Selling a Propane and Fuel Distribution Business

Gallons, margin and the weather

The first thing a buyer asks for is gallons sold by month, split by customer class. Residential heating, commercial accounts, farm and agricultural use, cylinder exchange and any delivered fuels such as heating oil or diesel each carry a different margin, and a buyer will want to see them apart. The number that matters most is the spread between what you pay your supplier at the terminal and what you charge at the tank, per gallon, held over several years. A margin that widened in one cold year and then fell back tells the buyer less than a margin that stayed in a narrow band.

Buyers also adjust each year's gallons for how cold the winter was. Two companies can show the same revenue and be worth different amounts if one of them had a hard winter and the other had a mild one. If you have the degree day figures for your area, put them next to your gallons. If you do not, your advisor can build the comparison.

The way customers get their fuel matters too. Automatic delivery on a schedule, set by the customer's usage and a monitor on the tank, is worth more than a call-in customer who phones when the gauge reads low. Scheduled delivery means fewer trips, fewer run-outs, and a customer who has not shopped around in years.

Tanks, and who owns them

In most propane companies the tanks at customer sites are the asset. A tank you own, sitting in a yard with a rental agreement or a fill agreement behind it, ties the customer to you in a way a customer-owned tank does not. A buyer will want a tank register showing every tank by location, size, age, owner, last inspection date and the date it is due for requalification. If the register lives in the dispatcher's head or on index cards, build it before you list.

Buyers also look for tanks you do not own. Some of your customers may be on tanks owned by a competitor, and some of your tanks may be filled by others. Whether and how a company can fill a tank it does not own varies by state, and your attorney confirms what applies. A buyer will count those customers differently from the ones on your own equipment.

Tank rental fees, minimum usage charges and delivery fees are worth listing on their own. They arrive whether or not the winter is cold, and buyers often value them like recurring revenue. Our post on recurring revenue and contracts explains why.

Trucks, drivers and the bulk plant

A buyer will walk the yard. Bobtail trucks for home delivery, transport trucks that haul from the terminal, the age and mileage on each, the inspection and maintenance records, the meters and the hose reels all get looked at. A fleet that is old but well kept sells fine. A fleet that was deferred for three winters will cost the buyer money on day one, and the price will reflect it.

Drivers are harder to replace than trucks. Anyone who can legally drive a loaded propane truck holds a commercial license and a hazardous materials endorsement, and the good ones know the routes, the dogs, the long driveways and the customers who need extra time. A buyer will ask for tenure, pay and certification status for every driver, and will ask what happens to the route when one of them leaves. Our post on owner dependency matters here if you are the person who dispatches, sets prices and handles every difficult customer.

The bulk plant gets its own review. Storage tank capacity, loading racks, the fire protection setup, the permits on the site and the inspection history are all part of the file. If the plant also stores or dispenses other fuels, a buyer will want to know about underground tanks, spill history and any environmental work done on the property. In some deals the buyer's lender orders an environmental review of the site before it will close. If you own the land, see our post on real estate attached to the business.

Records a buyer will ask for

Expect requests for business tax returns, monthly profit and loss statements and a balance sheet. Beyond that, a buyer wants gallons by month and product, the customer list with tank ownership and delivery method, and a receivables aging report. Farm and commercial customers often carry balances through winter, and a buyer will want to know how much of the receivable is old.

Budget plans and prepaid fill programs need attention. When customers pay a level amount through the year or pay ahead for a fixed price, the company holds their money before the gallons are delivered. A buyer treats a prepaid balance as something owed to those customers and will ask who takes on that obligation at closing. Fixed price contracts, and any hedges you bought to cover them, get the same treatment. Have the contracts ready and the hedge statements, so a buyer can see how much exposure travels with the sale.

Inventory is the last piece. Product in the bulk tanks and in cylinders at the closing date gets counted, and the way it is valued is normally set in the purchase agreement. Our post on earnouts, holdbacks and working capital covers how that tends to be handled.

What has to transfer

The supply agreement comes first. Most propane and fuel companies buy under a contract with a supplier or terminal, and the contract often carries volume commitments, credit terms and a right to approve a new owner. A supplier who will not consent, or who wants to reprice, can slow a deal for months, so read the agreement before you list and talk to your supplier at the right time.

After that come permits and licenses for the bulk plant, the trucks and the cylinder filling operation, plus the registrations for individual tank sets and any retail cylinder exchange locations. Some move with the business and some must be applied for again. Rules vary by state and your attorney confirms what applies to your company. Customer agreements, tank leases, commercial contracts and the lease on any office or yard need to be read for assignment language. The lease assignment post shows how landlord consent tends to go.

What tends to sink a sale

Most failed distributor deals have a cause that was visible early. The tank register did not match the field. Budget plan money had been spent and nobody had set it aside. The margin only looked good because of a single cold, high price winter. A supplier would not consent. Two drivers left the week the sale became known. An environmental question about an old fuel tank surfaced during the lender's review and nobody wanted to carry it.

Confidentiality is a practical matter in a company this small, because drivers and customer service staff talk. We market a company without naming it, and a buyer signs a nondisclosure agreement before seeing anything that identifies it. Our post on marketing a business confidentially explains the steps.

Getting the company ready

Start a year or more ahead, so that you have a full cycle of winter and summer to show. Build the tank register and match it to the field. Put the budget plan balances in a separate account. Sort out the environmental file for the plant and any old tanks. Train a second person to dispatch and price. Write down how routes are built and how the monitors alert you. Keep your trucks serviced and the records tidy.

Then start with a valuation built from your gallons and margin, and talk to us about how buyers are likely to read your company. At Business Advisors of America we work with owners from the first valuation through closing. The page on selling a propane or fuel distribution business is a good place to begin, and a short call is the step after that.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.