“In times of rapid change, experience could be your worst enemy.” – J. Paul Getty

For anyone playing in the retail fuel distribution space – either as a provider or in a client support role – you have seen your share of challenges over the years and adjusted accordingly to shore up your operation and offerings to confidently move forward. But the recent stretch just feels different. Developing state environmental regulatory schemes, while not yet fully formed, have business owners contemplating the possible impacts on their business lines, staffing, administrative requirements and profitability. Those operating in the “wait and see” states may not feel the regulatory pressure as acutely, but the risk of the ripple effect is there. Likewise, consolidation rolls on with companies making moves to achieve greater scale and efficiencies and to retain skilled talent from a diminishing pool. On the financial front, the prime rate has risen from 5.5% to 8.5% in the past year. While far from the highest rates we’ve seen historically, this 3% jump in interest expense is material to companies carrying debt used to grow or fund day-to-day operations. Citing this interest rate risk and sizeable deposit outflows, Moody’s reported this summer that it lowered the ratings of ten small and mid-sized banks and is reviewing potential downgrades to several larger banks. All these dark clouds have introduced more uncertainty than we’ve seen in many years and are beginning to impact the availability of capital to operate and grow.

While qualitative evidence so far this year suggests buyout activity in the heating and cooling space remains robust for the highest quality assets (notably, propane and full-service heating oil companies laden with technician talent), the questions do arise: When might company valuations start to feel the weight of these state regulatory and financial factors? At what point of “regulatory crystallization” might the fear of an eroding market chase away buyers (or, more importantly, buyers with big checks)? What will it cost us to modify our business lines and staffing to compete in the changing environment?

A conservative industry by nature, many don’t want to move too quickly for fear of relinquishing the gains built over decades in their legacy business. Some are deciding now is the time to exit for a variety of reasons – retirement, the aforementioned regulatory wave, lack of skilled workers, difficulty accessing capital, and myriad other legitimate reasons. But the point is they are making a definitive move.

For those marching forward or perhaps positioning the next generation to assume control of the family business, a clear vision and the right capital structure (whether it be bank debt, private debt or equity in the form of private capital) are invaluable. Simply expecting that your traditional business structure and financing approach will support acquisition growth and a competitive platform could be shortsighted. During times of economic uncertainty, it is vital to understand your company’s credit profile and whether it will permit additional borrowing without overly burdening cash flow or leverage. Likewise, now is not the time to burn too much precious working capital on growth opportunities.

Where banks have become more risk averse due to the growing financial uncertainty, private capital providers are stepping in. Although buyout deals on a macro level declined in Q2 of this year, multiple sources report there is ample “dry power” in the private capital markets to support acquisitions and recapitalizations over the remainder of 2023. It is worth a discussion with a private capital provider to understand your options and determine if avenues may be open to you to facilitate a sale at a competitive price, conduct a partial sale (“recapitalization”) or fund a major acquisition.

It is becoming clear that the administrative burden of running a fuel distribution and HVAC company will grow as the various environmental regimes take shape. And as much as the letters ESG send a chill down the spine of many business owners, the movement towards environmental, social and governance accountability (however that may eventually be defined) is creeping forward in corporate America, in the more progressive financial institutions and in some private equity circles. While we have yet to see pervading ESG demands from financial institutions serving the retail fuel distribution and HVAC sectors, this movement will be watched closely.

When I first started working in the industry a couple of decades ago, my boss advised me that, “doing nothing is still a decision.” The winds of change in our industry are blowing much more briskly today than they were back then and this simple bit of advice has taken on new significance. There are ways to strengthen your market position in a challenging environment if you plan for them, and many are tethered to your ability to access greater and more diverse sources of capital. Now is time to explore the possibility of aggressive growth and what it will take to achieve it. Simply defining “growth” and “capital” in the same old way you’ve been thinking about them for years may be a decision you’ll regret.