Propane Tanks and Company Value
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.
Managing Director, Cetane Associates
First published in LP Gas Magazine, November 2022 issue