Growing up it seemed like I had a lot of cars. One at a time, but they would not last. If you got 100,000 miles out of a car, it was a miracle. The odometer would go back to 0 after you reached 99,999. Since my budget only allowed me to buy a car with over 60,000 miles, I had a lot of cars.
The first Kelley Blue Book® was published in 1926 and for the last almost 100 years, it has been a guide for vehicle values. The one I remember first reading was in the early 1980’s. They were fairly simple as there were not a lot of models or options other than engine size, air conditioning, a landau roof or a convertible. It was nice to have a simple guide as to what I should pay for a car or what I could expect to get for selling a car, although most of my early cars ended up as scrap.
Now we use KBB.com® when we look at vehicle values for businesses, especially non-truck vehicles. There are quite a bit more options you have to input to get a value now than in the 1980’s. We recently purchased a vehicle for my wife and I wanted to see what the value of her car was. First, I had to input my zip code so the website could compare prices in my area. There were six trim models, however, I have seen as many as ten on some vehicles. There were two engine sizes, two drive train choices, different braking and steering choices, nineteen interior choices, seventeen exterior options and nine colors.
After I input all the options, I had to choose if the vehicle was in fair, good, very good, or excellent condition. I thought it was excellent, but I put in good to be conservative. I then received four options of 1) get a cash offer, 2) trade in, 3) private party offer, and 4) donate your vehicle. I went with trade in to be conservative. This gave me a relatively good idea of what my vehicle was worth. This was very different than looking up a value in a book.
Ok, so what does this all have to do with the delivered fuels industry and company values? Having been in the industry for many years and having valued companies since the early 1990s, I see many comparisons to how it was done then and how it is done now.
The question I would get in 1990 was always how much per gallon is my company worth. I think it’s been two or three years since someone asked me that question. Back in the 1970s-1980s companies were very similar, especially residential heating oil companies. Like in the old Kelley Blue Book®, there were not a lot of options. Almost all the customers had 275-gallon tanks, most were on automatic delivery, and almost all had service contracts since they were usually free. Service contracts were a loss leader to sell fuel since the real money was made on selling fuel. Very few companies serviced air conditioning. A marketer could buy heating oil in the summer, fill their storage tanks and sell the fuel in the winter because fuel was always cheaper in the summer. While the first NYMEX heating oil contract traded in 1978, it was something a marketer never even thought of until the late 1980s.
There were no heat pumps, wood pellets did not exist, many marketers stayed in their own neighborhoods and would not steal customers from competitors. It was an unwritten rule, a certain credo among fuel company owners. Customers typically burned around the same number of gallons and margins were in a very tight range. Customers had to have a good reason to go on will call if they wanted their free service contract. I mention all these things because it made it easy to value a company. There were trucks and there were gallons and maybe a bulk plant.
Companies who would acquire other fuel marketers literally wrote the initial offer on the back of the paper place mat at the local diner. There was not a lot of negotiation as the market had been set much like the early Kelley Blue Books®. Turn the page to gallons and margins, fill in the year of the vehicles and you have a value for your business. Most transactions were done with cash for the vehicles and a payout based on retained gallons. Buyers did not need to go to their bank to get approvals and there were very few companies who had board of directors to present acquisitions for approval. It was a handshake deal.
Over the years valuation became more complex. Natural gas became a big competitor and buyers were concerned with conversions in certain geographic areas. Heat pumps emerged as a new home heating source and they took away gallons. Competitors became more competitive, price protection became the rage, commodity manipulation and spikes in pricing changed customer perception. We used to be the heroes who showed up on Christmas when our customer’s heating unit was broken and now we were the villains who tripled their cost to provide heat for their family. The industry started to charge for service contracts because more customers began to shop their fuel prices. As the universe of heating oil and propane gallons contracted, many marketers became dual fuel suppliers, adding propane. Many diversified into home services such as alarms, insulation, pest control, electrical services, plumbing, wood pellets, etc.
All of these changes made the back of the diner menu turn into a thirty-page spreadsheet. Banks, still shaking from prior fuel price spikes and the 2008 banking crisis, now want to scrutinize every acquisition, even small seller-financed deals. The handshake deal was dead, however, consolidation continued. Buyers continue to see value in acquiring competitors. The return on investment is still very good for a buyer in the delivered fuels industry. Investors are attracted to the industry because it’s recession resistant and pandemic proof. Yes, some green investors would not consider any hydrocarbon selling businesses, however, many see long term growth and profits in a relatively safe industry.
The changes to the dynamics and product mix for most marketers has made it more difficult to know what the value of a business is. The new standard of valuation in the delivered fuels industry has moved from gallons to a multiple of operating income otherwise known as earnings before interest, taxes, depreciation, and amortization (EBITDA). That is the standard in most middle market transactions in most industries. What the multiples are based on are known as value drivers. Value drivers basically show the quality of the business and help project future performance. There are well over twenty that we consider when valuing a business. Items like automatic delivery, tank control (propane), good demographic area (high income), service contracts, fully staffed drivers and technicians teams, limited natural gas in the market, budget accounts, high margins, and many other factors determine how much a purchaser will pay for the assets of a business.
Business value metrics have changed over the years. You can no longer open a small book to find out the value of your car, and you can’t multiply gallons times margin to get the value of your business. Valuations have become more complex, but one factor remains the same. High quality assets continue to receive premium prices when they come on the market.
Managing Director, Cetane Associates
First published in CEMA AEGIS, Spring 2023 issue