What Kind of Acquisition Will You Make?
by By Martin Kirshner, CPA, MSA, Gray, Gray & Gray, LLP
Did you know that there are two distinct types of acquisitions in the energy industry? And the type of acquisition you make will affect your negotiations when striking a deal.
How you structure your deal — or whether or not you even make one — depends on how you will be operating the acquired business once the acquisition has been completed. Will it be a “tuck-in” where you absorb the newly purchased company and its customer list into your own operation? Or will you continue to run the acquired company as a separate business?
If you are planning to acquire and absorb assets (customer list, vehicles, equipment, personnel) in order to fold them into your own company, here are some key questions you should answer in advance:
- Will you be able to get your prices from the newly acquired customers? If not, there is a good chance you will not be able to retain a significant number of customers. Can you make the deal work with a “bleed off” of customers?
- Break down the seller’s asking price to a “price-per-customer” number. Now compare that to your cost of acquiring new customers on an individual basis. Understanding that it is very difficult in today’s market to grow organically, there will be a premium paid to acquire a “ready-made” customer list. But is the premium too high?
- Review the geographic concentration of new customers. Can you absorb them into your existing delivery patterns? Or will you have to invest in establishing new routes, with additional vehicles and drivers?
- Identify the new customers by type: automatic vs. will-call. Automatic delivery customers are more valuable because they have already shown a level of loyalty.
If, on the other hand, you plan to continue to run the new acquisition as a separate business, look for these factors:
- Do an honest assessment of why you want to buy the other company. Will the acquisition fit into your overall business strategy? Does the target company operate in a market that you want to break into? Is the company’s product line different than yours, say fuel oil vs. propane? Are you simply trying to eliminate a competitor?
- Is the business profitable? If not, do you have a strategy to turn it around?
- Can you get the seller to “take back paper” to help finance the acquisition? Or will you be financing the purchase in full?
- Can your balance sheet support the acquisition? You don’t want to drain your existing company to support the new one.
- Do you have the depth on your management team to run another company? Are there people from the acquired company who you want to retain? At what cost?
Growth through acquisition can be a smart strategy in an industry that is reaching maturity. But there is always the risk of biting off more than you can chew. Knowing upfront how you want the business to look going forward — and why — is an important first step in evaluating a merger or acquisition.
Martin Kirshner, CPA, MSA is the Director of Client Services and leads the Energy Practice Group at Gray, Gray & Gray Certified Public Accountants and specializes in accounting, tax, and consulting for energy company owners. You can reach Martin by calling 781-407-0300 or at firstname.lastname@example.org.