Let’s Make a Deal (Post-Pandemic Version)
by Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP
Lenders are ready to finance but social distancing presents logistical and personal obstacles
The lingering effects of the COVID-19 crisis are impacting the way businesses in the energy sector are being bought and sold. While we have yet to see a reduction in the pace of M&A activity, there are changes in the ways in which deals are negotiated and how closings are undertaken.
The fact that the U.S. economy was virtually shut down for nearly three months has had a profound effect on how potential buyers approach a purchase. The assumption of sustaining a projected post-purchase volume to support the purchase is no longer valid. Even commodities such as fuel oil and propane are impacted when everything grinds to a halt. This impacts how buyers negotiate purchase agreements.
Jeff Black of Haffner’s Energy Group in Lawrence, MA, says, “As a buyer you were never concerned about a complete economic shutdown that would have material adverse effects on the business you were buying. You were never concerned with not being able to close a deal because of a 50 percent drop in future volume.” Black feels that, going forward, the language in the asset purchase agreement (APA) will need to have stronger protections for the buyer, “now that we know it is possible for the world to stop.”
The Impact on Financing
This realization — that the bottom could drop out of the economy without warning — is also affecting the availability, pricing and other terms of M&A financing. Writing in Forbes magazine, author Richard Harroch says, “The volatility in the financing markets brought about by the coronavirus crisis has created challenges for transactions that depend on third-party debt financing, including injecting a fair amount of uncertainty about the availability and terms of such debt financing.”
As a result, having a strong cash position gives potential buyers an edge. Harroch writes, “While strategic and private equity buyers are of course facing their own business and operational challenges, many continue to be ‘cash-rich’ and generally can afford to bide their time to find the right acquisition targets at the right price.”
“Being a cash buyer is a huge advantage,” says Jeff Black, owner and chief operating officer of Haffner’s Energy Group in Lawrence, MA. “Banks are not sure of the future and some are concerned about lending into the market right now. So being able to use that [cash] to your advantage when negotiating price or terms is extremely important.”
Added to all of this is the difficulties and delays caused by a sudden shift by most businesses to a remote working environment. It is impossible at this point to get everyone in a room to conduct face-to-face negotiations. Use of new technologies to connect and collaborate has become compulsory as buyers, sellers, advisors, attorneys and financing providers adjust to new processes.
“It is difficult to coordinate all the elements that are needed to close a deal,” cautions Jeff Black. “It is a tough balancing act between getting your due diligence done effectively and to your satisfaction, but also not letting the process drag on too long to upset the seller, who wants to get the deal closed as quick as possible. But the reality is that everything is moving slower. Environmental work that used to take 45 days is now taking 75. Trying to explain that to the seller and keep them at ease is tricky.”
Missing the Human Element
Jim Townsend, CEO of Townsend Energy in Danvers, MA, is also finding that making a deal takes more time. Although he has not experienced any difficulty in conducting legal and financial due diligence, Townsend sees the human element as the biggest victim of the COVID-19 crisis.
“I can’t get to know the seller and their people,” Townsend says. “I usually like to spend a lot of time with the potential seller, their family and employees, and right now I can’t do any of that.” When Townsend is considering purchasing a business he likes to drive by and observe it before the workday starts and right after it ends. “I get a lot about the company from those visits,” he says, but social distancing and working from home make that impossible. “I can’t get a feel about the people, which is important because the workers are the company.”
“There is also a personal aspect for me,” says Haffner’s Energy Group’s Jeff Black, who has overseen more than 10 transactions over the past five years. “When we close on a deal, I like to address the employees in person and meet as many as I can to put their mind at ease that their job is secure, and that we are only going to improve their work experience. But given the environment today and social distancing regulations, it’s tough to know if that is the right decision. It comes down to trying to strike a balance between what is best for the company and what is best for the safety of the employees and their families.”
Black advises, “Communication is the biggest thing that we can do to mitigate these issues. As long as we are constantly communicating, whether it be with the seller or our employees, and trying to give them as much information as possible and reasoning behind our decisions, the better we are as a company.”
A Question of Timing
All this leads to an important question: If you are a buyer or seller who is “on the fence” about selling your company or making an acquisition, should you act quickly or wait it out?
We are a very resilient industry, marketing essential products and services. Right now, most fuel oil and propane companies have retained their value, and banks have been willing to lend for acquisitions. However, with a tightening economy, this may not last, particularly if banks become more conservative and return to asset-based lending. The largest asset that most energy marketers have is their customer list, an intangible asset. Some of us can recall that less than 10 years ago, most banks would not lend against the value of a customer list. The danger here is that if a company cannot get financing based on their customer
list, the value of the list will decline — a vicious circle that could be difficult to break.
Yes, it may take more time and effort to get a deal done in the present environment. But the M&A market demand is there right now while the future is uncertain. What will happen if a resurgence of COVID-19 shuts down the economy again? What if fuel prices, which have stabilized, take another dip or spike higher? What will your company’s financials look like next year? In five years?
That’s the dilemma facing many dealers right now. The opportunities today are better than they have been in years, but all that may shift quickly. While nobody can accurately predict the future, a thoughtful, in-depth analysis and carefully scripted projections can help you reach a decision about a sale or purchase that can put you in a stronger position moving forward.
Joe Ciccarello, CPA, MST, is a partner in the Energy Practice Group at Gray, Gray & Gray certified public accountants and advisors, where he also manages the firm’s FuelExchange® program. He can be reached at email@example.com.