Know Your Worth
by Marty Kirshner, CPA, MSA & Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP
Ten factors affecting business value in the energy industry
The turmoil of the lengthy pandemic and global shifts in fuel supply has impacted many aspects of the energy industry. Demand has fallen in many sectors, but not in the market for buying and selling fuel oil and propane businesses. Business values for retail energy companies are near an all-time high, and we are in the middle of the busiest M&A period in recent memory.
If you are considering selling your company, it is vital to know the value of your business. A valuation is the starting point for you to set a selling price and negotiate with potential buyers. If you are on the other side of the table and looking to make an acquisition, it is equally important to have an understanding of what factors go into the valuation process so that you can more fully assess the business you are buying.
That being said, a business valuation is an opinion, and not all valuations are equal. How you arrive at the value of your business depends on many factors, including some that are unique to the energy industry. Business brokers and consultants who do not fully understand the nature of the industry can get into trouble by overlooking these distinct factors:
Quality rating of customers – Are they primarily automatic delivery? Or do you have a preponderance of “will call” customers? (HINT: Automatic delivery is much preferred.) If your customer list includes problematic customers — e.g., those with narrow margins, delinquent payments, too many service calls, etc. — you may wish to clean it up before a sale.
Margin history – Have you been able to maintain a profitable margin, year in and year out? Has your margin been trending up or down over the past three heating seasons? The ability to remain profitable while market prices rise and fall is the sign of a well-managed company.
Competing heating fuel businesses – Does your company control a dominant position in your market? Or are there multiple competitors who are eager to steal customers away? Being able to verify a significant market share could help position your business for a premium price.
Competing energy sources – What is the likelihood of customers making a complete switch away from your products? This is an increasingly important consideration as other energy sources are gaining traction. If there is ample opportunity for customers in your area to bolt to electricity or natural gas, it could impact your asking price.
Diversification of the business – Are you getting by simply on delivering fuel oil or propane? Or have you put “more legs on the stool” by offering equipment service and installation, plumbing, HVAC and other home services? The more revenue streams you have feeding into the profit trough, the better.
Employee retention – The ability to keep employees is a sign of a positive company culture. A buyer is more likely to value experienced workers, as it makes a transition easier. Conversely, low employee morale can be an indicator of a company with other problems, which can decrease value.
Market demographics – Population density and household income trends are an indication of potential future growth. Is your geographic service area fully built out? Does an aging population pose the threat of customer turnover in the near future?
Regulatory issues – Are there onerous or expensive regulations (e.g., environmental) or requirements in place? This factor has taken on more importance as local and state governments begin to adopt carbon neutrality measures and push for the elimination of fossil fuels.
Transactional history – What is the frequency of similar energy businesses being bought and sold in your area? A high turnover rate might be a red flag to potential buyers.
Environmental hazards – Could there be costly brownfields or other environmental issues that could be expensive for an acquiring company? Potentially pricey cleanup and liability costs can crimp your company’s value.
It is important to remember that not all markets are the same. If you are looking to buy an energy company that is outside your market area, there will almost certainly be an adjustment period that will involve some additional costs. Due diligence can help determine what changes will need to be made, and at what price. If you can’t cover those additional costs with a higher margin, it may be necessary to negotiate a discount on the selling price of the business.
Of course, having an accurate value for your business is necessary for much more than just buying and selling. A valuation can also be important when you want to access financing, for succession planning and exit planning, for insurance purposes, and as part of legal issues such as estate settlement or divorce proceedings.
It is most important to work with professionals who have knowledge of your business and your industry. Familiarity with the special circumstances and requirements of a demanding business can help maximize the value of your business at a time when you most need it.
Marty Kirshner and Joe Ciccarello are Partners in the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the fuel oil and propane industry. They can be reached at 781-407-0300 or firstname.lastname@example.org.