Experts Note Confidentiality, Trust, Honesty Drive Acquisition Process

Dozens of retail propane companies are bought and sold every year, among them many small, independently owned Mom and Pops, but others are larger enterprises with wholesale operations, a truck fleet, and amply sized storages. The sales pace suggests the transactions are fairly quick and routine, but that is illusory. While some acquisitions take only a few months, many acquisitions are only finalized after a year or more of negotiations. Some companies start the planning process years in advance involving longtime top-to-bottom prepping by a company with the aim of elevating its value prior to offering itself for sale.

There are, however, long-established practices that are important for both the buyer and seller to consider in an acquisition. One company, Propane Resources of Mission, Kan., primarily represents sellers in the acquisition process. The company notes that when two companies come together, it often involves the challenge of blending different cultures. Leaders of firms being acquired often want to make sure employees are respected. Cooper Wilburn, a financial consultant at Propane Resources, recommends that the acquisition team visit with employees post-closing, asking them what has been working well and what hasn’t, and what they would like to change if they could —“to get where they’re coming from and get them to share where they see the company going.”

Executives at a company up for sale should know ahead of time what is important, both for themselves and from the buyer. Wilburn underscores that providing honest answers to a buyer’s questions is paramount. The truth will be revealed eventually, and dishonest or misleading statements will be discovered. It is important to keep strong records in all areas of the business, such as signed tank leases on file and good safety documentation. “With safety, if it’s not documented, in the eyes of the law it didn’t happen,” adds Tamera Kovacs, also a financial consultant at Propane Resources.

“Don’t be afraid to ask questions,” says Wilburn. Ask the buyer what his or her plans are for the company going forward. Don’t assume the buyer will run it the same way as you. “The important thing for those at an acquired company to remember is: it’s just as important to vet the company that’s buying as it is for buyer to vet the seller,” Kovacs says.

Furthermore, for the seller, the more buyers onboard the better. It’s never certain if a prospective buyer will drop out of the process, so having competition for the acquisition helps. Wilburn and Kovacs observe that a seller risks leaving money on the table if only one buyer is part of the equation. Competitive multiple offers typically yield higher offers and can help push the deal to close. The key for the seller is to maximize the cash he or she receives after tax. Deal structure (how the money is paid to the seller) can often be more important than the amount offered.

Kovacs comments that change is always uncomfortable. Employees of acquired companies often feel stressed because of uncertainty about their future employment, so if the buyer is honest with employees and puts them at ease by showing them that their salary and benefits package will remain whole, for example, they will become more focused on taking care of customers, which is what the buyers should want.

“It’s just human nature. People are going to worry about themselves first, even though they may say they won’t,” Kovacs says. “In that transition time, after the company has been acquired, that’s an uncertain time for employees. So anything you can do to put them at ease and help them understand how things are going to be going forward makes a smoother transition.”

Kovacs, who has authored presentations on best practices for building company value in the lead-up to a sale, emphasizes that maintaining high-quality customers and staff are among assets that boost valuation. She adds consistency also factors highly. Buyers buy sustainability. A company will be attractive to a buyer if it is consistent in gallons delivered and in its gross margins. “We understand the fluctuation that weather may cause,” she says. “But buyers want those trends to be positive trends. Good records are really important to a buyer, and also for a seller to have, because companies don’t buy what they can’t see.

“And selling your business is not dissimilar to selling your house.” She outlines that keeping bobtails well maintained and washed is one example of an important detail. “You don’t sell your house without staging it to look nice. Clean up your image and spend a little money to make sure your equipment is in good shape and in running condition.”

In addition to the traditional buyers actively making acquisitions, Kovacs and Wilburn note they are seeing more non-traditional buyers such as private equity and ex-propane marketers with venture capital money looking to get into the propane market. Such non-traditional buyers have money to invest and see the propane industry as a good place to put their investment funds to work. Propane Resources provides sellers the opportunity to take their company to both the traditional and non-traditional buyers to find the strategic buyer for their operation. Kovacs explains that propane companies are valued, bought, and sold based on a multiple of cash flow, or a multiple of EBITDA—earnings before interest, tax, depreciation, and amortization—essentially cash flow. For example, if EBITDA is $200,000 and a multiple applied is 5.0, the value of the company is $1 million.

Key to building long-term value is to increase EBITDA and increase all factors that impact the multiple placed on it. Those factors are identified by Propane Resources as best practices, and they include tank ownership percentage, how many gallons are used by the top-five customers; having a strong gross margin trend, and hiring strong staff to name a few. For companies considering selling within the next five years, they have the time to implement many of these best practices and if the company is a C Corporation, it is now a five-year waiting period from when a company changes from a C Corporation to a S Corporation or LLC to be taxed on the sale of their business as either the S Corporation or LLC. Owners of C Corporations pay much more in taxes as they are taxed two times, once at the corporate level and a second time when a distribution is made to the shareholders — hence the double tax.

On the flip side of the acquisition coin, how do buyers rank companies? How do they weight a propane operation’s value when they consider a purchase? What is the process after a sale closes? George Koloroutis of ThompsonGas (Frederick, Md.) says the people aspect is the most important part of the acquisition process. “I say that as if it’s a differential, because it is,” says Koloroutis, executive vice president and COO of the family-run and -operated company. ThompsonGas does not focus on laying off employees from the companies it buys. Rather, “We focus on learning what we can from the legacy employees and also hope we can connect with them.”

It follows there are myriad appraisal considerations at companies seeking to buy propane businesses that drive the acquisition process. Several experienced people say they of course prefer the firms they buy have a strong financial history. Others look for a high percentage of company-owned tanks. They also seek businesses with a strong safety record and good documentation of safety compliance.

But the people involved are the focus for many. Eric Kruger, senior vice president of strategic planning at Ferrellgas (Overland Park, Kan.), says while keeping all of the acquired company’s employees does not always make sense, firms with knowledgeable employees are attractive acquisition candidates. “Key employees who truly know the business, if they want to come aboard, that’s always something that’s very appealing to me.”

He observes every situation is different when it comes to integrating employees from an acquired company. Some sellers don’t want their employees notified about a sale until right up to the finish line. In those cases, the buyer must simply hope its salary and benefits can entice employees to stay, even though little or no communication has occurred with them up to that point. In a perfect world, he observes, the buyer would meet the employees well before the transaction closes to allow both sides to get comfortable with each other.

During the sales process, both sides are trying to sell themselves, he adds. Employees want to show their new employer they know the business, but the buyer tries to do the same for new employees, “making them feel good about the fact that we’re buying the company—because it’s a good business and good people work for it.” Upon completion of a sale, Kruger says Ferrellgas tells its new employees to keep doing what they have been doing. “We’ve learned our lesson that trying to force an acquired operation into a corporate template from day one doesn’t necessarily work out the best. You want as much continuity for the customer as possible, and you still want the same person back in the bobtail and in the driveway and filling the customer tank. Things like that are what make transitions run smoothly….”

ThompsonGas’ Koloroutis emphasizes that when acquiring another business it should be understood what is important to the seller, and maintaining confidentiality is paramount. The decision to sell a business is one of the biggest decisions of a lifetime. Sellers may have inherited it from their parents or may have started it themselves with their own sweat and tears.

“He’s got people who work for him, he’s got customers he goes to church with and sees in the convenience store, and this is really a big deal,” Koloroutis says. “He hasn’t sold a company before. He doesn’t know what’s going to occur. Things I list as most important are that he get the right value, that he understands the process, that his people are taken care of, that his customers and his legacy will be upheld, and the confidentiality that surrounds all of this is kept. Loose lips sink ships. No one needs to know he’s talking to a company about such an important decision.

“We believe this transaction is such a critical time in the seller’s life that we need to make it all about him, and we’ve seen it work out quite well. That doesn’t mean we give in on every negotiation, but even when we go back and forth, it’s still about him and his needs.” ThompsonGas’ priorities are simple. The company wants to buy propane businesses in the areas they see as best to operate in. However, sellers’ needs vary, so it tries to remove anxiety and make the transaction a positive experience.

“Do you understand how big a deal it is?” Koloroutis adds. “Think about being a second- or third-generation owner of a company that’s been passed down from your grandparents or parents, and now you’re selling it. It’s a big deal. Or think about a company you started with your own sweat and tears, and now you’ve got 25 employees but you are ready to cash out and sell your business. You’ve got a lot of competing emotions there. It’s very emotional and can cause undue stress. The seller needs a company to help him walk through the process while understanding how he feels about things.”

Kruger of Ferrellgas says he strives to be open and honest with the acquired company throughout the process, and it is helpful when that openness and honesty is reciprocated. Every deal will have its bumps, but when trust is built throughout the process, the parties can get past those bumps.

Mark Zimora, vice president of U.S. operations for Energy Distribution Partners (Chicago), agrees about the importance of the acquisition process. He says he recognizes that each of the thousands of independent propane companies in the U.S. has its own personality. “It’s probably safe to say none of them are exactly the same. You look for certain qualities and characteristics. Are they safety conscious? Are they a safety leader in their community? That’s key. Do they maintain a high degree of tank ownership versus customer-owned tanks? These are two areas.”

Kruger of Ferrellgas also focuses on the value of tank ownership, noting that his company is “essentially a cash-flow buyer.” Some companies that seek acquisitions are more “asset-value buyers,” but Ferrellgas looks at what it thinks a business will generate from a sustainable, repeatable, cash-flow perspective. “It’s not as simple as looking at someone’s income statements and basing a number off that,” he says. “The things that really drive value for me, in my opinion, are, do they own a vast majority of their assets or tanks? Is there some component of the employee base that wants to remain on board and work for Ferrellgas? I think that’s very important to us.”

Several involved in acquisitions referred to geography as a top factor in the decision-making process. As an example, Kruger mentioned Warren Energy, a Salt Lake City, Utah wholesale propane company that Ferrellgas acquired in 2016. That transaction made sense for Ferrellgas because of its 2015 acquisition of Salt Lake City-based Propane Advantage. Kruger noted that Propane Advantage was a strong acquisition, but the company did not have a great amount of storage capacity.

He explains that Ferrellgas does not acquire many wholesale companies, but the Warren Energy acquisition made sense because of its Salt Lake City location and also because storage is less plentiful in the western U.S. Warren Energy manages about 180,000 gallons of propane storage in Salt Lake. That helps Ferrellgas, which in some situations has had to move product from the Dakotas, Kansas, or Nebraska all the way west. Geographic considerations are not always quantifiable in dollars and cents, but the Warren Energy acquisition added efficiency to Ferrellgas’ operations in the region.

Kruger expands on the importance of geography in acquisitions, noting he likes to “put a new dot on the map” and get Ferrellgas into an area where it does not currently operate, which was the case with Warren Energy. Geography also played a role with Gasco, an Eldon, Mo. propane retailer that Ferrellgas acquired in 2015. “I love to either put a new dot on the map and get us someplace where we’re not, like Salt Lake City, or find a place where we already are and add a new business that will have a lot of synergies for us,” Kruger says, adding that Ferrellgas recognized that Gasco had a strong reputation in the area. “We knew they were a tough competitor, and they ran the business the right way. We were adding them to our portfolio even though it was where businesses were right on top of each other. It made sense from a multitude of different angles.”

Zimora of Energy Distribution Partners comments that geography plays a strong role in his company’s acquisition strategy, noting that some areas of the country “have a higher margin complexion,” whereas other areas have lower margins. “If the business has been managed with a healthy margin, abiding by the safety rules, that becomes a pretty attractive company from a number of different perspectives.” Further, ThompsonGas’ Koloroutis named Sun Propane as an acquisition example in which geography played a strong role for his company. “They’re a small business in West Virginia, and we already had a location in that town so it was a direct synergy for us.”

When acquiring a company, Ferrellgas tries to change as little as possible for the customer over 12 to 18 months. This period allows it to learn how the business and customer base works. After many years of acquiring firms — more than 235 acquisitions over 75 years — Ferrellgas has learned that propane customers are change-averse. They do business with their current provider because they like the company. Some might want to pay their bill in person at the local office and have a cup of coffee and chat with the customer service representatives.

Kruger says his company tries to limit change, making few modifications unless it’s absolutely necessary. “We want as little change for the customer as possible, for the people that are delivering their gas, the person picking up the phone on the other end when they’re making a call to order gas, or to the invoice they get on a monthly basis.”

When agricultural cooperative MFA Oil (Columbia, Mo.) looks at companies to purchase it examines the cultural fit of the business. MFA Oil is comfortable serving rural farming communities, and Don Smith, director of mergers and acquisitions, mentions the January 2017 acquisition of Keiser Oil & LP Gas Co., an independent propane marketer based in Keiser, Ark. “We feel we can talk to customers in that area, but we also have the advantage of paying patronage to agricultural customers, so that’s another thing we add to a business that’s not a cooperative. In a general sense, when we go in and there are farming customers on the propane side, we can pay patronage to those customers.”

Kruger likes to see companies with customers who are “sticky,” those who are more likely to stick with the company after it has been acquired. Again, that goes back to the percentage of company-owned tanks. If a customer owns his own tank and another company buys his propane provider, the customer will often call another and not give the new owner a chance to serve him. “Where the tank is company-owned, not that they can’t make that same decision [to leave], but it’s more likely that you’re at least going to get a chance to service them, and if not, you’ve still got an asset to show for it after the fact. Probably one of the biggest drivers for us is looking at the percentage of assets owned by the company.”

Some business owners would like to stay in the business after selling it. They want to take some of their chips off the table, but still remain active in areas of the business that they enjoy, says Zimora of Energy Distribution Partners. His company has been able to design programs for previous owners to remain with the company in some capacity.

Koloroutis says many employees from companies ThompsonGas has acquired have proven to be strong additions to the team. Some are now in management roles. “In fact, we have one example of someone in a senior management role because we acquired their firm. That’s walking the talk, bring those people in, make them part of your family and they soar. That is a great feeling.” — BPN Staff