In the 1970’s, many believed the world would soon be running out of oil. In the 1980’s I remember hearing that all the small family owned propane and heating oil companies would be gobbled up by a few large companies. Neither of those projections held true. The world is producing more oil and propane than ever before and I don’t know if in our lifetime, we will see the level of consolidation that was once predicted.

We are however seeing an uptick in acquisition activity, and I am often asked my opinion as to what is driving it. There are several reasons why family owned businesses are sold.

1. Retirement continues to hold the #1 spot, with increased activity due to less family transition. The Millennial generation seeks socially conscious careers and flexible work hours. While our industry is adapting, it is not high on the career path list and owner’s children are less likely to take over the family business than they were in the past.
2. Enjoying life without the day to day worries has become another leading reason for selling. Some business analysts also call this FBB (fatigue, boredom, and burnout). Most owners have done well but at the cost of getting burnt out, especially during difficult winters.
3. The owner’s financial situation, good or bad can cause a company to come on the market. Typically, we see distressed companies looking to sell, however we have seen the opposite several times. We saw one owner’s company come on the market after hitting the lottery for several million.
4. Medical condition is an unfortunate reason; however, we do see some clients who want to settle their estate while they are still able to do so.
5. Concern for the future of the industry has become more of a reason, especially for heating oil companies who have not diversified into propane. This is highlighted in certain geographic areas where conversion away from oil heated homes has been as high as 5% annually.
6. Fairly new to our list is the difficulty in finding drivers and qualified technicians. Many owners have had to step in and hit the streets in a truck or service van to take care of customers.

The good news for sellers is that there are still multiple buyers in most markets. In this past year we helped a dozen companies with acquisition transactions and very few were gobbled up by the big guys. We averaged twenty-one interested buyers for the companies we presented for sale and we had as many as thirteen offers on a single company. The buyers who have committed to staying and growing are eager to acquire companies.

The good news for the buyers is that industry is still consolidating. Home energy acquisitions continue to present buyers with a great return on investment. All the reasons listed above continue to bring new opportunities to buyers. It should be noted that there are also new family owned businesses entering the industry. Consolidation is happening and that brings opportunity for both buyers and sellers.

After years of preaching that companies can’t be valued by the gallon, owners are beginning to grasp the idea that companies are valued based on return on investment, usually in the form of a multiple of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) AKA: Cash Flow or Operating Income.

The valuation buzz at propane industry events is that companies are selling for 10X EBITDA. We have seen some record values being paid for companies and we even have it on good authority that values have reached as high as 10 X EBITDA. To better understand what that means, you need to determine what EBITDA you are referring to.

There are three basic EBITDAs. The first is the Seller’s EBITDA which comes from financial statements or income statements. Some adjustments are made for additional owner compensation. The second is the adjusted EBITDA which takes the financials and normalizes earnings by adjusting for items such as weather, related party rent, owner and family compensation, expensed items that should have been capitalized, onetime expenses and other items which would typically not occur under new ownership. Adjusted EBITDA is the basis for business valuations and the most commonly used of the three. The last EBITDA is the Buyer’s EBITDA. This calculation is done using the adjusted EBITDA, then projecting the Buyer’s results. A buyer may have operating synergies which would allow them to reduce expenses.

As an example, a company may sell for $5 Million with an owner EBITDA of $500,000. The owner perceives this as selling for 10X. When going through the income statement, the Buyer has reduced operating expenses items such as owner’s vehicle expenses, non-working family salaries, owner medical insurance, payroll taxes, 401K contributions and professional fees for owners such as owner tax preparation. The owner may also own the property and be charging themselves above market rent for tax purposes. Those items would all be adjusted and the Adjusted EBITDA may now be $750,000. This would be 6.6X EBITDA for a $5 Million purchase price. In addition, the Buyer projects that they can increase margin per gallon, consolidate a few positions over time, lower the insurance cost, bank fees, advertising expense and use technology such as tank monitors to operate more efficiently. This now brings the Buyer’s projected EBITDA up to $900,000. The Buyer is now paying 5.5X EBITDA based on their projections.

While EBITDA is a key measurement for valuing a company, there are many other aspects to consider. Those factors go into what the actual multiple includes. Does the company have real estate included which has a bulk storage facility? How old are the vehicles and will the buyer need to make further investments in vehicles and other capital expenditures? Is there a large percentage of Company tank ownership?

Let me give you an example. If there are two companies with identical EBITDA and Company A has an average of 6-year-old trucks, a modern office with three 30,000-gallon propane tanks, and 90% company tank ownership and Company B has an average of 15-year-old trucks, no owned real estate and 25% company tank ownership then Company A will sell at a higher multiple of EBITDA.

Another major factor is size of company. The larger the EBITDA the larger the multiple. A company with an adjusted EBITDA of $100,000 will sell at a substantially lower multiple than one with a $3,000,000 EBITDA. There are many other factors to consider such as exposure to natural gas conversions, competition, and union employees to name a few. A seller must also consider how a company is presented to potential buyers. A professionally presented company using a highly confidential managed process always brings a higher selling price with substantial tax benefits. What a Seller takes home after the sale is more important than the purchase price.

10X EBITDA sounds like a great valuation, but as they say, the devil is in the details.

As a general rule, no one likes change, however in the words of the 5th century philosopher Heraclitus “The Only Thing That Is Constant Is Change”. When a company is sold, both owners and employees are inevitably faced with change. How people address change is the key to success. I like to think of is as the difference between the Grim Reaper and Walt Disney. Some people will look at life as it was and think everything they have worked for is falling apart. The Grim Reaper has come to destroy their way of life. Others however, will see an opportunity to work for a new company who is growing and prospering. They are looking at the event through the “Walt Disney Prospective” Walt once said , “All our dreams can come true, if we have the courage to pursue them.”

I love to tell the story about a delivery driver who worked for a small family owned business while he went to school to get his degree. He worked in the summer for an oil company who also had a Porta Potty business. He basically pumped waste out of mobile toilets in the summer heat. The company he worked for was acquired by a large consolidator. He saw opportunity with the new company and he continued to work hard under the new management. As time went on his hard work was recognized and he continued to move up the ranks and became a dispatcher, safety manager, delivery manager, operations manager, Vice President of Operations and eventually he became the President of one of the largest fuel companies in the Mid-Atlantic region.

I recently attended an industry energy expo and I ran into two people who both referred to me as the Grim Reaper. They were referring to me as the person who showed up, helped sell the business and now the employees lives were forever changed. I never considered myself the Grim Reaper. Most transactions were very positive and the vast majority of employees involved in the transition after a sale have gone on to enjoy great careers in the industry. New opportunities open for them and career paths are typically better defined. I have always considered myself more like Walt Disney, as I was helping owners to realize their financial dreams. Walt Disney also said, “Well, my greatest reward, I think, is that I’ve been able to build this wonderful organization.”

After a lifetime of owning a business and all the challenges owners have faced, I think owners deserve to reap the benefits of their labors and their courage, not meet the Grim Reaper.

After all, change happens all the time. Changes are challenges and as an industry we have done a great job at keeping up. Owners are faced with addressing volatile pricing, health care reform, regulation & compliance, finding skilled service technicians, and employing qualified drivers, just to name a few. They also need to manage their businesses with changes in the weather from 12% colder one year to 10% warmer the next. I understand that when a sale occurs, some people will continue to refer to it as the Grim Reaper has come, but I will continue to believe that it can be a dream come true for many employees and owners.

There is a classic holiday movie called A Christmas Story. The story revolves around Ralphie, a young boy who wants a Daisy Red Ryder Range Model 1938 Air Rifle BB Gun for Christmas. In one scene, Ralphie’s younger brother is dressed by his mother to go to school. The mother puts several sweaters and coats on the brother so that he will not catch cold and get sick. The young child is so wrapped up in sweaters and coats that he can hardly walk. This embarrasses Ralphie as well as the little brother, and matters get even worse when the little brother falls down in the snow and can’t get up.

The overprotective mother is much like an overprotective attorney. Attorneys want to protect their clients from any possible situation that could have a negative effect. In many circumstances in a sale transaction, an attorney will try to wrap so many levels of protection around a client that it becomes embarrassing to the transaction and it causes a seemingly friendly transaction to turn into a tit for tat battle over ridiculous items. In addition to causing unneeded tension in a transaction, the overprotective attorney usually racks up excessive legal fees for both parties and delays the closing. Remember, the only way an attorney can protect you 100% in a transaction is to cause you to not do the transaction. Business has certain risks and good attorneys balance getting the transaction done while accepting reasonable risk.

In a past transaction, the seller had to spray paint the words “out of service” on tanks that had been removed from customer homes. Would anyone think that a tank not connected to anything was in service? My favorite item was when an attorney required, as part of a lease, that the landlord (Seller) remove all used florescent light bulbs and show documentation that they were disposed of properly.

Is it a good idea to remove used florescent light bulbs and dispose of them properly? Sure it is, but the middle of an acquisition transaction is not the place to address lightbulbs or spray painting tanks. Sellers already agree to multiple environmental indemnifications and specific environmental representations and warranties. Have the attorney protect you on legal matters but not in ordinary day to day business matters. All the buyer needed to do was ask the seller to get rid of the lightbulbs or just get rid of them after the transaction closed. Sending a red lined document that cost both parties additional legal fees to throw out some light bulbs makes no practical sense. Asking for petty changes usually just increases legal costs, upsets the other party, delays a transaction from closing and puts a negative cloud over the transaction. As an owner of a company, it is your responsibility to listen to advice, yet act with reasonable business sense.

I have seen many well-respected large and small companies get caught up in the same trap. When you are negotiating legal terms of a transaction there is a tendency to blindly take the advice of counsel without stepping back to examine what is reasonable and what is unreasonable and petty. If you end up in a battle of attorneys, please remember Ralphie’s little brother waddling down the sidewalk, falling into the snow and flailing hopelessly trying to get up. No one needs all those coats and sweaters to stay warm while walking to school or in negotiating a transaction.

This is a question that we are often asked by clients. The answer depends on the company and how well prepared they are for the sale process. We thought it would be helpful to go back and look over the last several transactions we completed to see exactly how long it took to close and why. The quickest transaction took just 11 weeks from engaging us to assist them until the closing date and the longest took 36 weeks. The average was 22 weeks.

Most owners we speak with tell us they think the process will take six to twelve weeks for a basic home energy company without a property sale. If everything runs perfectly they are not too far off in their estimates.

The number one area where business owners tend to underestimate the time it takes to close a transaction is in gathering the information a prospective purchaser needs to value the business. Most buyers want to get a good handle on the historical financial results and that’s not just gallons and margins. In addition, a clear understanding of the assets being sold needs to be identified. The number of propane tanks and their age, truck information, and current computer system software are just the start of what most buyers will want to know before making an initial offer.

Sellers Operating Expenses

Understanding the seller’s operating expenses is also a major focus for most buyers. While buyers will have a unique and different set of expenses, they will want to understand many expense items such as staffing, benefits, rents, vehicle repairs, fuel and advertising costs to name a few. A seller who has all the information laid out clearly will shorten the time it takes to sell their business.

Buyers Operating Expenses

The buyer also needs some time to learn about the employees and what their specific job functions and strengths are so they can transition the company smoothly for both the buyer and seller as well as for the customers and employees. The smoothest and quickest transactions are the ones where there are no surprises uncovered in the due diligence process.

When property is involved, a recent appraisal and current environmental report will shorten the closing cycle. It is possible to sell the business and later close on the property however most buyers and sellers prefer to close both at once.

Timeline to Sell A Propane Business

Another note on timing revolves around summer vacations. In our industry as well as dealing with anyone who has school age children, the summer is a big vacation time and it is often more difficult to coordinate meetings.

As I have mentioned earlier, time tables can vary by company depending on business complexity, property and time of year. The following chart may help to better understand time lines.

Tips to Sell A Propane Business

Here are some helpful hints for anyone considering the sale of their business:

1. Get together with your accountant and prepare a fairly detailed income statement in addition to your financial statement.
2. Prepare all financial information in Microsoft Excel. Almost all operating software and accounting software upgraded in the last ten years will have the ability to export reports into Excel.
3. Have recent (within the last 2 years) property appraisals and environmental reports (phase 1 and or phase 2) available for a rental or sale of property.
4. Start the process in January, February or March to avoid summer delays as well as avoiding the last quarter scramble to close the transaction before the heating season or the end of the year.
5. Seek help from your accountant, financial advisor or other professional who has transaction experience. You will be glad you did!