Happily Ever After

by Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP

How did you meet your spouse? Was it a blind date? Were you “set up” by a mutual friend? Did you find each other through an online dating app? Or perhaps you researched your potential mates’ bank accounts and chose the one with the highest balance.

I doubt it was the last one. Making such an important commitment based solely on financial considerations is surely not the best path to a lifetime of happiness. Yet time and time again, we deal with energy companies in the mergers & acquisitions market that focus almost exclusively on maximizing profits (sellers) and finding bargain basement pricing (buyers). Such laser-focus on price can short-circuit a successful sale.

For more than 20 years, our firm has coordinated energy company mergers and sales through our FuelExchange™ program. Throughout that time, we have stressed the need to look “beyond the numbers” of the selling price in order to find the best match. The most successful “marriages” are made by those that pay close attention to five intangible factors.

1. Corporate culture.
   Not every person you dated was “marriage material.” Similarly, not every oil or propane business is a perfect match for your company. We’ve seen acquisitions in which a larger company, whose success was built on a “buttoned down” corporate mentality, purchased a “mom-and-pop” business whose culture was more relaxed and laid back. On paper, it looked like a good deal. In reality, employees on both sides did not mix well and were unhappy. As part of your due diligence before making any deal, it is important to evaluate the type of corporate culture you are buying. Will the employees you acquire be fully on board with your management style? If you are selling, consider how well your employees and customers will fit in with the new owner. Will your customers receive the same favorable credit terms or will they be shut off if they don’t make timely payments? Minimizing disruption should be the goal.
   
   
2. Customer mix.
   The most valuable part of an energy business purchase is the customer list. But do not assume that all customers are created equal. Be sure to study the mix of customer types you are acquiring. Is the list heavy on COD and will-call customers? They are not as valuable or reliable as automatic delivery customers. Are customers used to communicating directly with the business owner? They may balk at dealing with an “outside” owner. One area that is essential to deal with early is pricing. If an acquiring company’s margins are stronger and prices higher, the potential exists for losing a significant number of customers. In one instance, the buyer agreed to “hold the line” on prices for a full year in order to keep their new customers in the fold.
   
   
3. Operational suitability.
   No two energy businesses are operated in the same manner. Addressing operational differences up front can help avoid surprises and difficult adjustments later. Issues can range from major (supplier contracts) to minor (payroll vendors). For a buyer, it is foolish to assume that the acquired company must always adapt to your processes. It may be that they are doing some things better than you! Keep an open mind and you might find even more efficiencies than originally anticipated.
   
   
4. Deal structure.
   Finding the right kind of deal is a critical part of any merger or acquisition. Whether it is a rare stock transfer from one corporate entity to another, a “cash up front” purchase, or a payout based on retained gallons, the agreement has to work for both parties. Every seller wants their money up front, while cautious buyers want some assurance that their investment will be protected. Over the years, the balance has swung between cash-only and retained gallons, depending on the M&A market and overall energy market conditions. My experience is that flexibility and creativity when it comes to deal structure and financing can help make an acquisition possible. Sellers should figure out how much cash they want (or need) to walk away with and then leave the details to well-qualified professionals who can work out a plan that is beneficial to both parties.
   
   
5. Owner compatibility.
   While the energy industry has long been one of “friendly rivalries,” things can get a little tenser when it comes to financial transactions between dealers. When wary rivals start to dance together toward a merger or acquisition, it is essential that both parties enter negotiations with a sense of fair play and mutual trust. If the two owners have a genuine dislike for one another, the process can be more complicated than necessary, and an equitable agreement less likely. Also, consider that in most situations the seller will have to agree to an employment contract for a year (or more) to assist in the transition. How is that going to work and what will it do to the business? Do you really want to work closely with someone you don’t like, and who may resent you?

Selling your energy company remains an important exit strategy option for most business owners. Acquiring another company is a proven way to build sustained growth and expand market share. Both goals can be achieved through a timely and properly structured acquisition or merger. But continued success after the sale depends on intangibles that can make or break a deal. Make sure you work with advisors who have experience in all aspects of the M&A process, and who can help you look beyond the dollars and cents to attain lasting success.

Joe Ciccarello, CPA, MST, helps lead the Energy Practice Group at Gray, Gray & Gray certified public accountants and advisors. He can be reached at (781) 407-0300 or jciccarello@gggcpas.com.

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