Energy & Petroleum Articles
Customer Attrition and Margin in Oil Company Transactions
By Joe Ciccarello, CPA & John Vachon, CPA
Gray, Gray & Gray, LLP
When an oilheat dealer acquires a competitor, it is almost always necessary for the purchasing company to make an adjustment in retail pricing for the newly acquired customers. This is done in order to bring the margin earned on sales in line with the margin being earned by existing customers. After all, the buyer just paid a premium to acquire the customer list and must be sure it becomes a profitable asset.
The biggest threat to the success of an acquisition is the potential loss of customers during the transition from the old company to the new one. Unfortunately, anecdotal evidence suggests that one of the main reasons customers give for “jumping ship” instead of remaining with the acquiring company is due to a jump in retail pricing. The adjustment necessary to make the deal profitable is also a factor in diminishing the success of the transaction.
We wanted to quantify this by reviewing customer list transactions that occurred in the last five years and examining the resulting customer attrition rates. The table below outlines three typical acquisitions from our review, including the terms of the purchase, along with the number of customers and the margin differential between the sales prices.
Even though the attrition rate for Companies A and C is similar (despite a 10-cent margin differential between the two) the difference could end up being a much greater, as Company C is measured 5 years after the deal and Company A is measured only 2.5 years after the deal.
Company B, which raised its margin 20 cents, experienced a huge 61% loss after one year. There had better have been a strategic reason for the buyer a.) making the purchase, and b.) raising the margin so high; because for customer retention purposes it is a complete failure. Because this was not a retained gallons deal, the seller made out well, walking away with cash in hand, while the buyer lost a significant portion of his investment in just one year.
In the example above, Companies A and C were both retained gallons deals, while B was a non-retained gallons sale. Regardless of what kind of deal you make, the higher the disparity in margins between the two companies (buyer and seller), the greater the percentage of customer lost.
Why risk losing new customers by upping their price after an acquisition? A larger differential in the price being paid for a customer list necessitates that the acquiring company charge a higher retail price to make up the difference. As we have seen, this causes a greater number of customers to “bleed off.” In the end, although the seller may be paid more per gallon for the customer list, there will be fewer overall gallons paid. If it is a retained gallons deal, the seller ultimately receives less money.
The examples above may lead us to believe that buyers should avoid non-retained gallons transactions (cash on the table) when there is a significant margin differential, as the buyer stands to lose a significant number of the acquired customers within a reasonable number of years.
Joe Ciccarello and John Vachon are with Gray, Gray & Gray Certified Public Accountants, Westwood, MA (www.gggcpas.com). Gray, Gray & Gray has served the accounting, tax, valuation and business advisory needs of businesses in the oilheat industry for over 65 years.