to them.
Your ads to sell the service station have been running for about two months, without leading to any really attractive proposition. There have been some offers from individuals who would like to operate a service station, but there have been problems with each of these. Either they had insufficient funds and little likelihood of receiving a bank loan, or they had absolutely no experience as service station operators and would therefore be unable to get a contract with a
major oil company. You have devoted twelve years of your life to building up this station, and you do not want to sell it to somebody who may well make a failure of it.
Most of the big oil companies have also looked at your service station, but the best offer you have received so far is $400,000 from British Petroleum, which would very much like to have a station in this area. The talks with them are continuing, but the likelihood that they are going to increase the offer is very slim in light of the firmness that they indicated at your last meeting. You have also been contacted by FINA, but after the last meeting they have not contacted you again, nor have they made any offer.
All things considered, it appears that Texoil provides your only real opportunity to complete the sale at a price that will enable you to fulfill your life's dream. They know the property, they appear interested, and they have often said that they thought sales could be increased with a more aggressive marketing approach. You hope that will lead them to make a substantial offer. If it does not, that's an end to your dreams.
What issues are most important to you? (list in order of importance)
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5. ______________________________________________________________
What is your BATNA? Reservation Price? Target?
What are your sources of power?
Other important things to note:
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What issues are most important to your negotiation partner? (list in order of importance)
1. ______________________________________________________________
2. ______________________________________________________________
3. ______________________________________________________________
4. ______________________________________________________________
5. ______________________________________________________________
What do you think your negotiation partner’s BATNA is? Reservation Price? Target?
What are your negotiation partner’s sources of power?
What is your opening move/first strategy?
Other important things to note:
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