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Propane Pitfalls and Your Business

Propane Pitfalls and Your Business

In recent years, long-established heating oil dealers have been jumping into the propane delivery business at a quickening pace, in an effort to diversify their offerings and seek new avenues for profitability. This strategic move makes tremendous sense for many in our industry, based upon the steady contraction in the retail heating oil market, and the values assigned to propane distribution businesses in today’s merger and acquisition environment. Business owners expanding into the propane business often face numerous unanticipated headaches associated with growth. While operational bumps are to be expected in any new endeavor, the potential financial pitfalls often are not fully understood. A growing propane business requires cash – lots of it – and over time capital demands can begin to stress the entire organization if measured steps are not taken. Slowly but surely, cash reserves and bank lines of credit that were previously more than adequate to support the base operations of the company become insufficient. This puts a strain on banking and vendor relationships, a situation we have witnessed on many occasions as financial advisors to the industry. In fact, it is a scenario that I have seen enough to dub it “Hitting the propane wall.” The greatest aspect of a propane distribution business, which is the dealer’s ownership of the customer tank and the resulting lucrative “ownership” of the customer, can become a burden for the dealer. Propane is more of a financial play for a fuel dealer than delivering heating oil. Because of the consistent capital outlay, what’s important is return on capital, maintaining liquidity and structuring financing in anticipation of growth, and not...

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