In the Know: What propane retailers can do to increase the value of their businesses

Photo by Kevin Yanik

In the Know is a monthly partnership between LP Gas magazine and Propane Resources. Our focus this month is on employees, addressed by Tamera Kovacs, financial consultant and industry expert in business valuations and sales for Propane Resources.

There are two primary drivers that impact the value of a propane retailer’s business: 1) the growth and sustainability of cash flow and 2) the way the company operates and markets. Cash flow is the basis for establishing the value of a propane company. The factors that impact the multiple applied to a retailer’s cash flow are the second, more subjective, piece

Not all cash flow is treated equally. Recurring cash flow has much more value than one-time cash flow. Cash flow generated through propane sales carries a higher value than cash flow generated from refined fuels. The type of gallons sold also impact the value of the cash flow, as wholesale propane gallons have less value than retail propane gallons.

Trends are important. It’s good to look at a minimum of the previous three historical years. Depending on the company’s year-end and the current time of the year, it may be worth looking at a comparative trailing 12 months.

Growing sustainable cash flow is critical but so are the ways you operate and market your business. Businesses are valued based on a multiple of cash flow. It is the operational and marketing practices you implement that impact the multiple applied to your cash flow.

The following items play a key role when determining the multiple.

1. Tank control: The percentage of company-owned tanks has a direct correlation to the multiple, the closer to 100 percent the better. Make sure you have customer-signed tank lease agreements on file and charge some type of tank rent – even if it’s a dollar per year. However, don’t get rid of your customer-owned business to achieve a higher percentage of tank control – work to increase the percentage either through purchasing customer tanks or focusing your growth on company-owned business to shift the percentage.

2. Growth: Are you growing in customers, gallons and cash flow? What is your net tank sets per year? You want that number to be positive. There’s always a balance, don’t sacrifice cash flow to gain customers and gallons. You can buy a lot of market share but not realize any increase in value. Buyers look at trends and while the ideal story is to show that the company is growing or trending upwards, this may not always be the case.

3. Quality of Information: The quality of information is best summarized as: Buyers discount for what they can’t see or what doesn’t tie out. When it comes to building value, quality of information is paramount. That means everything from financials, gallons, customer information/records, tank information, safety records, and on and on. If you don’t have good clean records that can be easily accessed and shared in a report, it would be worth the time and money to get it fixed.

4. Quality of Assets and Staff: Like the quality of information, good assets can go a long way. This doesn’t mean there needs to be all new trucks, but make sure yours are well maintained. In addition to good assets, quality staff helps build value in the business. While there are some buyers that may not want to take on the entire staff, many buyers need the staff and if the business can operate without the owner it can open your company up to a whole new set of buyers.

5. Gallons Concentration: While it is nice to have large accounts, if there is a high concentration of gallons in the top five or ten customers expect this to potentially hurt the multiple received. If a large customer was lost, how would that impact your cash flow times a multiple? This is the impact large customers have on your value. While we wouldn’t tell you to fire your large customers (providing you are making money on them) we would encourage you to grow your residential users to offset the percentage.

6. Image and Community Presence: Your image and your community involvement is the one thing you achieve by your actions and cannot be easily duplicated. Make the most of it!

7. Acquisitions: A strategic acquisition is a non-organic way to build growth if purchased and integrated into your business wisely. Larger, more established companies generally bring a higher multiple. That being said more gallons does not necessarily mean more value.

These are a few of the items that can impact the value of your business. Every retail propane business is different and what will help build value will be different for each. Look at your business and decide which areas you need to strengthen. Then start working on them. Your greatest risk of not building value is to do nothing.