Updated: May 19, 2022
Those of us who work regularly in and around the oil & gas energy industry recognize the difficulties presented by the current depressed energy prices and its effect on energy services, production and exploration companies. We view the world through the process of Mergers & Acquisitions as we work with business owners to sell their companies. Many Texas businesses are heavily impacted by the swings in energy prices. We see machine shops, water disposal, inspections, welding, tank, vessels, trucking, temporary housing and many other energy related businesses that suffer the financial pain when energy prices and production declines. We also see these same companies reap the benefits of rising energy prices and production cycles. Unfortunately, too many business owners have short memories.
“When the energy business is good many business owners think it will last forever. It won’t.” ~ Dan Elliott
Like you, we have seen this play out before in different cycles and many energy companies (and related businesses) always seem to recover. Selling a business for the highest value is often driven by timing. Will you be ready when the market is?
If your goal is to sell your business in the next energy boom here are 3 things you can focus on now to make sure your business achieves its highest value in the next energy recovery cycle.
1. Get your financial reporting up to standards that will one day survive a buyer’s due diligence.
Excellent financial records increase the value of your business because it reduces the buyer’s perceived risk that poorly maintained financials mean more financial room for error. Make sure your accounting is done consistently from year to year and make sure your current tax structure (C, S, LLC, etc) is what will create the highest value transaction. Look at your financials as a buyer would or better yet give us a call and we can review your information and give you a report that identifies the areas for improvement.
Tip: To most buyers Reviewed financial statements are almost as good as audited financials and a lot less expensive. If you have audited great, but if you just have compiled statements find a good business accountant to do reviewed statements.
2. Work hard on Customer Concentration Issues
A buyer often perceives risks if 1 or 2 customers dominate the revenue of your business. Ideally your largest customer should be less than 20% of your annual revenue (unless you have long term contracts which assure buyer purchases). Shifting customer concentration is often a long process, start now.
Tip: Look at your commission plans for your sales people. Are you rewarding salespeople who diversify their customer base?
3. Review your insurance to be sure you are adequately covered for your business risks
An underinsured claim is a nightmare for a business owner and can interfere with the sale of the business for many, many years. Do you have enough coverage? Do you have the right coverage? The “right coverage” question is even more important than how much coverage. We had a client get hit with a $2 million claim that he thought he had insurance coverage for. He didn’t. The deal to sell his business that we had on the table for millions of dollars was delayed until he found out he wasn’t covered, then that deal disappeared altogether. Talk to more than one agent and certainly more than just your regular insurance agent who may think they know your business but really don’t. Many commercial insurance agents will be more than happy to give you a review.
Tip: Talk to an insurance agent who specializes in your industry. Your trade association knows who they are.
Far too many business owners don’t plan ahead for an opportunity that could arise without much notice. Selling a business for the highest value and best terms is never an accident. The value goes to the prepared.
Mr. Elliott is Managing Director of Sunbelt Texas Business Sales & Acquisitions with more than 20 years experience in mergers, acquisitions and business broker. Mr. Elliott purchased Sunbelt Houston in 1996 and has managed the sale of over 500 companies from very small businesses to companies with revenue of more than $30,000,000. Mr. Elliot has provided Business Broker and merger and acquisition adviser services to privately held business in Houston, Austin, San Antonio and throughout Texas.
Over a 20 year career, he has handled a wide range of industries including manufacturing, distribution, medical, machining, construction, and contractors. Mr. Elliott has completed transactions with Private Equity Groups, strategic buyers and a wide range of regional companies executed plans to grow through acquisitions.
Mr. Elliott has been recognized as a “Thought Leader” by Sunbelt Business Brokers Global Network. Mr. Elliott is frequently interviewed in various media and is considered an expert in the field of buying and selling privately held businesses.
Mr. Elliott has received the professional designations of Certified Business Intermediary (CBI) and Master Merger & Acquisitions Intermediary (MMAI).