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An Expert Set of Hands for Informed M&A Decision-Making

FIRST SEEN IN FINANCIAL SERVICES REVIEW | The decision to acquire a business is often made with a clear vision: buy their technologies, conquer a new vertical, reduce the competition, and increase profits. But for a seller, it’s all about advantageously positioning their business, finding the right partner, and closing the deal on time. This is often challenging, as it entails numerous key legal, business, human resources, intellectual property, and financial issues, which result in sub-optimal monetary gains and longer sales time.

Established to assist businesses in navigating this complex journey of mergers and acquisitions (M&A) is Cetane Associates.

Serving as a leading M&A consulting specialist since 2007, Cetane Associates helps clients maximize their business value and secure the best deal possible with its suite of unmediated and end-to-end M&A advising services. Coupled with its team of professionals who have in-depth knowledge in the financing, accounting, law, and M&A domains, the company is a go-to partner for home services and transportation organizations. It assists them in deciding the right moment to sell, attaining maximum interest from potential buyers, and transitioning the sales process to successful completion. Team Cetane Associates also excels at negotiating agreements in its client’s best interest while maintaining a balance between buyers and sellers to achieve a win-win.

“We ensure that buyers are capable of taking care of our clients’ existing employees, upholding their company culture and legacy, and optimally meeting their customers’ demands,” states Steve Abbate, managing director of Cetane Associates.

Each client engagement at Cetane Associates begins with a business evaluation that helps understand the true value of their company. The team then examines the reason for the sale and identifies ways to maximize the business value of its client’s organization. If a business cannot obtain the maximum value at the time of sale, it often spends several years working with clients to maximize their business value. Cetane Associates examines sellers’ profit and loss records to identify the key areas where the business value could be swiftly increased. It often recommends clients to change their corporate status for maximum tax benefit.

Upon gathering all these insights, the Cetane Associates team starts looking for the best buyer from their repository of hundreds of potential financial and strategic buyers. It takes buyers to a virtual data room and shares the information confidentially, empowering them to make well-informed decisions. The company makes decision-making seamless by providing all the information that a buyer’s board of directors, banks, and investors need in the right format. This is followed by the team collaborating with buyers and sellers to ensure the requirements of each party are optimally met.

Cetane Associates then guides clients through the due diligence while compiling all the required materials to assist them in clearing the audit. They examine the seller’s ownership and asset allocation data on balance sheets and collaborate with their accountants, enabling them to make the best-informed decisions while choosing the deal with the lowest after-sale tax payment.

Illustrating Cetane Associates’ value proposition is its engagement with a Massachusetts-based petroleum firm, where it assisted them in quickly and efficiently closing a deal. The client had initially tried selling the business themselves but could not proceed due to their lack of experience. Cetane Associates closed the sale for a 30 percent higher price than the company could have originally obtained. It also helped the client gain the most advantageous tax benefits.

“We make sure that clients are never left confused and alone within the complex M&A journey. We strive to be their constant partner navigating them seamlessly through the entire process and securing the optimal deal,” adds Abbate.

 

Financial Services Review: Top 10 Mergers & Acquisitions Consulting Firms – 2022

First published in Financial Services Review, December 2022 issue


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
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FIRST SEEN IN FUEL OIL NEWS | We have all seen the cost of doing business increase.  Wages, especially driver wages, vehicles, propane tanks, service parts, vehicle fuel, and many other operating expenses have had substantial increases.  The Consumer Price Index rose 9.2 percent from April 2021 to April 2022, the largest 12-month increase since the period ending June 1982. Energy prices rose 33.3 percent over the last year, and food prices increased 6.3 percent.

Knowing how this affects your business is a key to keeping your company in good financial health.  Our company provides M&A advisory services and performs business valuations.  Forecasting financial performance for our clients is at the heart of what we do.  In the past we have used an inflation rate of 1.5%-2% on most operating expenses and 5% on health insurance and recently on driver wages.  This has helped our clients manage their business by identifying how much they need to increase margins or cut expenses to continue to be profitable.

The chart below is an example how inflation is projected to affect operating expenses.  We kept the analysis very simple and we encourage you to work with your accounting and financial staff and advisors to plan strategies more specifically for your business.

Keep in mind that some expenses are related to revenue, such as bad debt, credit card processing fees and vehicle fuel.  These are related to the cost of energy regardless if your vehicles run on diesel, gasoline, or propane.  Energy and food are excluded from general inflation statistics due to their volatile nature.  Since they are a significant part of our business, we need to account for the increases separately.

You should also note that in addition to payroll costs increasing, related items such as payroll tax, unemployment, retirement contributions and workers’ compensation insurance will also typically increase.

In our analysis we only used gallons to determine margin to keep it simple.  There are many other revenue streams contributing to bottom line profit.  A more detailed analysis can reveal a better understanding of your specific business and help determine the course of action which is right for your company.

We kept operating income the same to see how much gross profit was needed to offset increased operating expense.  We also define gross profit as revenue minus cost of fuel or parts.

Also not addressed in the chart is the increase in cost of vehicles and propane tanks, which are both in short supply.  We typically value businesses based on a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).  Another common valuation method is Free Cash Flow (FCF), AKA: Distributable Cash Flow (DCF).  Basically, DCF is EBITDA minus capital expenditures.  An owner needs to continually invest in capital assets to keep a business running.

In the above example, if $200,000 per year was spent on capital expenditures, and now the same trucks, tanks and other improvements have increased by 40%, then the company will need to generate an additional $80,000 per year in profit for an owner to take the same distribution.  That equates to an additional $0.026 per gallon to pay the increased capital costs.

Marketers have always competed in business their whole lives and these challenging times are not new, just different.  Increasing margins when prices are rising is uncomfortable for most marketers.  This past February, I made the suggestion to a client to raise margins substantially ($.12-$.15) for a month and have all his people track complaints.  He called me yesterday and let me know that of his 3,000 customers, of which 50%-60% took a delivery in that month, he did not have one price complaint.  The value you provide to your customers is likely worth more than you think.

 

Steve Abbate

Managing Director, Cetane Associates LLC

June 2022

 

First published in Fuel Oil News, July/August 2022 issue


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
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FIRST SEEN IN OIL & ENERGY | In today’s world, when owners are considering their transition strategy, there is a tremendous amount of uncertainty. Business owners are facing difficult challenges in day-to-day operations and many are trying to make the decision as to the right course of action. There is no ONE magic bullet. It is important to seek knowledge and advice so you can make informed decisions to best achieve your future goals.

Keeping the pulse on the market and asking questions is important. What’s the current status of the acquisition market? What’s the right timing to consider selling or transitioning the business? Are there key areas of focus necessary to build value for future succession planning? These are all good questions to support making an informed decision.

The acquisition market is a cyclical market that ebbs and flows between a buyer’s market and a seller’s market. Over the past 24 years I have seen this shift multiple times in the energy sector with the last several years being a strong seller’s market for well-run businesses. There is one thing for certain, the acquisition market will eventually shift back to a buyer’s market. The uncertainty is when.

There are multiple factors that support a strong seller’s market or can cause the market to shift to a buyer’s market. Here are a few:

Capital: There’s a lot of capital looking for sound investments where investors can generate a greater yield than other traditional investment vehicles like stocks and bonds. Investors seek good returns, but they also seek stability. The energy sector provides investors above-market returns in a recession resistant industry. Prior to COVID investors were more aggressive in the types of markets they chose to enter. The essential energy sector is even more attractive for investors post COVID.

Interest Rates: Low interest rates support a seller’s market. As interest rates increase the risk of the market shifting to a buyer’s market increases. Low interest rates help with the cost of capital for acquisitions, capital purchases and the cost of operating a business.

Strong Balance Sheets: Investors seek industries and businesses that have tangible assets and a strong balance sheet and most well-run energy companies have both.

Granted, there are some things as a business owner you have little ability to control. The one thing you can control is how you run your business, and if you are considering a transition, the timing of exiting the business can be critical.

My favorite question I receive from business owners is, “If I’m considering selling in the next five years, what should I be doing now?” This one question opens so many opportunities to build value and put together an exit strategy. After all, for some of you this is your life’s work and for many your business represents multiple generations of “life’s work”. You have one chance to maximize the value you receive for your business, and in many cases, to preserve the family business legacy.

The ONE thing to do now, regardless of your timing to transition the business whether in a sale to a third-party or to transition it to family, is to know the type of business entity. If your company is a C-Corporation, it is important to understand the tax implications for when you sell. Almost all fuel distribution or propane companies are sold as an asset transaction, not a stock transaction. Why is this so important? If the company assets are sold as a C-Corporation the amount of money you will realize after taxes will be significantly less than if the assets were to have sold as an S-Corporation or an LLC. It’s the double tax rule; you pay taxes at the corporate level then you pay taxes again when you make the distributions to the owners. Currently, if you were to convert your company from a C to an S Corporation you would have to wait five years “recognition period” before you could fully realize the tax benefit of an S Corporation.

The SECOND thing to do is make sure you have a valuation performed on your business when you make the election. This is important if you choose to sell before the end of the recognition period—if you sell prior to the recognition period your company is subject to built-in-gains tax. The valuation sets the baseline at the time of the S-Corporation election. I challenge you to talk to your accountant and request they run a comparison for you. Pose the following question, “All factors being the same, if I were to sell the assets of my business today, how much after-tax dollars would I realize if I sold as a C-Corporation compared to an S-Corporation?” I would love to hear the answers.

Earlier in the article I mentioned that the last several years have been a strong seller’s market for well- run businesses or strategic acquisitions.  How do buyers classify well-run businesses or strategic acquisitions? What can you do in the meantime to increase your attractiveness to a buyer?

Buyers seek well-run companies with strong cash flow. Companies are valued and acquired based on a multiple of earnings. In addition to looking at the earnings’ potential in today’s environment there are some key challenges marketers are facing that can have an impact on a buyer’s interest level in a business. Let’s talk about a few of these challenges.

Legislative Threats: Some states are facing legislative threats to the energy sector. For some buyers not currently doing business in those states they are opting not to enter. For businesses currently operating in those states, many buyers are looking at accretive opportunities but may not step into a new territory. It really depends on the quality of the seller’s business and the opportunity.

Staffing: This is a three-pronged challenge. The first challenge is the age of the industry; the second is finding employees and if you are fortunate to find and hire them; the third challenge becomes keeping the employees, particularly drivers and service technicians. Staff is affecting buyers’ interest levels in businesses. Buyers may not increase their offer because you are fully staffed but there is a chance they could reduce their offer if you have a number of staff ready to retire or have key open positions. I recently attended a seminar where the presenter said there are 11 million open jobs and only 7.5 million people to fill those jobs.

Improve Trends: There is no ONE magic bullet. Look at your trends, gallons, dollars and cents per gallon (cpg). What are the gallons doing? Which gallons are most profitable? What are the gross margin trends by fuel type and customer type? We can all agree that all the operating expenses must come from the gross margin – are you charging enough to cover your expenses, cover your debt, make new capital purchases, and pay yourself? Gross margin is the easiest place to add value but improving operational efficiencies has become paramount to improving the bottom line. With the increase in fuel costs, wages, and capital expense items it is more critical than ever to work on improving operational and delivery efficiencies.

Regardless of your exit strategy or timing, it is good business practice to create an exit strategy plan. This plan will encourage you to build a strong business while focusing on the future.

 

Tamera Kovacs

Cetane Associates LLC

June 2022

 

First published in Oil & Energy, June 2022 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
Articles

Tyler Machado, Analyst at Cetane Associates LLC

FIRST SEEN IN BPN Magazine | I am an analyst on the mergers and acquisitions (M&A) deal execution team for Cetane Associates LLC. I perform financial analysis and provide insights on the industry and deal process to clients.

As a newcomer to the industry, what’s the most interesting area of the propane industry right now?

The delivered fuels area is the most interesting to me right now. We are at a very interesting point where there is a lot of consolidation, and companies that have been owned by the same families for generations are starting a new chapter. It has truly been a privilege and joy working at Cetane and assisting these individuals and families with a pivotal moment in their lives.

I’ve especially enjoyed meeting business owners and other industry people at the National Propane Gas Association (NPGA) 2022 Southeast Propane Expo in Nashville, Tennessee, and more recently at the 2022 Propane Days in Washington, D.C.

The propane industry is unique; it has a tight-knit sense of community and feels like a big family — one where everyone is always willing to communicate and give each other insights and best practices based on their shared industry experiences.

What’s something that not a lot of people know about you?

I play the guitar — specifically rock, blues and pop. John Mayer is my biggest influence and favorite artist.

Name one or some of your greatest personal successes.

The best is yet to come! Although I have only been in the industry for a short amount of time, I feel myself learning a lot every day about the industry, how companies are run and the M&A deal process.

Is there a tool or technology that you rely on to do your job?

Microsoft Excel — I use it every day. It’s an extremely powerful tool and essential to performing complex calculations and dealing with vast quantities of data analysis.

What’s one thing you wish you knew earlier in your career that you know now?

The importance of networking and building meaningful relationships. The 2022 NPGA Southeast Expo was my first time having the opportunity to meet members of the propane industry from across the country.

It was a blast talking to everyone and learning about them both personally and professionally, especially at the Young Gassers event. I’m excited to be joining their Fantasy Football League this fall. I look forward to meeting others in the propane industry and building relationships in the future for years to come.

If you could have dinner with anyone alive or dead, who would it be?

Julius Caesar; he probably has some good stories. I love history, specifically the Roman and medieval time periods. I think it would be interesting to hear the accounts of someone who was an integral part of that period and in shaping history.

What skill do you think everyone in your role or a similar one should learn?

Excellent communication. I can’t stress the importance of being able to get your point across thoughtfully and clearly and make things understandable, especially when you are working in a service-based role.

With clear communication, you can pass along knowledge. You want your colleagues and clients to be confident in your thought process, judgments and decision-making. This stems from clear communication. Communication is everything.

What’s the last thing you read?

“Barbarians at the Gate” by Bryan Burrough and John Helyer. The writing and storytelling aspect was fantastic; it gave great firsthand accounts of the events that transpired for a historic corporate acquisition.

 

Tyler Machado

Cetane Associates LLC

July 2022

 

First published in BPN Magazine, July 2022 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
Articles

[Please note that the steel prices listed as examples in this article were valid as of March 2022.]

FIRST SEEN IN BPN MAGAZINE | We all know what has happened to steel prices in the last year.  The high cost has impacted propane marketers and some of the more popular propane tank sizes are up over 80% from two years prior.  In addition, wait times for truck loads are over a year in some locations.

Every couple of years we survey tank prices for completing our client’s business valuations.  Below is a comparison of 2020 to 2022.

Bobtails are also in short supply.  In speaking with Tracy Timmerman, President of Jarco, the bobtail manufacturer, he confirmed that cold rolled steel prices have gone from around 30 cents a pound in early 2019 to over 80 cents in 2022.  Coupled with supply chain issues, truck prices are up an estimated 30%-40%, if you can find a vehicle for sale.  Mr. Timmerman also points out that “Planning is key in this environment; axles, electronics and specialty steel or stainless all have lead times in excess of 6 months.  Without aggressive forecasting, the shelves would be bare.”    Regarding costs, he points out “some suppliers have raised their prices to us 3 times in the last year by multiple percent each time instead of a more traditional 2-3% once per year that we had become accustomed to in a more stable environment.”  The Wall Street Journal reported that in some cases, three-year-old used vehicles were selling for their original price.  Throw in cost of propane, inflation, and difficulty in finding drivers and our industry is facing some challenging times.

Well, that was the bad news and the “not as bad” news is that your competitors are in the same place as you are.  The first step in addressing these challenges from a financial perspective is to quantify them and understand the impact on the bottom line. Smart marketers will review their income statement and make appropriate adjustments and they will likely track down any unutilized tanks and keep their trucks longer than they may have in the past.

Our company focuses primarily on the valuation of a business during a sale transaction.  We help buyers determine competitive offers for the purchase of businesses but mostly we help sellers determine the amount they can expect when we assist them in selling their business assets.  The traditional method to value a business is to determine an adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and multiply it by a factor based on the quality of the business using industry-accepted value drivers, such as percentage of company-owned tanks (tank control), age of vehicle fleet, and real estate to mention just a few.  The multiplier is also affected by factors in the financial markets which we will explore here.

EBITDA measures cash in (gross profit) and cash out (operating expenses).  That is why it is sometimes referred to as cash flow.  Twenty years ago in 2002, the tax code was changed to allow for what is known as accelerated or bonus depreciation.  The code has since been modified to include more assets, and in many cases, it includes vehicles and propane tanks.  The challenge for valuators is that the capital expense needed to run a business has increased substantially. As an example, if a company three years ago had a $1 million EBITDA, purchased 200 tanks a year for $1,000 average cost, and purchased a new bobtail for $140,000, they would have $660,000 or 66% left to distribute to their owners before taxes.  This is the concept of distributable cash flow (DCF).  Public companies set up as Master Limited Partnerships (MLPs) focus on DCF as do other companies who focus on pretax distribution to shareholders.

So now take the same company making $1 million EBITDA with an average tank cost of $1,800 and a bobtail cost of $200,000 and the same company with the same earnings now distributes $440,000 or 44% to their owners or a 33% cut in pay before taxes.

So common sense would make you think that the high price of steel would negatively affect business value as distributions to shareholders has gone down so the return on investment has gone down.  Well, that has not happened and we are seeing just the opposite.  In our opinion there are several financial factors keeping business values strong.  Low interest rates are an obvious one, and in addition, the higher values of propane tanks, real estate, and vehicles allow for acquirers to leverage those assets and borrow at favorable rates.  In very simplistic terms, if a buyer can borrow money at 4%, they can buy a company with 12% earnings and come out ahead.  In addition, the continued bonus depreciation has tax advantages that have the ability to produce more cash on an after-tax basis.  You can even amend your return from last year and carry the depreciation back and receive cash refunds back.  As we keep hearing from investors, there is a lot of cash out there looking for a home, and we see this driving up values and activity levels.    Another major factor pushing up values is the continued interest in essential businesses by investors as a safe haven for funds.

Many marketers we speak with think their company value has gone up because the value of propane tanks they own has increased.  They are correct that company values are up, and they are correct that the value of their tanks has gone up, but it may not be just because of the price of steel.

 

Steve Abbate

Cetane Associates LLC

April 2022

 

First published in BPN Magazine, April 2022 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT