I am fortunate to be able to attend many industry functions and while attending, I am often asked questions on acquisitions and company values. The most common questions are:
- How much per gallon are companies selling for?
- Are there a lot of people selling?
- Who is buying?
- Are most sales on retained gallons?
- How much do you think my business is worth?
Through this series on “Valuing and Acquiring Home Energy Businesses,” we will address these questions to better understand how the opportunity to acquire fuel companies is an option open to most marketers in our industry. With a little bit of homework and a good relationship with your lending institution, acquisitions can become a part of your growth strategy.
It is important to understand how some trends have stayed the same and how some have changed over the last few years. Below are some trends we have seen in the current acquisition market for home energy companies.
Asset Sales: As has been the trend for many years, almost all transactions include the purchase of assets and not the purchase of the stock of a corporation. This is a disadvantage for a “C” corporation. There has been some good news for C corps in recent years. Recent tax law decisions including the “Martin’s Ice Cream Case” have helped many C corps with regard to tax treatment sale of good will. Consult your tax advisor and if you are considering a sale in the next ten years, you may contemplate electing to become an S corp. now.
Property has become more desirable: Just a few years ago it was very difficult to include real estate as part of a transaction. Now, due to low interest rates and reduced property values, many purchasers prefer to purchase property rather than lease property. Mortgage payments can be lower than lease payments in many situations. Bulk fuel facilities which are up to date with current satisfactory environmental studies and strategically valuable locations have increased in value.
In addition banks sometime prefer to have physical assets as part of a transaction to reduce the ratio between tangible and intangible assets.
Gallons are not used to Value Assets: Gallons may still be used as a payment method, but they are not used to value assets or businesses. Companies are generally not valued on a multiple of gross fuel margin and they are usually not valued on a per customer basis. Assets are typically valued on a return on investment calculation. The most common method is a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (E.B.I.T.D.A.); otherwise known as Cash Flow or Operating Income. More on this in future articles.
Note: For you die hard “how much per gallon are companies going for” individuals, you can still divide the purchase price by the gallons to get an answer but it has no relevance on how most purchasers value a fuel business. Go to http://www.cetane.net/images/fuel-oil-news/how-much-per-gallon-fon.pdf to learn more.
Will Call Customer Values have Increased: As consumer buying habits have changed, purchasers are willing to pay more for will call customers if regular buying behaviors can be established. The key here is to see how many deliveries a will call customers is taking in a season. If the answer is three or greater then they are probably valuable customers.
Service and Diversified Revenue Streams have Value: As service departments have moved away from lost leaders designed to help sell fuel and more toward profit centers designed to service HVAC equipment, they will add more value to the company. This is also true of other diversified offerings if they can be shown to be profitable and sustainable as a separate business entity. It is rare that purchasers will invest in the potential of a new revenue line. There will need to be a good track record for profits.
Nervous Owners: There is a trend toward nervous owners. Accounts receivable on the street in many cases exceeds company asset value. Many owners are unable or unwilling to keep up with a changing industry. Conversions, conservation and increased competition have eroded profits. Many companies have been forced to downsize operations as gallons have decreased and many customers who were once thankful for the 24/7/365 service are much more likely to complain about the cost of fuel and services. Many owners are just not having as much fun as they once were.
Industry trends and willing lenders have resulted in an unusual combination of having a good supply of companies being offered for sale and a good supply of willing buyers. Our clients have received multiple offers over the last year and sellers as well as buyers have been pleased with the overall transactions. Look for our next article on “Finding a company and Making an Offer.”