I have completed 34 marathons in my career with very limited running ability. I have shuffled and grinded my way for a 20-year period and was able to qualify seven times for the Boston Marathon. I did this based on a very consistent training program where I was able to run over 2,000 miles per year for 25 years. I practiced two concepts to get this done. First, I ran most miles with other people – often in packs of runners to stay distracted and allow for some limited conversation. Secondly, I told myself the race would be 30 miles and not just 26.2, the actual distance. The lesson here is to figure out how to simply “force yourself” to get something done without allowing excuses to take over.

I speak with PCOs across the country every day. They all seem to love what they do and feel like they have a secret sauce to provide a competitive advantage.  Far and away, their largest concern and reason for not growing is a lack of trained staff. They often feel overwhelmed due to a staffing shortage. They spend more money and time on recruiting and retaining employees. They hang on to low performers. Allowing this to happen enables others to lower their standards. Managers hesitate to reprimand other staff for fear that they will leave and go somewhere else.

Most managers I speak with are doing a very good job working with staff. They are appreciative, they are reasonable and they generally care about their staff. They develop pay systems and incentives to attract and retain, they buy lunches, they sponsor their employees’ kids’ youth sports and will often allow staff to leave early on Friday.

These managers often feel defeated and some blame the millennials for their selfishness and lack of loyalty. They attend seminars and read books on how to better recruit and retain employees. Before you read the rest—don’t ever stop working on developing ways to hire and retain. Work is better for all when we care about our staff.

The solution is to take away the human element and treat this like a marathon runner might approach it. Just force yourself to hire more staff than you need and treat recruiting and retention the same way as marketing your business.  Remember, humans are considered the most unreliable machine ever assembled. Compared to a machine we can be irrational, emotional and we develop bad habits easily.

You just need to focus resources on recruiting and hiring until you have 15% more delivery technicians than you need. Never allow this number to be less.

Consider what 15% extra delivery staff allows you to do:

• Get to new work faster
• Manage out staff that is not cutting it – a great help with retention
• Reduce OT and Saturdays
• Staff routes with 2-person trucks that could use the help
• Schedule vacations easier
• Let supervisors manage and train more and fill in for routes less
• Provide a Part-Time position for staff when they need that status and they can be valuable as an additional route filler

Improved retention based on all the above factors

Being constantly understaffed is like a having a chronic, self-inflicted disease. I see so many companies that never grow past $500k because of staffing limitations. You need to get out in front of staffing—unlike a vehicle, you can’t buy or rent a new employee quickly.

 

Bob Williamson

Pest & Lawn Director, Cetane Associates

Pest Talk, October 2023

 

First published on PMP’s “Pest Talk Blog” October 2023

While the process of selling a business is similar for every company, the process of preparing for a sale can be very different.  Every seller wants to get the maximum value for their business and have a smooth, uneventful transaction. In addition to maximizing value, they are looking to find a great buyer for their employees and their customers and to have the legacy of their business continue.

There are many items to consider when making the decision to sell a company.  We are often asked where to start.  Our recommendation is to first speak with a financial planner or your accountant.  Understanding what your quality of life will be like after your work-life changes is important for owners and their families.

Tax planning is one of the most important items a business owner can perform prior to deciding to sell. After all, it’s not how much you sell your business for, it’s how much you take home after taxes and we have seen some poor planning benefit the government more than the business owner.  As an example, if a business is a C-Corporation, converting to an S-Corporation can save a seller in the ballpark of 20% or more in taxes. There is currently a five-year waiting period before a company can realize the tax savings from the conversion. If this is your situation, we recommend having a fair market valuation performed to set the baseline for the value at the time of conversion.  This allows companies to take advantage of the S election in the event there is a sale or life event prior to the official conversion date.  Any gain in value after the conversion date would typically be taxed at the S-Corporation tax rate.

Another strategy for C-Corporations is allocating a portion of the purchase price to personal goodwill, which minimize taxes. For more on personal goodwill effects, look up the Martin’s Ice Cream case on the internet.  It’s rare an individual takes on the IRS in court and wins!  Mr. Martin did just that in 1998 and C-Corp owners have been reaping the sweet rewards of Martin’s Ice Cream ever since. Before the sale of a C-Corp, it is advisable to get a personal goodwill valuation performed as the IRS likes to challenge personal goodwill.  They hate to lose a court case but they do like to audit.

As a general rule, buyers don’t buy what they can’t see. It really is that simple. But what do buyers want to see is the question?

Buyers want to understand how your business has been performing financially, they want to see growth in the company, whether it is EBITDA, gallons, gross profit, customers gained, and sometimes diversification growth.

If a company delivers propane the buyer will want to understand how many of the propane tanks (by size) at customer locations are owned by the company compared to those owned by the customer. This is referred to as tank control and is a major driver of value of propane businesses.  You would think that this is an easy task, however our experience shows that most companies do not keep accurate, up to date records on propane tanks.  Sellers should be well prepared to answer how many signed tank agreements they have on file and fully completed and customer-signed leak checks. After all, in the eyes of the law and most buyers, if it isn’t documented it didn’t happen.  Buyers with poor propane tank records often see purchase price hold backs until tanks can be verified.  In addition to tanks at customer locations, buyers will want to understand how many new and usable used tanks you stock in the yard. Sellers need to represent the tank counts and they should be accurate.

Real estate can often be a challenge in a transaction. Are the deeds correct, does the property need a new survey, is the property clean from an environmental stand point, has there been a recent property appraisal performed to fully understand the value of the real estate (excluding any bulk tanks)? From a buyer perspective, if they look at a company with a recent real estate appraisal, property survey and environmental report, it puts them at ease that the company is on top of their business. Something as simple as a well maintained and aesthetically pleasing property can be the difference between a smooth due diligence/transaction and the buyer reconsidering the transaction.

Other important items include what the seller has for safety records, maintenance files, required permits, and employee files.  Safety and compliance items such as updated driver files and regular safety meetings also shows a buyer that the seller is on top of their game.  Today, more than ever, being fully staffed with properly licensed/trained employees is an important factor for buyers. Buyers are looking for a team that can continue operating the business. Even buyers of well-run companies in the same market find it difficult to find good qualified help and they will want to know that employees will stay and their investment will be in good hands.

Well maintained, updated vehicles also play into business value and they go to the personality of the business.  Drivers like nice vehicles and companies with nice vehicles tend to attract the best drivers.  Maintaining vehicles in good repair is one of those intangible factors that help buyers get a feel for a company. Buyers don’t want to buy a company and have to go out and buy new trucks because the ones that came with the business are constantly in the shop.

Buyers will seek to understand much more about your business and the key is to provide good data in a timely manner.  Good data will also help assure a smooth transition and avoid any issues after the sale.  Remember, companies that are prepared for a sale will receive higher offers and they will have choices of who is their best-fit buyer.  Sellers should be interviewing buyers and not the other way around.  Premium companies sell at premium prices and attract the best buyers.  The last item to mention is that most delivered fuel marketers are great at running their business, however, most have likely not sold a business.  Seeking professional advisors such as attorneys, accountants and industry brokers will smooth the process and their guidance will always more than pay for itself.

 

Tamera Kovacs

Director, Cetane Associates

May 2023

 

First published in Oil & Energy, June 2023 issue

Life, Liberty and the Pursuit of Happiness are, as the Declaration of Independence states, certain unalienable rights. The business world, and the delivered fuels industry (heating oil and propane) in particular, has enabled many people to pursue their dreams and create happiness for their families, employees and customers.

The fuel industry has some great history. In 1933 Leon Hess, age 19, formed Hess Incorporated (NYSE: HES). He purchased a 1926 second-hand 615-gallon oil delivery truck and began delivering to homeowners. Also in 1933, Abraham Slifka opened Slifky’s Reliable Oil Burner Service, delivering heating oil and burner service in the Boston area. Abraham’s two sons Fred and Richie, and then their sons, continued to grow the business now known as Global Partners LP (NYSE: GLP). The third-generation grandson of Abraham, Eric Slifka, is the current CEO.

Our company is one of the top ten national M&A advisory firms as reported by Financial Services Review in 2022. Our main focus is the delivered fuels industry where we have completed hundreds of transactions. We help entrepreneurs looking to exit their businesses and realize their dreams by selling their companies. It is a very gratifying career to help owners and shareholders transition their businesses. Finding the right buyer to continue their legacy, provide long-term employment for their staff, and helping to accomplish their financial goals is our mission.

There are always obstacles in working through a transaction process including providing accurate financial information, alleviating environmental concerns, negotiating indemnifications, and working through the legal process. These and other details of a transaction are challenging; however, we always worked through these obstacles, that is until we ran into a governmental road block recently.

Our clients started a heating oil and propane business over twenty years ago. Like Leon Hess and Abraham Slifka, they started with a truck and a strong work ethic. Like many successful people we encounter in the industry, they gave back. They gave back to their community, their employees and even their customers. They helped less fortunate people in their community and quickly gained a reputation as a reputable full-service provider of heating oil, propane and heating services. They did not grow their company as large as Leon or Abraham, but they grew it large enough to be able to sell it and retire comfortably, or so they thought.

As we worked with them through the process, all was going well until documents were filed with their State Attorney General’s office. That is when their American Dream started to get crushed. The AG’s office stated that there was not enough competition in the area and they could not sell to the larger companies in the area as it could lead to lack of competition and higher consumer prices. The AG’s office presented the buyer with a list of items that if they complied with, they would allow the transaction. The buyer was gracious, and in our opinion, went above and beyond to comply with all but one provision. The AG’s office wanted to impose price controls, not only on the new customers, but on all the buyer’s existing customers. As you might expect, that was one request the purchaser declined.

We met with the AG’s office and explained that six companies were serving the area and that there were little to no barriers to entry into the industry for other companies to startup. As a good friend once told me, all you need is a truck and knuckles to get into this industry. Knuckles knocking on doors was his form of marketing.

The AG’s office did not agree that there were almost no barriers to entry and told our client that if their only other choice was to go out of business and close the doors, then maybe they would consider approving the transaction. They requested a written plan stating that the company would cease doing business. The crushing of the dream continued.

After seeking legal advice, it became evident that it would be extremely expensive and drag on for an unnecessarily long period to fight the battle in court. Ultimately the AG’s office would not approve the sale and our clients were forced to stay in business for now. Their other option is to close their doors and liquidate their assets. In the end, the customers will likely end up with the same companies that the AG’s office said they could not sell to.

As a politician once told me “I feel very strongly both ways”. I understand government controls to protect against anti-competition; however it seems obvious to me that competition, in this case, will continue and who knows, maybe another Leon or Abraham is out there looking to buy a truck and knock on doors and achieve the American Dream.

 

Steve Abbate

Managing Director, Cetane Associates

May 2023

 

First published in Fuel Oil News, June 2023 issue

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.

 

Steve Abbate

Managing Director, Cetane Associates

June 2023

 

First published in CEMA AEGIS, Spring 2023 issue

Over the years many people in the industry have shared funny stories with me that often made an impact on the way I have thought about business.  I would like to share one of those stories with you.  I know I will be dating myself as this story goes back to when drivers and technicians used two-way radios and when anyone over the age of 12 knew what a booby prize was.  Ask someone under 35 today what a booby prize is and see what response you get.  If you don’t know, ask an older person.

Before texting, or the use of electronic dispatching, or before Nextel touch and talk radios, or even before cell phones, there were two-way radios.  The proper language on two-way radios was to use the “10 code.”  Some common examples are 10-4 = Message received, 10-6 = Busy, please stand by, and what’s your 20, which is 10-20 = My location is _____.  Just watch a Smokey and the Bandit movie for a refresher course.

Getting back to the story—there was a home heating oil customer who called their fuel company to let them know they had no heat.  They said they thought they were out of fuel.  The CSR informed them that they were on automatic delivery and they had received a delivery in September and since it was the middle of October it was unlikely they were out of oil.  The customer had a service agreement in place so the company dispatched a service technician.  When the technician arrived, they found the above ground 275-gallon tank was empty.  He put ten gallons of fuel in the tank, primed and started the burner and called for a driver to fill the tank.

Two weeks later, the customer called in with no heat.  Another service technician was sent out and found that the tank was empty.  Service dispatch was concerned that there may have been an oil spill as the oil line from the tank to the burner was underground.  The service technician tested the line and did not find a leak but he ran a temporary line just to be sure and to make certain the customer would have heat.  The homeowner was informed and they were very grateful for the thoroughness and diligence of their supplier.  Their heat was back on and it was a good thing as it was now November and it was getting cold.

Two weeks later the customer called and said they had no heat.  They said they checked the new gauge that was installed on the tank and it showed that the tank was empty.

This raised alarms for the fuel company and all sorts of theories were discussed such as someone stealing the fuel.  The action that they took was to send a service supervisor.  When he pulled up in the street in front of the house, he said I am 10-20 at the customer’s location and they are out of oil, please send a truck.  The dispatcher asked if he had looked at the tank and the burner and if he had diagnosed the problem.  He said that he had not gotten out of his van but he was fairly certain they were out of oil.  The dispatcher asked him how he knew they were empty and he said it was simple, there is no roof on the house.

I’m sure there are many lessons to be learned and hopefully you can use this story to help train your employees as to what questions to ask a customer and how to be observant at a customer’s home.  If you have any questions just 10-25 me but don’t 10-26 me.  I wish you all a 10-99. (You can Google it at https://www.commusa.com/walkie-talkie-10-codes).

 

Steve Abbate

Managing Director, Cetane Associates

February 2023

 

First published in Fuel Oil News, February 2023 issue