Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
April 2012
Should I stay or should I go now?
If I go there will be trouble.
If I stay it will be double.
If you are old enough to remember these lyrics from The Clash, you are probably old enough to have retirement on your mind. And, given the very challenging heating season that is coming to an end, thoughts of exiting the business may be taking a more important place in your plans for the future.
The oilheat industry is in a period of instability. The gas industry has gained enormous strength in the market, and is benefitting from favorable media attention and political goodwill the result being lower prices for their customers. As a result, your customers are flocking to gas. Heating system conversions are up, while oil’s pricing advantage over gas has been reversed. Top this with a season that saw degree days down by 30% and it is easy to see why some dealers are discouraged to the point of wanting to leave the business.
Before making a rushed decision about your future, take the time to draw up a list of all the problems you are experiencing in the business. Then sit down with a trusted advisor, such as your CPA or attorney, and go over them one by one. You may also want to speak with other dealers about the current market conditions. There may be solutions out there that can help you rebuild the strength of your company and perhaps rekindle your interest in the business.
If you decide that you have “had enough” and are ready to retire, the way in which exit your business is critical to your future. Unfortunately, it is no longer possible to simply say, “I’m through” and walk away with a pocket full of cash. There are three basic motivations for exiting a business:
- On a personal level, it is time for you to leave the business
- You want to cash out the equity you’ve built in the business
- You want to pass the company along to a family member or partner
Your particular reason for stepping aside will affect how you leave the playing field. Do you want to relinquish ownership of your energy company? Or just hand over operation of the business to someone else while retaining your stake? There are generally three options for an owner who would like to exit his or her oilheat or propane business. Each of these options has different implications for your future:
- Transfer control of the business to a family member or partner
- Sell your company to another company
- Close the business
Let’s look at how each of these options has been affected by today’s market conditions.
Transfer
Transfer of ownership is the most common exit option for a closely held business, and usually the best. But to transfer control to a child, other family member, partner or a member of your management team requires careful planning and execution. Simply handing over the business to an unprepared successor is a recipe for failure.
We tell our clients that the best time to start thinking about a succession plan is the first day they open their doors for business. Nothing is forever, and your time as owner of a business is limited. Succession planning is the path to ensuring that you will be able to retain some value and legacy from the business you built over many years.
If you do not have a succession plan in place, your exit options are extremely limited. You may be better served by remaining at your post and continuing to run your oilheat company until you can put a plan in place for its continuation. You’ll need to quickly identify a family member or key employee with the skills and experience necessary to handle operations, finance, marketing and the thousand other details of running a business. This is where mistakes can be made, and why it is in everybody’s best interest to develop a succession plan early.
Hopefully, you have long ago created a succession plan that outlines in detail the process of transfer of control to the next generation. Or you have an operating agreement that includes a buyout clause. In many cases an existing owner will retain some ownership or a role in the company in order to ensure a smooth transition and preserve the company’s future health.
Sell
Selling your company usually involves a transfer of ownership along with a transfer of operational control. When a company is sold, the role of the previous owners is usually negotiated along with the terms of the sale. Right now it is definitely a “buyer’s market.” Acquiring companies are shifting nearly all the risk of a sale onto the shoulders of the seller.
Most transactions are retained gallons deals in which the payout occurs over several years, and is tied to customer retention. This has several implications, some of them conflicting. The new owner is likely to ask you to stay on in a supporting role to help ensure a smooth transition. And you will want to participate in order to make sure customers are retained and you get the payout you expect.
There are two major challenges here. The new owner will want to put their own stamp on your company and integrate it into their own business. This makes it essential that you identify a buyer whose ideas and way of doing business and pricing structure are aligned with yours. Otherwise your time spent during the transition may be difficult and unpleasant for you and the business will lose customers that have been with you for many years. A business broker with experience in the oilheat industry can help you identify buyers that are a good fit for your company.
Another issue that the absorption of your customers can cause a “bleed off.” Customer loyalty is not what it once was, especially with oil prices over $4.00 per gallon. As customers seek out a different dealer, your payout (based on retained gallons) is diminished. It is easy to see why a transfer of ownership is preferable to selling in today’s market.
Close
For most business owners this is the least attractive option. Nobody wants to see a company that has taken so much time, money and effort to build simply disappear. But, unless you have taken steps to keep your business well organized and profitable, you may not be able to attract any buyers. And if there are no children, partners or other family members interested in stepping into your shoes, selling of whatever assets you can and closing the doors may be your only choice. But you are likely to walk away with very little in terms of capital. Most dealers have reinvested any profits back into the business, saving little for retirement, hoping for that payoff date which now will never come.
There is nothing like the pride and sense of accomplishment you get from building your own business. Successful businesses create wealth for you, your employees, your family, and your customers. If the time has come for you to leave this phase of your life behind, make sure you do all that you can to preserve what you have built while ensuring that your own future is secure. Putting together a plan of action is the best way to safeguard an orderly and successful transition.
Joe Ciccarello is the Managing Partner at Gray, Gray & Gray Certified Public Accountants, a Boston accounting firm (www.gggcpas.com). Gray, Gray & Gray has served the accounting, tax and business advisory needs of companies in the oilheat and energy industry for more than 66 years.