The value of your business is the result of your own actions

October 19, 2014 By and    

The phrase “You reap what you sow” has roots in early Christianity and can also be applied in nonreligious situations, such as valuing your propane business.

I recently advised partners through the process of selling their propane business, and it was a classic example of reaping what you sow. Placing a value on your propane business for change-of-ownership purposes, whether it be for corporate reasons, next-generation estate planning or sale to an outside party, depends on the owner’s actions of the past.

In this sale, interested business buyers had similar questions about the business that went well beyond the normal number of gallons and customers. Questions were posed, such as:

What percentage of the propane tanks at your customer locations are customer owned versus company owned?

Although survey results vary widely, the average propane retailer operates with about 15 percent of the tanks under customer ownership. In this case, higher-than-normal levels of tanks were customer owned. This will usually make business buyers uncomfortable because they are concerned about the stability of the customer base under new ownership.

However, the owner’s actions in selling tanks were justified by their overall new customer sales plan. In their market, the average to above-average user was leased a tank at no charge. If a prospect came in who was projected to be a lower-than-average user, perhaps a seasonal user or smaller home with fewer gas applications, a tank lease plan was offered to help recoup the tank investment and keep an adequate size tank in place for a time when usage may increase. Low or sporadic user prospects were offered a tank purchase plan so the propane retailer could immediately recoup the tank investment and still gain a gas customer.

This tiered sales plan enabled the propane retailer to have a plan for all propane users and to sell propane in a narrower range of pricing that was more related to size of delivery than annual usage. The propane retailer reaped large numbers of loyal new customers every year based on the way prospects were treated, and the business buyer felt comfortable with the risk of customer loss.

Do your new customers receive a Gas Check or some equivalent inspection of their propane system?

Business buyers and insurance companies want assurance that your customers have safe-operating propane systems. In this case, the owners performed an equivalent Gas Check on all new customers, performed a leak test on all propane run-outs and had documentation in customer files to prove it. The business buyers liked what they found.

What is the condition of your tanks?

The business owners had always purchased new or highly reconditioned tanks and had been in business for less than 10 years, so the condition of the tanks in the field was very good. The eventual business buyer did spot inspections of customer installations as part of the due diligence process and liked what was found.

What is the curb appeal and the under-the-surface condition of the office and storage location?

The photos inserted in the business sales packet only told part of the story. This business was a best-in-class example of owners wanting to build and maintain a first-class business.

What are the age and condition of your delivery and service trucks?

The business partners had a reasonable number of newer model trucks in their fleet that fit the business size. The trucks were well maintained, with service records from a reputable commercial truck maintenance garage to prove it. There were no old out-of-service or seldom-used trucks sitting around the yard gathering rust and leaking fluids.

Do you have a loyal workforce that fits the workload?

The owners worked in the business, had some full-time employees and were able to develop loyal seasonal employees who worked in the busy season. Employee compensation plans were competitive but not overly generous. It was a well-balanced workforce with no useless relatives of the owners taking up space, so the business buyer was able to take all of the employees on board and continue to build the business.

When the business sale was finalized, the business partners received a premium price for their company based on the actions they had taken over the years to take good care of their employees, customers, facilities, trucks and field equipment. Remember, the value of your business is the result of your own actions.

Tom Jaenicke is the founder and principal adviser at ATomiK Creative Solutions LLC. He can be reached at 810-252-7855 or tom@atomikenergysolutions.com.

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