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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
Articles

Introduction to Financial Leverage

Cash flow is the lifeblood of a propane marketer. The difference between cash flowing into the business from customers and cash flowing out to pay suppliers, vendors, employees, lessors, and other parties is net cash flow. If that number is positive over time, the business has generated a profit, and there should be a growing amount of cash in its bank accounts. An owner can either distribute this profit for personal benefit or purchase additional business assets to generate even more cash flow in the future. Successful propane marketers use financial leverage to accelerate this growth in cash flow even more.

Financial leverage is the use of relatively low-cost debt to buy more assets. By borrowing, an owner can fund the purchase of business assets that are otherwise beyond its current financial means. And the interest expense for this borrowing is ordinarily tax-deductible. By adding more fixed assets such as storage, propane tanks & cylinders, vehicles, and real estate, the business can attract and service more customers and more positive cash flow. If appropriately planned, these new assets will help generate enough positive cash flow to pay off the amount borrowed and make even more cash flow available to the owner down the road.

Of course, providers of certain types of debt will want to restrict the owner’s ability to distribute cash flow for personal use and establish specific ongoing financial covenants and reporting requirements to monitor the business’s financial health. Excessive leverage can be a potential hazard should the business experience a downturn and fail to generate enough cash flow to meet its then-current payment obligations.

Financial Leverage for Smaller Marketers

Most smaller propane marketers already use some form of leverage. The most common and least expensive kinds are customer credit balances and trade credit. When budget customers have positive balances, they have essentially have extended an interest-free loan to the business in return for future performance. Suppliers that offer favorable payment terms are helping the business finance its product purchases on a short-term basis. Absent both arrangements, the business would need to use cash on the balance sheet, or absent that borrow in another manner.

A revolving credit facility or revolver is an arrangement under which a lender, typically a commercial bank, agrees to lend cash to the business up to some specified limit on an ongoing business. Any amount the business repays becomes available to be borrowed again. The lender will typically take a security interest in the business’s cash, receivables, inventory, and equipment to be enticed into this arrangement. The lender will also seek a junior collateral position on fixed assets to the extent that the business has already pledged those assets to a different lending party. Properly filed liens, which is how lenders perfect their security interest, can position a lender ahead of other parties in priority for repayment should the business become financially insolvent and declare bankruptcy. The term of a revolver is typically six months to two years.

A commercial real estate loan is another standard leverage tool used by smaller marketers. Such loans are used to acquire commercial property for operating locations, possess terms of five to twenty years, amortize monthly, and are secured by a mortgage on the subject estate property. These loans can present a significant source of leverage for the business because the amount a lender is willing to advance against the market value of the real estate is relatively high (70 to 80 percent). In this case, the lender considers business creditworthiness but emphasizes the collateral as a source of repayment. And since real estate values are likely increasing at the same time the loan balance is decreasing, the cushion that protects the lender rises over time.

Propane marketers often finance the purchase of their vehicles, bulk storage tanks, field tanks, and other equipment using equipment loans or equipment leases. Like the commercial real estate loan, an equipment loan relies on a security interest in the assets being financed as a source of repayment. Since equipment tends to be a wasting asset with much shorter economic life spans than improvements to real estate, these loans are typically structured to have terms in the range of two to five years, with monthly amortization. Banks, captive finance companies, and independent equipment financing companies can all provide equipment loans, but terms and pricing can vary. The latter two sources also typically offer lease arrangements whose benefits can depend mainly on the circumstances of the particular business and asset involved.

Financial Leverage for Larger Marketers

The larger a business, the less risky potential creditors will perceive it, and its access to capital will increase accordingly. One additional alternative for a larger propane marketer to fund its growth is using a secured term loan. Bank and non-bank lenders offer such loans with terms ranging from three to six years in length and pricing moderately higher than shorter-term revolvers – more so for the non-bank lenders. Banks will often offer a loan package that comprises both a revolver and term loan. A shared collateral package secures the combined loan package. Alternatively, lenders could bifurcate the security interests in the business assets. The working capital-related assets might secure the revolver, while the remaining other assets secure the term loan’s interest. Each will likely seek a junior security interest in assets for which they do not have a senior interest. Repayment or amortization of a term loan is subject to some flexibility compared with other loan alternatives.

Large businesses can likely also borrow using subordinated debt and mezzanine debt. These forms of debt fill the gap between senior debt and equity in the capital stack of a business. Both permit a company to stretch its finance when a business opportunity arises such as a strategic acquisition. Both feature terms more extended than a senior term loan (typically six to eight years), have little required amortization, and may or may not have second or third lien security interests in the business’s assets. While both will have interest rates in the range of 10 to 12 percent, the mezzanine might have a provision to defer cash interest payments by rolling them into the existing loan balance. Also, mezzanine debt will typically have some mechanism by which the lender gets some form of equity participation.

Conclusion

Financial leverage can help an owner accelerate cash flow growth for a propane marketer. And the leverage tools available can vary based on the size of the business, assets available to be used as security, and the business’s perception of creditworthiness. A prudent propane marketer owner will balance the potential financial benefits of leverage with the increased solvency risk should the business face a significant downturn and the impact of restrictions put in place to protect the lender’s interest.


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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

THIRD IN AN EIGHT-PART SERIES | When Mike Abrams enlisted in the US Army after college, he began his long military service—both on active and reserve duty—as an attack helicopter repairman. Through the years, he was deployed in support of Operations Desert Storm and Iraqi Freedom, graduated from the Officer Candidate Program, and held multiple posts leading up to his future retirement as a Lieutenant Colonel in spring 2022.

Mike and I met in 2009, when he was still in the Army’s inactive ready reserves and was also the director of fleet services for one of the largest propane companies in the US. At the time, I was the owner of a bobtail manufacturing business, which supplied trucks to his organization. From our earliest meetings, I could see that Mike had a work ethic and a personal style that would always serve him well with his co-workers and suppliers. Although I had known Mike to be diligent and data driven when we were discussing bobtails years ago, I’ve learned that his analytic mindset is a skill that bridges his multiple work projects.

His strengths as a fleet director and as an Army officer continued to develop in tandem as he applied his abilities to choreograph either trucks or people moving in concert. This past spring, he took on a new challenge to create and develop a fleet program for one of the fastest growing propane companies in the US. Clearly, his background prepared him well to take on this “dynamic, not static process.” There’s a direct link, as Mike says, “I developed a certain skill set in the Army that translates well to my work as fleet director.”

While in the reserves, Mike experienced a few combat deployments and maintained his military certifications as an officer. His dedication to serving his country in the armed forces is admirable. Today, he is proud to provide service to communities nationwide by bringing propane, a clean[1]burning fuel alternative, to those folks who live beyond the grid. He’s proud of propane’s environmental record as “a good niche fuel with a mature, established infrastructure. It’s one of the available solutions to climate challenges.” He defines the industry as being “responsible stewards” of our environment and personally ensures his drivers are trained to conserve fuel, which saves significant dollars and carbon emissions.

As a fuel used in every state in the nation, propane creates a diverse choice of places to work and live. In Mike’s case, having been moved about by the Army, he now appreciates settling down and is glad to call the Kansas City area home. When asked about what keeps him motivated in the energy industry, he talked frankly about the dangers inherent in dealing with a hazardous material and how this fact has rightly resulted in a culture of safety being created. In the military, people are trained to be safe, and that emphasis instilled safety in Mike’s life. He brings a “safety first” policy to his work as a fleet director.

From his first words to me about his concurrent military and civilian careers, Mike talked about the importance of teams and how “everyone has to pull their weight.” He “started in the military in the trenches, turning wrenches” and learned discipline, leadership, tenacity, and flexibility. Mike sees the possibility for ex-military personnel to become part of a winning team within the military-friendly propane industry. Truck drivers, service technicians, fuel handlers, as well as dispatchers, customer service reps, management and office people are all needed—for example, it’s “not hard for a driver with a Class A CDL to get a hazmat endorsement if you already have a security clearance.” He suggests you may use your developed skill sets or apply more training to learn new ones. This industry’s employment opportunities can “dovetail very nicely with your military background.”

Nancy Coop, Cetane Associates

This article was first published on www.Vets2.org in August 2021 as a part of their “Fueling the Workforce” series.

                                    


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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