In the Know: 8 value drivers for propane businesses

In the Know is a monthly partnership between LP Gas and Propane Resources. This month, Adam Zoellner and Sean McCann explain the qualities in a propane company that drive strong business value.

QUESTION: What qualities drive business value?

ANSWER: There’s no universal formula to determine your company’s absolute value.

Actual value can be subjective in the eyes of a buyer and abstract or arbitrary to the seller. Objectively, both perspectives are guided by value drivers.

Every market has unique qualities that influence the development and growth of the local propane retailer. Therefore, applying an absolute method of valuing one company to the next would be unfair. The industry does not derive monetary value from the assets owned but from the potential cash flow produced by a company’s assets and operational attributes. Your company’s worth is based on the individual buyer’s perception of its ability to incorporate your operations.

The heart of a company’s perceived value comes from the multiplication of adjusted “earnings before interest, taxes, depreciation and amortization” (EBITDA). EBITDA is influenced by the seller’s ability to regulate gross margin and manage operational expenses to provide customers with goods and services. You have control over this part of the equation.

The adjustments to EBITDA are subjective to each buyer’s plans of incorporation. This is where value drivers become complex and fluid. You don’t have control over this part of the equation. Let’s discuss some of these “value drivers” and explain how and why their value can be hard to quantify.

Tank ownership: One of the most important attributes adding value to your organization is tank ownership. Owning and leasing over 80 percent of the tanks being serviced is a positive attribute.

Minimal customer concentration: If you add the gallons sold to your top 10 customers last year, does that figure exceed 20 percent of your total gallons? If so, this can reduce your company’s value.

Margin performance: Another value driver that folks tend to forget about is margin growth or, at least, margin consistency. Buyers tend to put more value on companies with steady margins year over year. Stable margins can indicate a healthy and established geographical market and customer base. If your company’s margins are all over the board from year to year, it can reflect turmoil in your operations or the market.

Operational efficiency: Push customers toward your automatic delivery schedule or keep-full patterns. Auto-delivery and keep-full customers drive your company’s value up in various ways: more gallons dropped per stop, fewer out-of-gas situations, fewer phone calls for the office staff to answer and more predictable weekly demand.

Growth: Whether it’s gallon growth, customer growth, service territory growth or margin growth, everyone wants to own or purchase companies that are growing. An organization that consistently grows increases its value. There is little to no value being added if your organization is shrinking.

Technology: Moving away from handwritten route cards and delivery tickets to automated systems is essential. It reduces daily batch work and human errors. Using software in any format allows for streamlined delivery, back office, finances and customer management. Another benefit of relying on technology and software is data transferability to a buyer. Present technology allows seamless transfer of data between site operations and corporate management. This visibility improves time management in the field.

Business continuity: Is your company “easy” to operate and manage? What would happen to your company if you couldn’t come to work the next day? Do you have a manager or team to continue leading your operations? There is inherent value in putting your company on autopilot. Buyers see value in this because it allows them to purchase your company and maintain your company’s cash flow without significant changes.

Cash flow: All of these items are essential, but at the end of the day, your company’s value comes from your cash flow. Businesses are valued on the annual cash flow that the buyer will realize. More cash flow equates to more value. Increase your sales strategically, improve gross margins, cut expenses and drop as much as you can to the bottom line. Buyers in our industry are looking for a return on their investment, and a strong EBITDA-producing company is what they are after.

If nothing else, quality over quantity is the golden rule for driving increased value in your business.

Adam Zoellner is a mergers and acquisitions manager at Propane Resources. He can be reached at adam@propaneresources.com. Sean McCann is a financial analyst consultant at Propane Resources. He can be reached at sean@propaneresources.com.