Energy & Petroleum Articles
Branching Out Calls for Strategic Planning
By Paul J. Gerry, Jr., CPA
Gray, Gray & Gray, LLP
For years, some dealers have supplemented their oil income by selling kerosene, diesel and other energy products. Others offer plumbing and HVAC service, install septic systems – whatever they can do to bring in more money. When you think about it, even a service department, while directly related to oil, is also a separate business.
Recently, the difficult task of making a reasonable profit in today’s tough oilheat market has led many dealers to consider expanding their offerings to include other products and services. As the old farmer’s adage goes, “the more legs on the stool, the more stable it will be.” But deciding to offer a new product or expand into a new service line is not something to be approached lightly. It takes careful planning and preparation to be successful.
Here are six key questions to ask — and answer — before launching into any new venture.
- Will the new business lines be grown organically or will you purchase an existing business? It can sometimes be easier to add an operation that is already up and running and generating income. But that requires an up front investment, and how you structure the purchase has significant tax implications (both positive and negative) for your current business.
If, on the other hand, you are going to grow your new business yourself, you’ll need to determine how much capital investment you will need for equipment, personnel, marketing, etc. The good news here is that the recently enacted Economic Stimulus Package includes an accelerated depreciation deduction that can help you write off equipment investments in the first year.
- How are you going to pay for it? Whether you are buying another business or growing your own, you’ll need funding. Can you pay for it out of current cash flow or will you invest your own savings? If you don’t have the cash, you’ll need to find a source of funding. The first stop should be your current bank, since they are familiar with your company and your history. But if tight credit terms prevent them from lending to you, you may have to seek alternate financing or outside investors.
- Will you organize this new line as a separate entity or a division of the current business? The answer to this question will have serious consequences come tax time. Although setting up the new venture as a separate company takes a little more time and money, it may be a better choice for taxes and liability issues. The latter is especially important if you are going to be selling a new product or service with which you are not totally familiar.
- Do you have the administrative capacity to take on the additional workload? Who is going to run this new operation? You know how you were scrambling to manage everything during the heating season. Will you have the time to oversee another business? Or will you need to promote or hire a manager?
- Will you be using your same management systems or will you need a separate system for the different lines? If you expand into products that are similar to oil (i.e. kerosene, diesel, etc.) you may be able to piggyback on your current invoicing and accounting system. But it you are venturing into new territory (i.e. plumbing, landscaping, etc.) it may require a whole new internal structure for managing cash, workflow, inventory and personnel.
- What is your intended return on investment (ROI)? This may be the question you should ask first. Will the new business actually make a profit that is worth the investment of time, money and effort? If you are simply thrashing about trying to find something — anything! — to make a few more dollars, you may end up further in the hole. Make sure you do your homework in advance. Sit down with your trusted advisors, including your accountant and attorney, to make sure your new venture makes financial sense.
A little planning can go a long way toward making the expansion of your business a success!
Paul J. Gerry, Jr., CPA is a partner in the accounting firm of Gray, Gray & Gray, LLP, Westwood and Framingham, MA. Paul can be contacted at (781) 407-0300, or via email at: pgerry@gggcpas.com.