Investments without return

Residential real-estate experts have known for years that dollars invested into existing homes for improvements do not return the same value when the homes are sold.

It makes sense to consider what a potential buyer might value as you contemplate company investments.

For example, the amount of dollars spent to paint a house before placing it on the market will generally result in 100 percent to 200 percent of returned value in the eyes of the general home-buying public. Other high-yield investments in your home include kitchen and bathroom renovations, which experts believe have a higher return on investment from a potential buyer.

However, not all investments in homes are viewed equally by the general home-buying public. For example, if you choose to invest in a new swimming pool, buyers will place little to no value on it. So enjoy the pool for yourself, but don’t expect a buyer to assign value to it.

Real-estate experts say that while you may plan to live in your home for the rest of your life, understand that as you invest in your home, the actual value of those investments is determined by the home-buying public.

Value through buyers’ eyes

A similar thought process should be used by all of us who make investments in our retail propane companies. While we may plan to keep our retail companies for the long term and would never think of selling, we should be considering how our investments are valued by a potential buyer.

In my line of work, I often talk with retail propane operators who are surprised that a particular investment or activity – in which they have invested heavily in time, energy and dollars – is not valued very highly by buyers. Conversely, I will often observe what I consider the highest investment opportunities being ignored by some retailers.

So the question, as it relates to the propane business, is: “What kitchen, bathroom and pool investments can you make in your business that will be correspondingly valued by those who buy retail propane distribution companies?”

What do buyers value most?

• Quality customers – those customers who are most likely to be long-term customers and who can be transferred to a buyer without risk. The highest grade of residential or commercial customers is where the retailer owns the tanks and has a lease or rental agreement with the user. Keep making these investments as they will return 150 percent to 300 percent of the amount invested.
• Up-to-date equipment – all buyers can tell if you have not kept up fleet replacements and deferred investment in other maintenance capital items. Buyers will factor this additional cost into their valuation model. So make the fleet upgrades. They will return 100 percent to 150 percent of the invested amount.
• Quality cash flow – any investment you make in customer types that generate consistent and reoccurring cash flow will be highly valued.

What do buyers value least?

• Unrecorded and unreported cash sales – no buyer will pay for unrecorded or unreported sales of any kind.
• Appliance and other income – generally that income which comes from non-propane sales will be considered difficult to replicate year after year. So expand your front retail appliance presence if it makes you feel good – but don’t expect any buyer will see it the same way.
• High volume/low gross margin – generally these accounts require a lot of equipment. They add considerably to your company’s revenues and activity, but little to the bottom line. Further, they are accounts that tend to shop on a regular basis and often switch suppliers. Buyers are very wary of cash flow from this type of customer base.
• Customer-owned tanks – it does not matter if a customer has been with you for 20 years. If they can switch to another retail provider on any next delivery, the cash flow they generate will not be valued by buyers.

We all, at times, get a little too close to our businesses. It makes sense to consider what a potential buyer might value as you contemplate the “kitchen, bathroom and pool” investments in your propane company.

Carl Hughes is senior vice president of business development for Inergy LP. He can be reached at
Chughes@InergyServices.com or 816-842-8181.