Driving towards the sale of your propane operation

June 4, 2019 By    
Preparing your business for a possible sale should start years before exploring options. Photo: iStock.com/peopleimages

Preparing your business for a possible sale should start years before exploring options. Photo: iStock.com/peopleimages

Propane retailers face business decisions on a regular basis.

Whether that’s a decision on bobtail fleet improvements, routing software, personnel or business expansion, the owner of a retail propane operation makes short- and long-term decisions in the best interest of the company. The same goes for deciding on the future of the business.

Owners of a propane operation have an important decision when their time in a leadership role nears its end: Find a successor or sell the company.

Selling your propane operation is a viable option, but to do it correctly involves a great deal of preparation to make your company the most attractive and valuable it can be.

When it comes time to sell

If selling the business is your next decision, it is time to start thinking of the value of your operation. Driving company value is a crucial first step in preparing your business for sale.

IMPORTANT TERMS TO KNOW

EBITDA: Earnings before interest, tax, depreciation and amortization is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.

Joint venture: A commercial enterprise undertaken jointly by two or more parties that otherwise retain their distinct identities.

Balance sheet: A long version of the basic equation of accounting, which states that a company’s assets must equal the sum of its liabilities and shareholders’ equity. Each category of information from the equation is grouped together on the balance sheet.

Cash flow statement: Also known as statement of cash flows, it is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities.

Fair market value: A selling price for an item to which a buyer and seller can agree.

“An owner needs to know why driving value is important,” says Gary Papay, principal at The Oil & Gas Advisor. “Behind making a living, owners need to think about the future. You can only sell your business one time.”

The Oil & Gas Advisor – a firm that works with buyers and sellers of middle market businesses in the oil and gas industry – lists the top 10 value drivers of propane companies:

  • Profitability
  • High company tank ownership
  • Annual gallons
  • Quality customer base
  • Adequate bulk storage capacity
  • Quality of assets
  • Safety
  • Great customer service
  • Exceptional employees
  • Good records

Record keeping is important to show possible buyers what’s valuable at your operation. According to Papay, buyers want a seamless transition, and good record keeping can make that happen.

“There is going to be a level of due diligence performed,” says Marty Kirshner, the energy practice group chair for Gray, Gray & Gray LLP. “That process is only going to be as successful as how well the books and records are being kept.”

To put it simply, due diligence is the process in which a buyer receives the most accurate look at a company. Kirshner calls it an audit without a program or checklist.

Buyers are looking to identify unrecorded liabilities, legal liabilities, environmental issues or anything else that may cause a headache after the acquisition. Buyers want the most accurate look at the company and to know they are getting a fair market value for it. Making the due diligence process as smooth as possible is crucial to the selling process, so preparation should start years before the decision to sell. This process should start with the books.

“We will take the balance sheet and the income statement and dissect it,” Kirshner explains about cleaning up a propane retailer’s books. “A lot of time, especially with smaller companies, there’s a lot running through the company that might be beneficial to the owner for tax purposes. If we are representing a client for sale, we are going to make sure their records are neat and tidy.”

According to Kirshner, it is good to rid the balance sheet of any outstanding expenses that do not provide value to a buyer. If a selling company doesn’t do this on its own, these types of expenses will get caught during the due diligence process.

Earnings before interest, tax, depreciation and amortization (EBITDA) is also a key metric in measuring the value of a company, Kirshner explains. The higher the EBITDA the more the company’s worth.

Outside of well-kept financial records, Papay says, a strong record of tank ownership is important to driving value. He says buyers are attracted to companies that own the majority of their tanks.

Updating your bobtail fleet and other equipment, recruiting new employees and having a strong working capital are some avenues to enhancing your company’s value. Buyers want to see a company that has strong cash management and can keep up with payables.

Your most important asset

Accurate bookkeeping will help in the due diligence process of a transaction. Photo iStock.com/DNY59.

Accurate bookkeeping will help in the due diligence process of a transaction. Photo: iStock.com/DNY59

Papay and Kirshner agree on the most important asset of any propane company: its customer list.

“When you are buying or selling a company, the most valuable asset is the customer list, and a lot of times you are never going to see it on the books,” Kirshner says.

The customer list shows customer quality, diversification in gallons, annual gallons and customer service – four value drivers for a propane operation.
Papay suggests that sellers compile a list of a dozen customers for buyers to survey and learn more about customer quality. These customers can aid in the due diligence process to help promote the value of a seller’s operation.

When a propane operation decides to sell, it is important to have a high retention rate from that customer list throughout the selling process.

“You need to make sure that when you sell to a buyer, that buyer can retain those customers,” Kirshner says. “A lot of times you are going to get paid on how many customers you can retain.”

Why is the customer list so important? It is the quickest and easiest way for a propane company to expand because, as Kirshner puts it, organic growth can be difficult for a propane operation.

“Most buyers are looking to grow what they currently have,” Kirshner explains. “So, the best way to grow a customer list is through acquisitions.

“Buyers are looking to grow their customer list because the margins on propane are so good that buyers are thinking they can get a return on investment rather quickly.”


BUYERS WEIGH IN

Having a high percentage of company-owned tanks is a good way to drive value. Photo: iStock.com/Joe_potato.

Having a high percentage of company-owned tanks is a good way to drive value. Photo: iStock.com/Joe_potato

LP Gas asked companies featured in our 2018-19 acquisitions list two questions about the acquisitions process. Here is the feedback we received:

LP Gas: What two or three characteristics of a propane operation are most important to a company looking to acquire?

AMERIGAS:

“AmeriGas is always looking for quality operations. We consider reliable volume and margin, a high company-owned tank percentage, a quality staff and a good safety reputation to be important characteristics whenever we evaluate the potential acquisition of a propane operation.”

ENERGY DISTRIBUTION PARTNERS:

“We look for excellent customer service, the highest standards for safety, deep roots in the community and a strong cohesive group of employees. That’s our culture and the kind of business legacy we can preserve and build upon. A growing customer base with a majority of residential accounts, including a high percentage of company-owned tanks. Good assets regarding quality and age, including facilities, bulk storage, vehicles and customer tanks.”

FERRELLGAS:

“A favorable view of the seller by the community and customer base, high percentage of company-owned leased tanks and sufficient storage.”

SUPERIOR PLUS:

“We look for propane companies that have long track records of stable operation – specifically well-run delivery and customer service and tenured employees; an established and loyal customer base; and consistently strong financial performance over a period of time. All of these factor in to how we plan to operate the business following the transaction, and they all weigh into the valuation we can offer an owner, both quantitatively and qualitatively. We put in a ton of effort to build a customized plan for every transaction, taking into account all of the unique characteristics, ranging from employee payroll and benefits transition to back office software and system integration to the right customer communications.”

LP GasWhen your company is looking to acquire another, what is your company hoping to gain?

AMERIGAS:

“We are hoping to gain quality employees and customers to be a part of the AmeriGas family.”

ENERGY DISTRIBUTION PARTNERS:

“A team of people who share our core values of excellent customer service and the highest standards for safety, with a culture of operational excellence that can sustain an acceptable return on investment.”

FERRELLGAS:

“Strategic growth in a new market or to add density in a current market.”

SUBURBAN PROPANE:

“We are looking to acquire a business that fits Suburban Propane’s brand while gaining a quality customer base that is sustainable. In addition, we are looking to acquire talented employees who can grow and flourish under the Suburban culture.”

SUPERIOR PLUS:

“In some situations, we’re looking for new geographies to serve or new customer application/markets to get into. Recently for us, our acquisition of NGL [Energy Partners’] retail propane business expanded our footprint from the Mid-Atlantic and New York area into New England and the Southeast United States. In other instances, acquisitions have helped us strengthen our operations in an area, improving our customer density in areas we already have bobtails.”

Joe McCarthy

About the Author:

Joe McCarthy is an Associate Editor of LP Gas Magazine. You can contact him at jmccarthy@northcoastmedia.net and at 216-363-7930.

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