Sold! When companies look to sell, more and more are turning to Griffith Energy

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Tiff and Debbie Nevins, along with their dog Chappy, of McCandless Fuels in Conshohocken, Pa., near Philadelphia, had carried on the family tradition that began in 1897. In looking for a transition plan for retirement, the Nevins’s chose Griffith Energy Services. They felt that in addition to the financial considerations, they had an obligation to their employees and their customers, and had turned down an acquisition offer from a major oil company because that company would have closed the office and substantially reduced the staffing. After the sale, Tiff Nevins continues to provide Griffith Energy with consulting services.

Recently, Fuel Oil News met with Steve Abbate, manager of acquisitions for Baltimore-based Griffith Energy Services, to discuss a variety of industry issues. Griffith is a wholly owned subsidiary of Central Hudson Enterprises Corporation and currently serves 80,000 fuel oil customers in eight states and the District of Columbia in a region that stretches from New England to West Virginia.

Fuel Oil News: We know Griffith/CHEC has completed acquisitions over the past several years. What made the year 2005 special in the acquisition sector of our market?

Steve Abbate: Though the price of fuel and cash flow were major changes for the industry, it’s surprising, but these weren’t the major factors for the companies we spoke to who were considering the sale of their businesses. The primary reason cited by most owners for wanting to sell their business was succession planning. Most of the companies we spoke to have an owner who simply wished to retire.
I personally believe that the difficulty of putting more personal assets into funding a business may be a reason that many owners are considering retirement. I also feel that for some owners, running the business is just not as much fun as it used to be. Taking calls from long-time customers on fixed incomes who can’t afford the increased cost of fuel is often an unpleasant conversation.

The other major difference we noticed in 2005 was that company valuations came into line with good business investment practices. Proper valuations for businesses that are looking to sell are healthy for the industry. The roll-up acquisition model proved to be financially disastrous, and this has had negative ramifications for everyone.

As they neared retirement, Willie and Carole Charette of Unionville Oil & Propane in Connecticut decided to downsize their business by selling off their propane and heating oil units, while keeping their fuel terminal and tank business. They lease part of their office to Scasco Energy, a division of Griffith Energy Services, which purchased the heating oil business in October. Picture are, from left to right, Fred Elliott, general manager of Scasco Energy Services, Willie Charette of Unionville Oil & Propane, and Steve Abbate manager of acquisitions for Griffith Energy Services.

FON: Does your firm try to expand using a ‘hub” concept, that is, looking mainly for firms that you are selling near or close to?

Abbate: Our main focus is in finding companies within our existing footprint. These companies are more valuable to us, as they provide operating cost reductions (synergies). We also know these markets better, so we are better prepared to compete within them. We can better utilize our local management team, and that helps us make the employees feel a part of the family atmosphere. That’s an important element of our success.

With that said, this year we did go outside of our existing marketing area with the purchase of McCandless Fuels in Philadelphia. This is a well-run company that represented a good opportunity for us. They had been in business since 1897, one year longer than us, and they had a premium customer deck with almost all automatic delivery customers, as well as service contracts. We were also very excited to be able to enter the Philadelphia market. The office is 55 miles from our nearest location, so it is still manageable for us.

FON: Some years back at an industry luncheon, a firm that was very active in acquisitions said the starting price was $2 per gallon. Does this approach sound very simplistic to you?

And tell us what factors besides the gallons delivered make a fuel oil marketing firm an attractive acquisition for Griffith/CHEC?

Abbate: This is the question that I am asked more than any other. Owners would like a quick and simple way to value their business, however, there is no quick, simple way. A business is worth what someone will pay for it. The value to a buyer will depend on the buyer’s business plan. High-growth companies, investment bankers and roll-up acquisition companies may use a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Other companies use an internal rate of return, distributable cash flow, or a return on equity model. Many owners tell me they have been told their company is worth their gallons times their margin times a factor, typically between 1.25 and 2 depending on the percentage of automatic delivery accounts.

Steve and Maxine Elansky, along with Steve’s brother David, owned and operated Mutual Oil Company in Bloomfield, Conn. They decided to sell the company to Scasco Energy Services, a division of Griffith Energy Services, when they felt it just wasn’t fun anymore. Steve is now concentrating on his business as the owner of Centsible Auto Sales. David enjoyed the customer interaction at Mutual Oil, so he stayed on with Scasco and is involved in the operations and customer service side of the business.

As an example, let’s look at two hypothetical companies, each selling two million gallons at 50-cent margins. Both have the same percentage of automatic delivery accounts and service contracts.

Company A has newer service vans and trucks, they have a tight delivery area, they do not give away free service to get the oil account, they pay all their employees reasonable wages near the industry average, the drivers and service technicians all wear clean uniforms, they have a solid equipment sales program, they have a low percentage of price-protected customers and their service call-back rate is very low.

Company B has two additional trucks and drivers because their delivery area covers five counties. They purchased their last new truck when Reagan was president. They give away three-year service contracts for the price of one; they have a high percentage of fixed, capped and/or prepay customers who make a purchasing decision every year. They have had to pay higher wages to attract good employees because the work conditions are poor.

Obviously Company A has more value, even though both have the same gallons and margins. Again, it all comes down to how much someone is willing to pay for the business.

FON: We know a great deal of your negotiations and final agreement is comprised of proprietary information, private to the parties involved, yet could you describe the various time frames for carrying a sale from initiation to completion? And could you give us some insight into the ways you structure some of your acquisitions?

Abbate: We have a very structured process. After we make an initial contact, we enter into a confidentiality agreement. We then have the company complete a questionnaire and build a model to see how the company fits with ours. Afterwards, we meet with our own management team to review the model. For smaller companies we formulate our offer in this meeting. For larger companies, or companies outside our market, we’ll make recommendations to senior management. Once approved, we then present the offer to the owner. Upon acceptance, we perform due diligence by going through company documentation to prove the numbers presented to us. We then present a purchase agreement and close on the company assets.

This process can take as little as four weeks or as long as four months. If all the documentation is in place and the company has good records, the process can proceed smoothly and quickly.

Steve and Maxine Elansky, along with Steve’s brother David, owned and operated Mutual Oil Company in Bloomfield, Conn. They decided to sell the company to Scasco Energy Services, a division of Griffith Energy Services, when they felt it just wasn’t fun anymore. Steve is now concentrating on his business as the owner of Centsible Auto Sales. David enjoyed the customer interaction at Mutual Oil, so he stayed on with Scasco and is involved in the operations and customer service side of the business.

FON: Many in the fuel oil industry agree that having reliable, competent employees who can handle customer complaints either on the telephone or in person is a key ingredient to a successful business. What types of arrangements do you initiate for bringing competent employees along with the acquisition?

Abbate: The financial consideration is always the biggest issue in purchasing a business, but the human factor runs a close second. I hear horror stories about family-owned businesses that have been sold to companies that immediately laid off key employees and ended up losing not only a large amount of the business, but also their reputation. In one case, the former owner had to move out of the area because he was so embarrassed at the way his former customers were being treated.
We try to make it a point to keep all existing employees. There is usually room in an organization for good employees. Eventually, as some employees retire or leave, we may not replace their positions. In the short term, this may not appear to be a good financial decision as it reduces our synergies, but in the long term it gives our employees a sense of security. Many companies live by the mantra that the customer is No. 1. While we believe this, we also know that our employees are equally important because, in a service-oriented business like ours, if you take care of your employees, they will take care of the customers.

FON: Can you summarize what owners should look for if they are considering the sale of their business?

Abbate: If the owner is preparing his/her company for sale, he/she should make a conscious effort to convert as many customers to automatic delivery service as possible. Typically, 80 to 90 percent of the value of a company is in the customer list and goodwill. An automatic delivery customer has a greater value even if the will-call customer has been buying exclusively for many years. The other consideration is service. If your service department loses money to keep an oil customer, then the oil customer has less value.

When you are ready to sell, I suggest you do your homework. Find out who is purchasing companies in your area. It may be a large company or it may be a local competitor. Meet with them and ask questions. The best advice I can give is to follow your feelings in addition to your pocket book. If you care about your family, your reputation in the community and the customers who have supported you and your family over the years, I would recommend choosing the company that gives you the best peace of mind.

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