Energy & Petroleum Articles
Preparing Your Oilheat Business for Sale.
By John Nardozzi, CPA & Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
Last month we wrote about the reasons why many fuel oil dealers have decided to sell their companies this year, and why others are eager - if cautiously so - to buy them out. If you have come to the conclusion that your best course of action is to sell your oilheat company, your work is far from done. In fact, you have several months of intense work ahead of you if you wish to successfully complete the sale of your business.
Courting a buyer for your business is a little like the process of dating and marriage. First, you want to look your best. When dating, you might buy some new clothes, make sure your hair is neatly styled, take a shower and splash on cologne or perfume. Similarly, you want to "dress up" your business to be attractive to buyers. But it takes much more than cosmetic changes.
Here are some of the basic steps you may want to take in order to prepare your business for sale.
1. Convert to an S Corporation. If you are a C Corporation now, you may not wish to sell your business until you have converted to an S Corporation and waited a number of years. The reason? When a C Corporation sells it's assets, taxes are paid twice, once at the corporate level and again at the individual level. Obviously these additional taxes can significantly cut into the net proceeds of the sale. Selling assets of an S Corporations, on the other hand, takes only one "tax bite." There is a long waiting period once you elect to become an S Corporation to avoid this tax bite, so attend to this step immediately unless you are willing to accept less money at the end of the sale.
2. Clean up your customer list. The list is the most valuable asset your company owns, and will receive the most scrutiny from a buyer. Make sure your list does not contain any old, inactive accounts. Convert as many customers as possible to automatic delivery, full service, budget accounts, as will calls and CODs are likely to be discounted - or even dismissed - as "non-customers."
3. Clean up your hard assets. Make sure your trucks are in good repair and clean. A clean truck helps to build goodwill. Organize your office and records. Clean up your office, truck yard and bulk plant, and take a detailed parts inventory.
4. Address environmental issues. If you have been holding off on looking into possible environmental violations, wait no longer. Get them taken care of before the due diligence period to eliminate any questions or hesitation. No buyer wants to purchase an unknown liability, and you are likely to be saddled with clean up costs of any hidden problems that arise after the sale.
5. Address employment issues. Resolve any lingering problems with employees. Make sure any employment contracts or union agreements are clearly defined. If possible, dismiss problem employees before entering into sales negotiations. If you have a pension or retirement plan, make sure your obligations are current and fulfilled. Protect your customer list from employees that may be inclined to "take it with them."
6. Lock in key employees. Get firm non-compete agreements from your key employees - if not all of your employees - before starting the sales process. A buyer will want to have these non-compete agreements in place before purchasing the business. If you wait until you are already in the process of the sale, such agreements could come at a higher cost.
7. Pump up your margin. Even if it means being less competitively priced at the end of the heating season, try to get as strong a margin as possible. Healthy margins are attractive to potential buyers, and a late season surge will help boost your seasonal average.
8. Fill up customers in March and April. Even if you have avoided late season deliveries in the past, try to build as much volume into the end of the year as possible. The more gallons you can delivery now, the more you will have to sell to a potential buyer this summer.
9. "Profile" your business. Create an informational package that lists vital statistics (i.e. annual gallons by product, annual sales, average margins, number of customers, market area by zip code, hard assets, years in business, number of employees, sales trends over the past three years, and a description of any real estate). This information will be necessary to distribute to buyers.
10. Determine an asking price. You should have a pretty solid idea of how much your business is worth and how much you want to make on the sale. Be prepared to consider some creative financing terms that may require you to accept a longer payout period than might desire. That is a function of the current market conditions. Discuss the tax consequences with your CPA.
11. Seek professional help. Don't try to sell your business by yourself. There are too many variables and too many issues that could derail the sale or prevent you from getting the best deal. Get your attorney and accountant involved and make sure they know all there is to know about your business. It is especially helpful to have professional help when the time comes to negotiate the selling price and final terms of the transaction.
Now that you are all "neat and pretty," how do you get a date? Hanging a "For Sale" sign outside your office is unlikely to generate much interest. You must be active and aggressive in seeking out potential suitors.
In our FuelExchangeŽ merger and acquisition service, we advise clients to build a list of companies they feel might be a good match for their business. We ask them to be as specific as possible. What we get is often a list of nearby competitors, larger regional companies and large "roll up" consolidators. (To that list, we usually add other target companies that may be less obvious to a seller.) This list becomes your marketing list.
This is where it gets tricky. You need to contact potential buyers and let them know that your company is available and tell them why it would be an attractive acquisition. But, for most dealers, there is a reluctance to show any sign of weakness or reveal too much information, especially to dealers who are close competitors. This is where a "go between" third party is helpful. Your company can be showcased and information distributed anonymously to potential buyers. Only those who show genuine interest and are willing to sign a confidentiality agreement will be privy to additional information.
If you have prepared your company well and correctly targeted potential buyers, you may expect to receive several inquiries from interested parties. You may want to set a deadline for inquiries to encourage response, yet remain flexible to avoid missing out on a good offer.
Now the dance begins. You cannot sit on the side of the dance floor tapping your toes, but must become actively involved in presenting your company for sale. There will be intrusive, sometimes uncomfortable questions. Potential buyers have an obligation to dig deeply into your company's financial background, operations, facilities and personnel situation - a process called due diligence.
Although you must be honest and aboveboard, you can also do all that you can to present your business in a good light. Stand by your strongest assets, your reputation and customer list. Be prepared to negotiate heavily over even the tiniest detail. Try not to take criticism personally, as it can simply be a negotiating ploy.
Realize that time is an issue. A buyer will want to drag out negotiations as long as possible into the fall, in the hope of closing the deal just before the cold weather returns and revenue starts to stream in. On the other hand, you may consider being more flexible on pricing if it gets the deal done sooner, so that you can wrap up the sale before being forced to commit to another year of operations.
Do not expect a "win-win" happy ending. Reality dictates that neither party is likely to be ecstatic with the deal that finally gets done. If both the buyer and seller feel that they gave away too much, it is the sign of a fair deal, fairly arrived at. But if you prepare well, go into the process with realistic expectations and remain flexible, you will probably be satisfied with the end result.
Next month: What Is Your Oilheat Business Worth?
John Nardozzi and Joe Ciccarello are partners with Gray, Gray & Gray Certified Public Accountants, Westwood, MA. Gray, Gray & Gray has served the accounting, tax, valuation and business advisory needs of businesses in the oilheat industry for over 60 years. The firm also offers FuelExchangeŽ, a merger & acquisition service for the fuel oil industry.