Is it time to sell?

October 1, 2004 By    

You may lack family members willing to line-up in a succession plan. Or perhaps you’ve had your fill of coping with rocketing insurance costs, government regulations and endless days topped off by late-night telephone calls from empty customers.

If it’s time to for you to hit the links in a more pleasant climate or drown some worms in a favorite fishing spot, opportunity remains for you to sell your business at a comfortable sum.

While the pace of acquisitions has slackened compared to years past, consolidation continues in the propane industry and there are still deals to be made with willing purchasers.

Buyers these days are looking for value – meaning good profit margins, healthy earnings and a promising future. And you should have adequate record keeping to verify that these attractive traits are reflected in the performance of your business.

Industry consultants suggest that you’ll want to enlist the aid of a professional to assist in the sales process and help achieve the highest amount of after-tax funds. These transactions can be quite complex.

The best prospect for a potential purchase is tied to what the seller is generating with cash flow, advises Jeff Kaminsky, group director of corporate development for AmeriGas.

“When we evaluate a business we do it on cash flow,” Kaminsky says. The adequacy and worth of the fleet, tanks and other equipment are considered a given, even with the elevated cost of steel or similar signs of value that an owner might see in the enterprise.

“We assume the assets are there to run the business,” Kaminsky explains.

“We look at cash flow as opposed to the ‘fair market value’ of their assets,” concurs Dan Carrigan, director of corporate development for Ferrellgas.

The company does take into account a prospect’s potential cash flow if it were to become a Ferrellgas outlet.

“Until you complete the sales process and collect the cash you’re tying up more money in working capital,” Carrigan says.

“With regards to acquisitions, we don’t see the higher price of propane and the impact it has on working capital as a negative necessarily. We view it as a natural progression of the industry. But it’s something that we’re continually monitoring.”

According to Carrigan, a buyer’s market and a seller’s market are determined primarily by the level of interest among buyers in a particular seller, as well as the margins of that seller.

Don’t expect the buyer to offer much insight as to how your business graded out for purposes of a sales offer, several industry consultants maintain.

“The buyers aren’t offering any information except ‘This is the number we can give you,'” notes consultant James E. Hinkle of JEH Consulting. “They’re not saying what’s right with your business or what’s wrong with your business.”

What to compile if you want to sell
What to compile if you want to sell

Multiple equations

The consensus among acquisition-minded propane marketers is that the industry’s multiples are currently in the 4 to 7 range, since numerous elements can come into play.

Buyers typically base their purchase price on a multiple applied to the earnings before interest, tax, depreciation and amortization, known as EBITDA. Gleaning EBITDA is an analytical task; assigning a multiple is viewed as an art.

“It varies according to how you calculate EBITDA. For each buyer it’s going to be a little different,” Hinkle says.

“That is a question that most people (on the selling side) can’t answer. A buyer can answer that because they have people crunching numbers all day long,” says Hinkle.

“The question often gets tossed around loosely at coffee shops and cocktail parties without really knowing what it means,” says Carl Hughes, vice president of business development for Inergy and an LP Gas Magazine business columnist.

“You need to understand where the value of your company is. The ranges of values for companies are very diverse out there.”

Multiples go up based on a company being in a high-growth area, high gross margins, a high percentage of company-owned tanks, high-quality gallons, good employees, good systems, good operational standards and other factors. In some circumstances companies may be bought based on their asset value instead of a multiple, but not both.

“We’ve seen multiples increase slightly in the last year and a half,” Carrigan says. “I don’t anticipate a significant increase in the near future.”

“I believe that multiples are inching up,” says consultant Dan Dixon of Propane Resources. While you’re not going to see the double-digit multiples of the 1990s, “the multiples are inching up from what they were a couple of years ago and the fair market values are moving up,” he says.

“It’s probably a good time to sell,” says Brad Atkinson, vice president of corporate development for Heritage Propane. “Taxes are low and multiples are higher than they were two or three years ago.”

But when pressed about multiples, however, Atkinson poses a question of his own: “A multiple of what?”

From a buyer’s perspective “typically you’ll put a multiple on earnings that you’ll have” after making the purchase. A seller’s viewpoint can be quite different based on the owner’s investment in time, toil and tribulations.

“A fair market value of a business is what someone is willing to sell it for and what someone is willing to buy it for,” Atkinson declares.

“There are so many different criteria that go into fair market value,” agrees Charles White, president of Southeastern Energy Partners. For example, the worth of a deal in Atlanta is likely to be vastly different than a transaction in Hampton, S.C., he says.

“We’re never going to be able to say that there’s a fair market value nationwide,” says White.

He says the multiples he’s been experiencing are “somewhere south of 6.”

“I’ve seen four-and-a-half, five-and-a-half and five-and-three-fourths; you’ve got a few out there that will bring more because of consolidation (in a given market). A lot of companies can gain some really solid efficiencies” when integrating a purchase into an existing network of propane outlets.

“As a buyer, we feel that it’s a lot less risky to go into a marketplace that we already know,” says White.

Geographic preference

Like real estate, location, location and location are key anytime an acquisition is contemplated.

“It’s geographic-specific” when multiples are computed, Carrigan contends. “Typically you see higher multiples for sellers located on the coasts compared to sellers located in the Midwest because the margins are higher,” he adds.

“Six is probably a good number these days in the East, in the Midwest. In Kansas, it’s probably a five,” Hinkle says.

Some of the independents are in high-growth and high customer-value markets. According to Kaminsky, the composition of the market and the makeup of the customer base is important.”

A community experiencing population expansion amid healthy demographics is almost always a good target for buyers. Yet an area showing an elevated businesses climate, such as a place where forklifts and other commercial applications are present, or other signs of being a good prospect for propane use can be ripe for a purchase plan as well.

“These markets are not just occurring in high-income markets,” Kaminsky points out.

There are lots of good businesses out there that could qualify for as a decent purchase, Hughes says.

“It’s really hard to drill down into what quality customers are. We prefer a residential business in areas that have good demographics,” he notes.

If your operation is in a less-desirable region, you’re likely to have a tougher time closing on a sale.

“Sellers in that market don’t have a lot of options,” Hughes says.

Accelerating the pace

Accounts vary on the actual scope of today’s acquisition arena.

“You have fewer buyers in the marketplace, but you have a handful of larger buyers. That makes it a spottier market for businesses looking to sell,” observes Hughes.

“We’ve had a good growth these past few years and we expect to continue at our pace and be successful. We’re a multi-state marketer and consolidator by any definition; we have strong footprints,” he says.

Attractive interest rates are driving companies wanting to accelerate their pace of acquisitions.

“It’s a good time for transactions to take place because of the low cost of capital,” Hughes says. “Because capital is cheap a deal is more economically feasible today.”

Three or four years ago it was more of a sellers market than a buyers market as consolidation efforts went forward. Now, it’s a little more iffy.

“You can almost say it’s a buyers market,” says White, but not quite. “You still have an economy that’s sluggish and trying to recover, but it’s not the recovery that we would like to see.”

Still, prospects look better for 2005.

“The potential is there for a shift because I have an optimistic outlook on the economy,” White says.

The buyers market vs. sellers market scenario “depends on which side of the fence you’re sitting on,” Kaminsky comments. “If the multiples become too high we’ll sit on the sidelines.”

While there are some deals getting done, it’s not like it was in 1997 and 1998, according to Hinkle.

“Those were good years for sellers. Now there are cautious buyers and cautious sellers. There aren’t that many buyers pushing it up.”

“There are more people out there looking to buy and there are more prospects,” Kaminsky counters.

“There’s a lot of activity out there now. There are new players out there now that weren’t there last year,” agrees Dixon. who cites Liberty Propane and Southeastern Energy as examples of more recent participants.

“There’s not as many mid-level purchasers out there like ours,” White adds. “We’re able to go to independent marketers and develop a relationship with the company. It’s put us in competition with the larger buyers out there.”

“There’s competition from the national and regional players, as well as competition from new entrants into the industry that typically are regional in nature. These new entrants generally are focused on a specific region of the country, but if an attractive acquisition opportunity presents itself outside of that region, many will pursue those opportunities,” says Carrigan.

Moving on

Propane marketers cite a cornucopia of reasons for choosing to cash out, and plenty of people seem willing to take that step.

“Over the past 18 months we’ve definitely seen an increase in call volume from potential sellers,” says Carrigan.

“We’ve had more calls from people thinking about selling this year,” agrees Dixon.

“I’ve seen folks say ‘I’m tired of this,'” admits White. “I’ve also seen them say ‘I have a really good business here and I don’t want to sell.’ But I do see more people throwing their hands up; more often than not that’s the response I get.”

Adds Atkinson, “Some people just get tired of the daily grind and are ready to throw in the towel and move on to something else.”

The specific reasoning differs with each prospective seller.

The higher costs for insurance, regulatory compliance, propane, truck fuel and just about everything else is frequently noted, plus there’s the added heat generated by contending with Homeland Security issues and the resulting red tape.

“It’s one more bump in the road,” Dixon says of the War on Terror. “Regulations can be frustrating; this is something their parents didn’t have to worry about.”

Day is done

Family issues are a prime motivator for selling, be it illness, a desire to retire or lack of a succession-line.

“You’re seeing fewer third- and fourth-generations out there in the propane industry,” Dixon observes.

Hinkle believes that while many propane marketers consistently complain about the high pressures and high costs of doing business, by the time they’ve decided to actually sell instinct has taken over. “They get out when it’s time for them to get out. They know when their day is done.”

At this point the objectives become relatively simple, although the transaction itself can be extremely complex, according to Dixon.

“For the seller, he’s looking for the most after-tax dollars and making sure their employees and customers are taken care of,” he explains.

“They’ve been in the business a long time, a lot of their employees are like family to them and many remain in the area to retire.”

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