Written on: March 10, 2025 by Jeffrey Simpson
For the first time in recent memory, we’ve had an honest-to-goodness Winter. For the first time in just as long, my conversations with my advisory clients and other fuel companies have been focused more on operational challenges brought about by demand pressures as opposed to challenges related to weak sales and no gallons. Extended cold weather stretching from the northern tiers of the U.S. to the southern states has generated much-needed revenues across the industry. If there’s one thing the lean years have taught the companies that were paying attention, it’s that strong margins and cost containment are paramount. Those hard lessons have been paying off in big ways, as disciplined companies have maintained their margin while dealing with the increased consumer demand.
Besides the feeling of relief that we’ve finally had a real heating season and the boost to this year’s profitability, there is so much more to be excited about. The Winter of 2025 has created a broader array of options for business owners, some of which were just a pipe dream a season or two ago. The savviest of business leaders will be mulling their options. As you plan your next move, consider these exciting opportunities. Which path will you choose?
Correct a Weak Working Capital Position
Weakening liquidity has become commonplace in recent years, as falling demand for fuel and a drop-off in installation and service work has been the norm. This can manifest as an inability to pay vendors on time, trouble keeping a line of credit balance within bank-mandated borrowing base levels or persistent credit card balances. In severe situations, comprehensive debt refinancing has been required to keep some businesses afloat. Yet nothing corrects liquidity like a prolonged stretch of profitability.
Strengthening your capital position and balancing out your debt is never a bad decision. However, before you become too aggressive paying down any long-term debt or pulling substantial cash out of your business, check where you stand with your net working capital position. Compare your current assets and your current liabilities. If current assets don’t exceed your current liabilities (including your upcoming annual principal and interest requirements), it is best to leave that “extra” cash in the company to support regular operations. If you are “cash flush” and your assets exceed liabilities, you have the ability to strengthen your position and climb out of that hole.
Operational Improvements & Scaling Growth
Strategic reinvestment in your company is vital to growing value. Whether your plan is to operate for many more years or get ready for an eventual sale, getting the machine—your business—running efficiently should always be near the top of the list. Investments in new accounting systems, routing and delivery systems, remote monitoring, business intelligence software and developing AI products could be in the mix. It may be the perfect time to invest in customer acquisition and customer retention strategies. Companies often deprioritize marketing and lead-generation efforts in lean times. However, when you have the resources to improve your business operations and expand your customer acquisition programs, you’ll be increasing your value and increasing the likelihood that the future years will be profitable even if the weather doesn’t cooperate.
Seeking that Elusive Acquisition
We expect the acquisition climate to remain active, and the key to winning that deal you might be eyeing could be your ability to enter purchase negotiations with a bank ready to support your transaction. As attractive as a particular opportunity may be to you, the most critical aspect to securing financing will be consistent positive performance of your operation as the buyer. Your ability to maneuver through the challenging years and capitalize on more favorable conditions, such as those enjoyed recently, indicates a competent management team and is often a gating issue for banks looking to provide acquisition financing.
Most sellers are looking for more than just the very top dollar for their company. The due diligence and documentation process is often lengthy and the certainty of closing the transaction following months of work is a top consideration for most sellers. You can leverage your strong recent performance to pull your financing partners, deal team and advisors together to make sure that you get to “Yes” on the deal that you are focused on.
Position Your Company For Sale
If you’re looking to go out on top after one last very solid Winter, it’s important to be prepared for how potential acquirers will look at your business. Buyers will evaluate many quantitative and qualitative factors when exploring an acquisition. In the end, the earnings level and the consistency surrounding it will have an outsized impact on the value of your business. Many owners considering an exit recognize that strong earnings typically drive strong offer prices. If you can provide ample evidence that pricing power and cost structure is sustainable, a buyer will lean heavily on the earnings stream to support loans or equity investments to consummate the deal. While savvy buyers may adjust their projections for periods of unusually high profits, there is power in exhibiting that your customers stuck with you during periods of operational stress or high prices. This is also reflected in enterprise value, which provides evidence that your customer base values broader aspects of your company’s offerings. Remember, it’s not just about the weather and the fuel you deliver!
Finally, the “stickiness” of your customer base is a prime characteristic sought by buyers. Are you attracting the right customers and keeping them for long periods of time? Or are turning over your customer list every few years? The latter scenario could significantly impact the valuation you receive.
Embrace Alternative Solutions
Increasingly, business owners in the middle of their careers who are plugged into the pace of industry consolidation recognize there is a growing pool of capital sources that can support their continued commitment to their fuel distribution and HVAC businesses. These owners comfortably seek out and partner with alternative capital providers to complete transactions that otherwise may be out of reach using traditional bank financing. The “buy and build” strategy is becoming increasingly popular as business leaders recognize that there continue to be strong opportunities for financial reward within our industry, and that the right financial partner can help them to scale in ways that wouldn’t be possible otherwise.
This pathway is the right one for business leaders who have a longer time horizon in the business, who aren’t committed to riding off into the sunset just yet and who aren’t content to simply keep running the same business they’ve been running for years. The pot sweetener in these co-investment arrangements is that there are powerful tax advantages to owners in the form of tax-free equity rollover and Qualified Small Business Stock (QSBS), resulting in capital gains tax-free growth if IRS tax code conditions are met. Plus, these kinds of arrangements are typically employee-friendly in that the management team and employee structure that has led to success in the past is valued highly and maintained in most cases.
No matter which pathway you ultimately take, you get to make that decision with some significant wind at your back. Your improved business performance and profit can support ongoing organic growth, can strengthen your position to sell or can place you in a powerful position to buy. It all comes down to one key question: What do you want to do? ICM
Jeff Simpson is the Founder and managing member of Notch Capital, a private investment firm specializing in buyouts and recapitalizations of lower middle market businesses in the heating, cooling and home services industries. Notch Capital also provides advisory services to help these businesses strengthen their performance and analyze acquisitions.
