In the Know: Mergers & acquisitions
In the Know is a monthly partnership between LP Gas and Propane Resources. This month, Adam Zoellner reviews what the future might look like for independent propane companies looking to sell.
QUESTION: What does the future look like for small, independent propane companies?
ANSWER: The future for small, independent propane companies depends on the direction they’re looking.
Successful companies look forward to the future. How can they grow? How can they modernize? What possible problems are ahead? Do they have a five-year plan? What obstacles stand in the way of reaching that five-year goal?
Small businesses are only small as long as they are stuck looking back. Or they’re focusing on surviving what’s happening now. Companies that look forward, beyond today’s problems, and begin solving next year’s problems will prosper. The past couple of years have shown the world that adaptation is critical to moving forward. Independent propane companies that are proactive instead of reactive will be able to navigate a changing industry successfully.
The future requires businesses to stay modern and in tune with their customer base. Identifying trends or new ways to operate will set you apart from competitors. Investing in software, tablets and tank monitors are all ways of improving operational metrics. These small investments can have a dramatic impact on the earnings of your company and, in turn, affect the total value of the operation.
Consolidation in the industry remains high. We’ve seen more regional and larger single-state retailers being acquired. Some attribute this to the challenges the industry faces, while others believe this is par for the course.
Another trend is the wide range of multiples being applied to a company’s earnings. There are business sales with an offer at a 5x multiple next to an offer with a 10x multiple. It goes to show what might be valuable to one buyer may not be to the next.
The value of a small, independent propane company is great right now. The number of buyers in the industry and low interest rates have caused favorable selling dynamics in the past few years. In the short term, we expect interest rates to remain low compared to historical norms. Largely, this should not affect the propane industry’s acquisition market.
Another factor playing into the buyer’s appetite is increased barriers to entry primarily through real asset prices. Prices on propane-specific assets like cylinders, trucks and storage tanks make it more difficult for small startups to be successful, as the rate of return is significantly decreased.
Certain aspects of the propane industry will be difficult to manage in the future. Labor is one of the biggest challenges everyone faces and will continue to face. The labor pool is aging and stagnant. Companies will need to get creative when it comes to sourcing and retaining quality employees. That may involve increasing hourly wages or expanding health care benefits.
Nobody can see into the future or have all of the answers. Small, independent propane companies face uncertainty in the coming years. But it’s nothing that can’t be overcome. Retailers looking to exit the market have more certainty now than those who plan to operate for another generation.
Adam Zoellner is a mergers and acquisitions manager at Propane Resources. He can be reached at adam@propaneresources.com or 913-329-2735.