In M&A, Cash Is King

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Buyers don’t want to wait on retained gallons

By Joe Ciccarello, CPA, MST, Managing Partner, Gray, Gray & Gray, LLP

Despite tight money and difficulty finding financing, the pace of M&A (merger and acquisition) activity in the retail energy industry quickened last year, as consolidation continued across the Northeast. We saw more energy businesses sold during 2014 than any year in memory.

But the way deals have been structured has changed markedly in the last few years. More and more transactions are moving away from a payout based on retained gallons. Today, cash is king.

Sellers are not content to wait two or three years for their money. They are nervous about seeing their favorable terms melt away as customers disappear, lured away by competing dealers or succumbing to the promises of pipeline gas utilities. Buyers eager to expand their delivery area and grow their gallons have no choice but to come up with the cash to make the purchase.

Cash Has Tax Implications

Complicating matters for the seller are the tax implications brought about by a large infusion of cash. Without proper planning in advance, a significant chunk of the purchase price could go straight to federal and state taxes. It is more important than ever to make sure your company gets the right advice on how to best allocate the funds received from the sale.

For the buyer a cash deal presents the difficult task of getting financing in a stringent lending environment. Banks are understandably reluctant to lend based on a customer list that may or may not remain whole. The buyer must demonstrate an ability to generate enough cash flow to pay back the loan, no matter what happens to crude oil prices, the oil supply, or even the weather.

The result of the tight credit market and demand for upfront cash sales is simple: Good companies with solid balance sheets and a track record of profitability will get the loan and the deal. Marginal dealers with spotty financials will be shut out.

This is one reason that we are seeing the return of “roll up” consolidations, in which large regional companies buy up smaller oil dealers. They bring professional management to the companies they acquire, with economies of scale through streamlined operations. Some of the consolidators are bank financed, but we are also seeing private equity lenders jumping into the market with significant investments.

Access to Capital

With organic growth nearly nonexistent, the inability to borrow the money needed to expand by acquisition is going to be the death knell for some of the region’s small and mid-sized oil and propane companies. This is good news for those companies with access to capital, but devastating for the core of smaller dealers who have been the backbone of the heating industry for generations.

All of this points to the importance of focusing on keeping your company’s balance sheet clean, well documented, and showing reliable profits at decent margins, particularly if you are contemplating an acquisition at any time in the next few years.

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