Energy & Petroleum Articles
What Is Your Oilheat Business Worth?
By John Nardozzi, CPA & Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
In the previous two installments of this series, we discussed the current market for buying and selling a fuel oil business, and steps necessary to prepare a company for sale. This month, we take a practical look at how to determine an asking price for your business.
If you were to sell your business to a competitor today, what would the asking price be? Putting a price tag on an entity as complex as an active fuel oil business is obviously not a simple process.
Dozens of factors directly or indirectly affect the value of your business. The value of tangible assets are fairly easy to ascertain. You can count your trucks, real estate, buildings, parts inventory and product (oil) inventory. But assigning value to intangible assets is a more difficult undertaking.
Customer lists, "goodwill," logos, trademarks, telephone numbers, margin trends, key personnel, business history, where your company is located and the level of competition are just some of the factors that can greatly influence the value of your company. Being able to place the right value on these "soft" assets is both an art and a science. But it can mean the difference between underpricing and overpricing your business.
Aspects beyond your control also affect the value. The market price of oil, environmental issues, the tax landscape, loss of key employees, labor conditions and government regulations can all sway the value of a business.
With the help of time-tested formulas, you can use a "rule of thumb" approach to setting an approximate value for your company. This rough value may be adequate to help you decide if selling your business is an idea worth pursuing. But don't count on being able to assess the value of your company for legal purposes. You are unlikely to come up with an objective answer or accurate value. You will need to find a qualified appraiser, preferably one with experience in the oilheat industry, in order to get an accurate valuation.
The "Secret" Formula
Whenever we are involved in an acquisition or sale of an oilheat business, the following formula has proven to be an accurate indicator of a company's intangible value:
Gallons x (Average Margin x Intangibles Factor) = Intangible Assets
Once the intangibles are valued you can now determine the selling price or purchase price for the transaction:
Intangible Assets + Tangible Assets (trucks, real estate and inventory) = Asset Selling Price
With the value of your assets known, here is a formula that will help you estimate the final "walk away" amount you might expect to pocket after the sale of your business:
Average Gallons x (Average Margin x Intangibles Factor) + Asset Selling Price + Assets Retained (cash, accounts receivable, etc.) - Liabilities - Taxes on the sale = Total Net Realized Value
Most of these variables are self-explanatory. You can easily comb through your records to determine how many gallons you have sold over the past three to five years and what your average margin was during the same period.
Determining the "intangibles factor" is the most complicated part of the valuation process. It requires an intimate knowledge of the oilheat industry, its history and trends. The value of intangible assets such as customer lists, goodwill and company reputation are very fluid. They can be worth more than their apparent value, or less.
That is why we must apply a factor to adjust the value of your company's intangible assets to current market conditions. The value of each part of your business (oil delivery, service, installation) should be adjusted according to the current status of the following factors:
. Competition Rating
. Margin Quality
. Customer Quality
. Operating Density
. Service Level
. Company History
. Company Image
. Profitability
. Annual Growth
The end result is an "intangibles factor" that can be multiplied by your average margin to give you a more accurate assessment of the true value of the value per gallon. Multiply this figure by your average annual gallons, add your hard assets and you have a fairly accurate selling price for your company's assets (for an asset-based deal).
What If You Are Buying?
If you are on the other side of the buy/sell process, you will want to make your own determination of the value of the company you are buying.
An important aspect to consider is margin support. Make sure the business you are acquiring is in a market area that will be able to support the margins you need to make to be profitable - and to pay off the investment you are making in buying the new company. For example, if you are looking to buy an oilheat company that has struggled to earn $.30 margins, while your business requires $.45 per gallon to make money, you may want to reconsider.
You will also be assuming several liabilities of the business you are acquiring, and may wish to discount the purchase price accordingly. These liabilities may include unexpired service contracts, budget accounts, uncovered fixed and capped price program accounts and any outstanding customer credit balances. The biggest liability you may be saddled with is any outstanding environmental problem, especially if there is a real estate component in the purchase. Make sure your due diligence uncovers any potential problems.
Here is a list of the documentation you should ask for when investigating a potential acquisition:
. Breakdown of gallons sold, by product, for the last three years, including: Automatics, Commercials and Will Calls by product.
. Gross margins for each group for the last three years.
. Discount policy for each group, with a list of largest discounts by customer.
. List of gallons sold to related entities.
. Delivery reports for the last three years.
. Fuel purchases for the last three years (including gallons broken down by supplier).
. Sales for last three years by product category.
. Detailed listing of employees, their roles, compensation and benefits. Obtain a copy of the company manual if possible.
. Detailed listing of trucks and service vans.
. Copy of all service contracts, including unexpired service contracts as of the proposed date of sale. Obtain a detailed listing of renewal prices, number of customers under contract, and number of free contracts.
. Number of customers on budget accounts.
. Number of customers paying by credit card.
. Number of customers on guaranteed price or fixed price programs and the renewal dates.
. Copy of any futures contracts still in effect.
. List of customers with underground tanks.
. Residential and commercial customer breakdown.
. Customer delivery history.
Now are you ready to put that price tag on your business? The process is a bit more involved that it first appears. This article is, by necessity, merely an overview of what you must consider in determining the value of an oilheat business. You should obtain a professional valuation before making any decision about selling your business or buying another company. Don't forget to consult your CPA about tax consequences, and always hire a knowledgeable attorney to draft and review your documents.
But having an idea of what your company is worth is a valuable piece of business intelligence, and can help you make a decision about proceeding further down the road toward selling your company or buying another business.
John Nardozzi and Joe Ciccarello are partners with Gray, Gray & Gray Certified Public Accountants, Westwood, MA. Gray, Gray & Gray has served the accounting, tax, valuation and business advisory needs of businesses in the oilheat industry for over 60 years. The firm also offers FuelExchangeŽ, a merger & acquisition service for the fuel oil industry.