Energy & Petroleum Articles
Is This the Year To Sell Your Oilheat Business?
By John Nardozzi, CPA & Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
The snow is still flying and temperatures remain below freezing, but the end of another heating season is almost within sight. Thank goodness! It is generally acknowledged that this year has been among the most difficult and challenging of any season in recent memory. It seemed that every element conspired against the retail fuel oil industry and continued the assault throughout the winter. Hurricanes, soaring crude oil prices, unpredictable weather patterns, fickle customers, unfavorable press - enough!
That is precisely what we are hearing from many dealers throughout the Northeast - "Enough!" Oilheat veterans who have survived many tough winters are coming to realize that they no longer have the desire or stamina to face another demanding season. They want out, and are looking to sell their business before next winter.
Of course, for every seller there must be a buyer. Other dealers recognize the opportunity to expand and grow, and are entering the market with an eye toward acquiring former competitors, expanding into new markets and strengthening their hold on current territory. However, they are coming to the table more cautiously than in the past.
Whether you are among those who are looking to exit the oilheat business, or seek to extend your company's reach, the time to start the process is now. Over the past several years, we have observed and participated in a number of oilheat mergers and acquisitions through our FuelExchangeŽ service. A clear pattern has emerged, based on critical calendar dates.
. April/May: Decision to sell (or buy) is made. Have a formal business valuation completed. Tie up as many loose ends as possible. If preparing to buy another business, start the process of lining up financing.
. May/June: "Profile" the business for sale, identifying key areas of strength and making the business as attractive as possible to buyers. For buyers, create list of desirable qualities of potential acquisition targets.
. June/July: Market the company to potential buyers, or seek possible acquisition targets. Identify likely companies among local competitors or larger regional dealers. Approach owners carefully and confidentially about acquisition.
. July/August: For sellers, narrow list of potential buyers and be prepared to "open up" for inspection. For buyers, conduct due diligence on selected target companies. Begin negotiations.
. September: Finalize negotiations and financing arrangements. Close the deal prior to heating season.
This calendar of events falls into the pattern described for good reason. Dealers wishing to sell their companies want to have the deal done before they are forced to prepare for another heating season, while acquiring dealers want to wait as long as is practical before committing their money. Few people want to buy an oilheat company in the Spring. That makes September the common meeting point for buyer and seller.
Of course, not all transactions take this long to occur. More importantly, once an agreement in principle is reached, things happen fairly quickly, often closing within 60 days. That is why it is so important to be prepared in advance.
While we expect this timing pattern to hold true again in 2006, many other aspects of the acquisition market have changed significantly. A few years ago, when margins were strong and the market fairly stable, it was a "sellers' market." There were several consolidators eager to bring smaller companies into their ever-growing fold of dealers, and banks were willing to provide financing. A dealer might field several competing offers for a company.
That is not the case today. The difficulties many dealers are facing as they struggle to remain profitable have made buyers more cautious and discriminating. The large consolidators are gone or in hibernation, cash is scarce and buyers are much more demanding.
Where, in the past, buyers may have been willing to pay a premium for customer lists and gallons that were "on the books," today they are more likely to scrutinize every detail of your operations and seek guarantees on retained gallons. We expect two types of transactions to dominate the acquisition market for the foreseeable future.
The first (and most common today) is a "retained gallons" deal, where the buyer offers limited cash up front, but pays only for customer gallons that actually get purchased and delivered over a period of years. In such a scenario, the risk is almost entirely shouldered by the seller. Thus the seller is likely to remain working in the business to help ensure that customers stay loyal through the buyout period. It is the best way to maximize the income to be derived from the sale.
At the same time, the buyer should be prepared to pay a premium for the gallons he or she does purchase. This is the price to be paid for what is essentially a "no risk" deal for the buyer.
A second, less common today, type of transaction is a "cash up front" deal. This is the one dealers dream about - a quick, clean cash out and then off to retirement. However, even this deal has changed. If a buyer can be convinced to come up with up front cash, it is generally only for "safe" gallons, such as automatic delivery customers who are paying full retail price. Forget about will calls, price program customers and CODs - they have no value to cash buyers. So, although a cash out deal is still possible, it will have much less value than in prior years.
In short, it is unlikely that you will be able to pack up your golf clubs and head to Florida this year. But that is not to say the right deal is not out there if you are ready to sell. It will, however, take more work to properly prepare a company for sale, and more flexibility on the part of the seller to strike a deal with the right buyer.
Next month: Preparing Your Oilheat Business for Sale
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.