Tough Year So Far? Acquisition Growth Awaits the Prepared

by Jeffrey Simpson

Key characteristics of a successful buyer

Has your company considered growth by acquisition but largely remained on the sidelines due to fear, a lack of knowledge about how best to move forward, or both? The impacts of the warm winter and the unprecedented COVID-19 pandemic could serve as perfect reasons to retrench for another heating season. Some of your competitors, however, may have a different plan.

Acquisitions are long-term moves by business owners, and the basic elements necessary to foster deals have not gone away despite the challenges many have faced this year. While natural uncertainty stemming from the shock to the economy exists, two truths remain: fuel dealers provide essential services, and financing sources remain prevalent as a result of the massive infusion of cash by the federal government to counter government-imposed stay-at-home orders.  

Risk always exists when embarking on an acquisition, but those who are positioned to strike quickly will have the best chance to win. Here are some key characteristics shared by companies that have exhibited success over the years in their acquisition growth strategies.

A company-wide commitment to grow via acquisition.

Success starts with a conscious, expressed decision to grow through acquisition. Consistency in this approach is not an accident. Some companies have seen several-fold growth over the past decade while others have largely served the same customer base. A major differentiator is often focus. Owners, key managers and staff must understand that they each play a role in locating opportunities and efficiently integrating companies when the time is right.

A developed industry awareness of their intent to acquire.  

Sellers and brokers want to know they are dealing with a serious party before sharing sensitive financial data with a buyer. You should connect with industry brokers and advisors to make them aware of your interest in acquisitions. Other approaches include letting friendly competitors know of your intent and sending confidential letters to owners of acquisition targets. Be sure to tout your strong banking relationship, ready access to capital and any prior success with acquisitions, including closed transactions, retention rates and customer satisfaction.  

Financial stability.  

In general, if you face financial challenges now, an acquisition will not help to strengthen your company. In fact, it could imperil it. The intangible nature of the customer list asset you intend to acquire necessitates a history of consistent earnings. Understand your key banking indicators such as liquidity, debt service coverage and leverage. If you have struggled with cash to operate, have a strained banking relationship, or large levels of debt, it is imperative that you evaluate your position with your financial advisor before embarking on an acquisition bid.  This will allow you to modify your company’s capital structure, increase earnings if necessary and ultimately avoid the frustration of missing prime opportunities when they arise.

Knowledge of existing bank’s growth support.  

All banks are not created equal when it comes to acquisition financing. A lender who has been there to support your company historically with a mortgage or a truck loan may have little appetite in financing a million-dollar customer list purchase. A history of strong earnings can help in this regard while inconsistent earnings can diminish the possibility of success with your current bank. It is critical that you have a specific discussion with your banker about the acquisition support required. If you do not sense the comfort level you are seeking, trust your gut and expand your discussions to larger banks, SBA lenders and non-bank lenders.

Realistic as to deal structures.  

In broad strokes, the current mergers and acquisition market demands an all-cash or predominantly cash offer to be competitive, particularly if you are bidding on high-quality, full-service retail heating oil or propane assets. Ready access to financing will help you avoid the frustration of conducting detailed analysis, hiring advisors, and submitting an offer, only to be trumped by an all-cash offer from your competitor. To be sure, seller financing can work in some circumstances where other non-price factors are also important to the seller. In the current environment, however, you will be reducing your chance for success if you veer too far astray from a predominantly cash offer.

Disciplined about valuations.  

We advise our clients to conduct due diligence on at least three years of the seller’s financial and operating data. Consider the weather impact and any trends. As proud as you are of your company’s strengths, not all acquired customers will agree (for a variety of reasons), so build in reasonable attrition assumptions. Ten percent in year one is a good start, but more may be justified. Work with a financial advisor or an appraiser versed in the industry metrics to establish a reasonable value range based on asset values and EBITDA multiples. Be sure to adjust earnings to capture reasonable cash flow streams that you will be retaining after the seller departs.

Leverages understanding of likely competitors in its offer.  

Your local knowledge of likely bidders is valuable and complements the knowledge any advisors bring to the acquisition process. For example, has a competitor recently made another acquisition that tied up its cash or resulted in integration headaches? Do you have a good rapport with the seller or a seller’s family member who prefers to stay on as an employee after the sale? Where real estate or storage facilities are being offered, is the need on your part higher or lower than that of your competitor?

Develops in-house M&A skills and has on-call advisors.  

The average fuel dealer does not carry a finance team, but it is possible to develop baseline operational, due diligence and finance skills to pursue acquisition opportunities.  I liken a financially successful acquisition to a puzzle. Beyond operational fit, it takes an understanding of how the cash flows, projected earnings and debt obligations to fit together. Your financial advisor can help you look before you leap and effectively communicate benefits of the transaction to your financial partners.

The process of acquiring a business is often among the weightiest decisions an owner will make in his or her career. Success in acquisition typically does not occur by chance but instead requires a foundation of discipline and team effort. Take the steps now to capture the opportunities that await.

Jeffrey Simpson is the Managing Director of Angus Finance and acts as an advisor on the subjects of budget preparation, cash flow management, capital structuring, acquisitions, the location of financing and banking negotiations. He can be reached at 860-299-3358 or jsimpson@angusenergy.com.

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