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

The recent increases in propane tank costs have had some interesting effects on company value.  Many clients have come to us thinking that since propane tanks costs have doubled over the last few years, their company value has gone up the same amount.  While it is not a one for one increase, we have seen values increase along with the cost of steel.

As a buyer, looking at return on investment, if the earnings don’t change and you now must invest more in tanks to make the same return, you would think that overall company value would decrease.  Yes, the value of real estate, tanks, and trucks are higher, but it has been offset by a reduction in the value of the intangibles.  A buyer investing $10 million to get a $1 million return is still investing $10 million to get a $1 million return no matter what happens to the price of tanks.

The increases in value we have seen are directly related to being able to depreciate the tanks quicker than the intangibles, being able to borrow against the hard assets, and the recession- and pandemic-resistant nature of our industry.  We have also seen some tax advantages for both buyers and sellers related to how the purchase price is allocated.  When you buy a tank for a customer location, depreciate it, and sell it in an acquisition for more than you paid, any amount over the cost basis is treated as capital gains and that is good for a seller.

In addition to the actual value of the tanks, a marketer should remember that customer tank control is one of the biggest value drivers for propane company value.  Own the tanks, own the customer, and see the highest multiples on the sale of the company assets.

 

Steven Abbate

Managing Director, Cetane Associates

November 2022

 

First published in LP Gas Magazine, November 2022 issue

On occasion we are asked if it is more cost effective to gain an account through sales and marketing or through an acquisition. Over the years we have completed the analysis several times. To do the analysis yourself, you need to drill down into your operating expenses and calculate all the expenses associated with sales and marketing. Some of the items on your income statement are easier to identify than others. Expenses such as advertising, salesperson wages, auto allowance, referral fees, and any type of direct customer solicitation are easier to quantify.

Other expenses need to be researched or estimated. When you calculate salesperson wages, don’t forget to add a benefit load to include payroll tax, health insurance, workers’ compensation and other payroll benefits. These items are sometimes called “benefit load.” We use between 28%-35% of wages depending on the benefits package.  Other items may be the cost of a promotional program such as a first fill discount or a free or discounted service agreement.  Website costs may need to be estimated. While the cost of a Search Engine Optimization (SEO) program may be 100% attributed to sales and marketing, the cost of the website would likely have little weighting to sales and marketing as it is a necessary business expense.

Having done the analysis several times, we have continually found that marketing for a new customer has always been substantially lower cost than acquiring a new customer. So why do so many companies get acquired? The answer is that a great marketing program can typically grow a company’s customer list by 1%-4% per year. This is referred to as organic growth. If you are in that range then you are in the top percentile in the delivered fuels industry. This is especially true if you are in a market where conversions to other heating sources, such as heat pumps, are prevalent. Most companies have attrition and strive to stay even on customer count from year to year.

Acquiring customers typically costs two-to-three times what it costs to grow organically. No matter how good your marketing programs are, or how low you price the product, many customers will not switch. Customers are loyal to their fuel suppliers and we have seen customers who have run out of product in the winter more than once and they still stay with their current suppliers. We have seen margins in excess of $1.00 a gallon over competitors and they still stay with their current suppliers.

So how can that be? You let them run out of fuel and you still keep them as a customer most of the time? You charge more than your competitors and they stay customers? There are many answers to that question. Mostly, it is the relationship you have built over the years and your value proposition. Your company may have a good reputation in the community and customers may be familiar with the drivers who they know by name. If you are a propane marketer, it may be that you control their tank as you own it. Having an HVAC component to your business also helps keep customers. If you sold the customer a heating or cooling appliance, studies have found that they are less likely to change companies.

The other reason acquisitions are so prevalent is that they still offer a buyer a great return on investment. This is especially true if the buyer borrows funds at an interest rate lower than the return on investment. In that situation, the return on the buyer’s investment before loans, or the return on the equity investment, is even higher. The delivered fuels industry has always proven to be a great, recession resistant, pandemic resistant industry and it offers a safe investment at over-market returns.

So, if you can market to gain customers, go for it as it is the most cost-effective method to grow. If you decide to complete an acquisition to grow your business, it is also a safe, high-yielding method. Better yet, do both!

 

Steve Abbate

Managing Director, Cetane Associates LLC

November 2022

 

First published in Fuel Oil News, November/December 2022 issue

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

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