By Steve Abbate
Almost every Seller of a business wants to be paid all cash at closing and most buyers prefer to present offers where the seller gets paid over time, typically on a performance based formula. As most advisors will tell a seller, the future of the buyer is uncertain and the only way to completely secure your compensation for the sale of the business assets is to be paid all cash.
Unfortunately 100% cash transactions are not available to all energy marketers. If you own 80% of your propane tanks or if you deliver heating oil and 80% of your customers are on automatic delivery then the odds of an all cash sale are very good. This is because the Buyer has minimal risk of losing the business they acquire.
The difficulty arises where companies have lower propane tank ownership percent or a higher percentage of “will-call” customers. In those situations there is a greater risk to the Buyer. A smart buyer will get information on how loyal the will-call customers are. A will-call customer who has purchased all of their fuel from the energy marketer for the last few years is sometimes considered to be similar to an automatic delivery customer. The trick for the Seller is in documenting their will-call customer purchasing habits.
Budget accounts and accounts with service contracts are also more desirable from a Buyer’s prospective, as those two programs show customer confidence. Customers on budgets and service contracts are less likely to leave as they value the customer/company relationship. Price protected customers on cap programs also fall into the desirable category for most Buyers, however they have lost favor in recent years. We also typically see lower margins for most cap priced customers, especially those not managed by a hedging company.
One major factor in the last couple of years that has contributed to more cash at closing transactions is the lower cost of fuel. Most banks have not reduced revolving lines of credit. However, when the cost of fuel increased a few years back, banks were reluctant to increase RLOCs and this resulted in a tighter cash flow for marketers. This curtailed acquisitions and drove values down. Now buyers have access to more cash through their RLOCs and this has helped to increase company asset value, competition for acquisitions and more cash at closing.
Another reason for more available cash is with regard to higher operating income as a result of lower fuel cost. In addition to a trend of higher margins in a down market, there are also savings to operating expenses. We mentioned RLOC interest costs but marketers will also see lower truck fuel expense, lower credit card fees and lower bad debt expense. Truck fuel is an obvious savings; however, most marketers do not consider savings on credit card processing and bad debt. As an example, if credit card fees and bad debt each run .35% of revenue (this is an average of what we see) and revenues are $8,000,000 then these costs are $56,000. With revenues cut in half as a result of lower fuel cost, the expense is now $28,000. Add in a $40,000 savings in truck fuel and $68,000 drops to the bottom line. If you are a multi-fuel marketer that could mean an increase in the value of your company of close to half a million dollars. If you are a buyer, this means higher cash flow. Buyers are still looking to conserve cash and sellers are still looking for cash transactions, yet there is more cash available to buyers and as a result we are seeing higher values and more cash transactions.
Steve Abbate is the president of Cetane Associates, which provides hands-on merger and acquisition advisory services for privately held companies. Abbate has been providing M&A advisory services for most of his career. In addition to his track record of completing over 70 successful transactions, he has consulted with and performed financial and operational evaluations on hundreds of businesses throughout the U.S.
Cetane Associates LLC
4504 Stonecrest Drive
Ellicott City, MD 21043