Is Now the Right Time to Acquire Another Company?
by Martin Kirshner, CPA, MSA, Gray, Gray & Gray, LLP
Acquiring another propane or fuel oil company can be a great way to grow your business. Expanded revenues and a larger geographic footprint can help boost efficiencies and contribute to a stronger bottom line. But any merger or acquisition must be approached with common sense and careful consideration. If a deal comes your way, how can you judge its worth and value?
Having helped to guide dozens of fuel companies buy and sell through our FuelExchange™ merger and acquisition service, we know what it takes for a deal to succeed. Our recommendation is to start by carefully thinking through both the pros and cons.
On the plus side…
Merging with or acquiring another energy company can help your business to grow rapidly. Increasing sales of existing fuels and services or expanding product and service lines through the acquisition of another company may significantly boost revenue immediately, in comparison to organic growth, which can take years.
An acquisition might also enable your company to expand into new markets. This can be accomplished through a horizontal acquisition (acquiring another company that is similar to yours) or a vertical acquisition (acquiring another company along your supply chain).
Acquiring the right type of company can also generate efficiencies and synergies that can boost growth. Synergies are business characteristics and capabilities that complement and work well with those of your own company. Identifying an acquisition target that offers the right synergies can create a new combined entity that is stronger than either business would have been on its own. For example, do your customer lists have similar characteristics? Are you in adjoining or overlapping geographic markets? Do you have compatible software systems?
But watch out for…
Balanced against the possible benefits of acquiring another fuel oil or propane business are potential drawbacks that must be factored into your decision. Completing an acquisition can be a costly process, from both a financial and a time-commitment perspective. Therefore, you should determine how much the transaction will cost and how it will be financed before beginning the M&A process.
It is also important to get a handle on how much time you and your key managers will need to spend on M&A-related tasks in the coming months, and how this diversion of resources might impact your existing operations.
Depending on the way a deal is structured, another potential drawback is loss of control. If it is a true merger, control may have to be shared with the owners of the business with whom you are joining forces. This is especially true if the owner or owners are not retiring but intend to remain actively involved in the merged entity.
It is important that the cultures of the two businesses are compatible. Mismatched corporate cultures have been the cause of numerous failed acquisitions. If you appreciate a more structured and “buttoned-down” approach, but the management of your acquisition target is more casual and laid back, conflict may ensue. Plan carefully how the two cultures will blend in order to work together.
Due diligence is essential…
You can reduce the risk involved in buying another fuel oil or propane company by performing solid due diligence on your acquisition target. Your aim should be to verify claims made by the seller about the company’s financial condition, customers, contracts, employees and management team.
The most important part of M&A due diligence is a thorough examination of the company’s financial statements, including an income statement, cash flow statement and balance sheet. Another critical asset that should be scrutinized is the existing customer base and any customer contracts that are in place, as they are the source of projected cash flow and future earnings.
Finally, try to get a feel for the knowledge, skills and experience possessed by the company’s employees and key managers. You may find that offering key people an incentive for remaining with the company for a specified length of time after the acquisition can be beneficial. Or, if they are essential to ongoing operations, you might even offer an ownership position in the newly merged entity to reward their loyalty and ongoing commitment.
Have a plan and pursue it with help…
An acquisition is one path to expanding and growing your business. But a successful acquisition requires intensive planning and preparation before taking the plunge. It helps to have guidance from a resource that understands the process. An advisor who understands the energy industry can provide guidance on both the big picture and the nuanced details that go into making a deal succeed.
Martin Kirshner, CPA, MSA is Chair of the Energy Practice Group at Gray, Gray & Gray Certified Public Accountants, which specializes in accounting, tax, and consulting for energy company owners. You can reach Marty at (781) 407-0300 or firstname.lastname@example.org.