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3, 2, 1 Blastoff! Is Your Business a Platform for Private Equity?

FIRST SEEN IN BPN MAGAZINE | In the realm of private equity, the allure of platform companies as lucrative investment opportunities is undeniable. But as a business owner, you may ask, “What is a platform company, and how can I become one?” If you’re a business owner looking to attract private equity investment by transforming your company into a platform, this article will give you insight directly from the most active companies in the Propane Private Equity space, exploring the areas you should focus on to position your business as an attractive platform investment.

The experts quoted here are Jared Rubenstein, Director, Monroe Capital; Jeffrey Simpson, Managing Member, Notch Capital Partners;  Matt Romandie, Managing Partner, Silvermine; and Bill Overbay, Stone Road Partners.

 

1. What key characteristics define a platform company in the context of private equity investments, specifically regarding the propane industry?

“When reviewing platform companies for investment, our goal is to identify opportunities where we can leverage the skills of the existing management team in combination with our broader access to capital to springboard the company to the next level.  We typically like to see baseline adjusted annual EBITDA of $2 million or more, a pattern of consistent or growing profitability, a seasoned management team with a solid finance function in place, and a continued opportunity for that company’s growth in the region.” – Simpson

“When we at Monroe are evaluating a business for its potential as a platform, we ask if the current infrastructure can handle the expected scale in terms of customer volume and operational capacity while maintaining the core business. We emphasize the importance of professionalizing the Company and enhancing brand recognition locally, which would allow for expansion beyond the initial geographic market.” – Rubenstein

 

2. How do you evaluate a potential platform company’s ability to integrate and add value to subsequent add-on acquisitions?

“Our goal is to partner with management and support them where we can.  We partner with great management teams whose core competency is creating long-term relationships with customers and suppliers.  We don’t necessarily expect them to be well versed in the finer points for growth through acquisition strategy; that is where [we] see our value being contributed to the company.  That being said, the investment a team has made in the company and the people makes a good platform for us.  If the company is investing in their people and systems, then that provides insight into how the team will be able to integrate and work with the varying levels of information available from add-on acquisitions” – Overbay

 

3. What specifically drew you and your firm to the propane industry?

“After more than 25 years working in the fuel distribution industry in operational, banking, and financial advisory roles, my decision to found Notch Capital to focus on the fuel distribution market was a natural fit.  The propane industry is still a highly fragmented, consolidating industry that faces challenges on the staffing and regulatory fronts.  The scale has become increasingly vital to tackle the financial impact of these challenges and ensure long-term survival. Our firm is designed to bring the capital resources necessary for continued success.  We believe there is a real opportunity for financial buyers and investors like Notch Capital to support the staffing and growth goals of propane business owners with flexible and tax-advantageous purchase structures that strategic buyers cannot bring to the table by corporate mandates to integrate acquired companies into “traditional” multi-state infrastructure.” – Simpson

“Monroe became interested in the propane industry because it provides an essential utility-like product with relatively stable demand. Additionally, the market is highly fragmented, offering numerous opportunities for consolidation, and it benefits from having sticky customers who are typically loyal and consistent in their usage.” – Rubenstein

 

4. What key metrics should owners focus on tracking and growing to attract the most interest from private equity investors?

“Beyond reaching a minimum EBITDA of $2 million as a platform company, a high proportion of company tank control and automatic deliveries are attractive characteristics.  In addition, recurring tank rental income and relatively low customer concentration are desirable.  All these factors are prized because they evidence a solid base of recurring revenue, and recurring revenue attracts financial buyers who will rely on the existing management structure and associated costs for continued operation.”  – Simpson

“To attract private equity investors, owners of propane companies should focus on key metrics such as consistent revenue growth, high profit margins, and strong customer retention rates. Demonstrating a stable and growing customer base, with high retention and low churn, highlights market penetration and service appeal. Investors look for predictable and stable cash flows, so a significant portion of revenue from long-term relationships is important. Operational efficiency metrics like cost per delivery, profit per gallon, and inventory turnover indicate effective logistics and cost management, while a strong safety record and full regulatory compliance minimize risks.

Additionally, financial health indicators like revenue and EBITDA growth signal strong overall performance. Showing potential for further growth through an acquisition pipeline and investment in innovative technologies can also enhance attractiveness. High customer satisfaction, evidenced by metrics like Net Promoter Score (NPS) and positive feedback, underscores quality service and support. Together, these metrics present a compelling case for investment by highlighting the company’s profitability, stability, and growth potential.” – Romandie

 

5. Can you provide examples of successful platform companies in your portfolio and describe what made them stand out?

“Looking through our portfolio there are several themes that emerge. Firstly, how involved management is in the industry.  This tells us a lot about management; if they are involved in the industry trade associations, be it local, state, or national, this demonstrates that management is invested in the industry’s success and respected by their peers to be elected to leadership positions. Also, longevity, how long the business has been around, and our most successful investments are in multi-generational companies. Finally, reputation in the market from competitors, customers, and service providers.”  – Overbay

 

6. What role does management play in the selection and success of a platform company, and how do you assess their capabilities?

“As a financial buyer, we view the existing management team as vital to our transactions. During due diligence, we will discuss with senior executives to assess their strengths and career desires.  One of the most important areas we evaluate is the management team’s experience and the team’s ability to function independently of outside advisors, identify and integrate acquisitions, and step into the CEO and CFO positions post-closing.  “Headless” companies –where the former leader exits following a sale without preparing a natural successor – can pose cultural challenges to a financial buyer or investor.  While our preference is to continue to employ the prior CEO or to identify a new leader from within the seller’s existing management team if the former CEO is no longer interested in serving post-closing, we will work to locate the right successor from our industry network during the due diligence phase if no obvious successor is available.” – Simpson

“Management is the single most important factor in the success of a platform company. They are critical for the day-to-day operations and overall direction of the business. At Monroe, we focus on retaining the existing team and building on their established foundation. We assess whether the management team possesses the operational expertise, strategic vision, and financial acumen necessary for growth. Additionally, we ensure that the company culture aligns with our values and determine how we can flourish it going forward.” – Rubenstein

 

7. How do market conditions and industry dynamics influence your decision to designate a company as a platform?

“Since the industry’s fragmentation differs from region to region, the minimum EBITDA targets we seek may shift slightly lower if we identify a high-quality investment opportunity in a geography poised for continued organic growth or marked by identified acquisition opportunities.” – Simpson

“When evaluating a propane company as a platform investment, market conditions and industry dynamics play a crucial role. The propane industry’s fragmentation, with numerous small and regional players, presents opportunities for consolidation and market leadership through strategic acquisitions. Growth potential is driven by increasing demand for propane across residential, commercial, agricultural, and industrial sectors, supported by its essential role as a versatile and cleaner energy source. Regulatory considerations, particularly regarding safety and environmental standards, are critical factors. Companies demonstrating operational efficiency, strong customer relationships, and responsiveness to market trends and consumer preferences are well-positioned for growth and resilience in the propane market. These elements guide our decision to designate a propane company as a platform, ensuring alignment with market opportunities and potential for sustainable expansion” – Romandie

 

Summing Up

In summary, a propane company represents an attractive platform for private equity investment due to several key characteristics. These include a solid market position, scalability, operational efficiency, and financial health. Leveraging the existing management team’s expertise and access to capital is crucial for driving growth and expansion. Successful platform companies typically exhibit consistent profitability, a seasoned management team, and regional growth potential. Additionally, they possess the infrastructure to handle increased customer volume and operational capacity.

The ability to integrate and add value to subsequent acquisitions and maintain high customer retention rates are vital for sustained growth. Private equity investors are drawn to the propane industry in particular because of its stable demand, opportunities for consolidation, and recurring revenue streams. Key metrics such as EBITDA growth, customer retention, and operational efficiency are critical in attracting investment. Effective management, strategic vision, and alignment with market conditions and industry dynamics further enhance a propane company’s appeal as a platform for private equity investment. If you are curious if your business would be considered a platform or would like to know exactly where you can focus to become a platform, please reach out.

Ford DuBose

Associate, Cetane Associates

January 2025

First published in BPN Magazine, August 2024 Issue.

 

About Cetane Associates

Cetane is a leading provider of financial advisory services to business owners in the propane, heating oil, pest control, lawn care, landscaping, and HVAC & plumbing industries. Clients engage Cetane to advise on sales, spin-offs, and acquisitions, as well as to perform valuation and ad hoc corporate finance assignments. For more information, please visit www.cetane.com.


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT