by Janet Tooke, VP Strategy Group
Market volatility, such as low oil prices but attractive downstream retail margins, lower cost to borrow capital and perceived or actual demand erosion can all be reasons for the spike in acquisitions in the fuel retail market. Private equity investors, for example, have been active in seeking out under-valued investment opportunities in the downstream fuel market. Investors are disciplined in their approach, targeting future returns, not just current performance. When it comes time to dig in and understand whether or not a site or network is the correct acquisition for your company, due diligence isn't always enough. A quality acquisition analysis extends far beyond current volume or competitive awareness.
A quality acquisition analysis will make sense of complex possibilities so you can make more educated growth and development decisions. What impact will a prospective acquisition have on your total network? Your brand? Your volume and profitability?
What Does a Quality Acquisition Analysis Look Like?
Acquisitions serve a number of possible business objectives:
- Extending reach into a new market
- Scaling to improve efficiencies
- Improving visibility
- Achieving critical mass via adding market share
- Growing revenues and earnings
A typical acquisition analysis, performed without a strict model, could reveal some important information. Your results might include a list of service stations identified for purchase across a network, the current volume of those sites, and some details about nearby competitors.
Information about the past and present, though, is not nearly as useful to your investment strategy as is information about the future. A quality acquisition analysis is facilitated by drilling down into all volume influencers, so you can understand the potential volume of each service station and the full network before you purchase. After all, there may not be much value in purchasing a network that is fully saturated at its maximum volume.
First, your acquisition analysis should inform you about which markets to enter, and which to avoid. If your organization has already selected a market, ranking others won't necessarily support your objectives. But if you want to understand which market is best for your objectives prior to making that selection, a definitive ranking is required. Every market sits within a different economy and projects a different growth potential. A quality analysis will first detail the data for each prospective market, allowing you to understand if your investment will yield greater returns in one geographic area or market than in another.
After receiving a market ranking and selecting a market to examine, you'll need rich, in-depth information about every existing service station in this market in order to uncover the value of each station in which you'd like to invest. A thorough acquisition analysis will include over a hundred data fields for each station, including reference to each of the 7 elements: market, location, facilities, operations, brand, merchandise and price. With this data, your analysts are able to separate out each element to understand how strong each service station is versus another station, and how strong, in total, one company is in the market compared to another.
A key element is location strength. Every site has a volume potential. A best-in-class acquisition analysis will unveil how a site's potential compares to its actual volume. With a quadrant analysis, you are able to identify sites sitting in the under-performing, but high potential block. Ideally, an astute investor wants to purchase a network with more sites in this quadrant, which can be invested in and turned into major volume generators. High potential and high performance sites are also valuable: they keep your brand strong and competitive. Ideally, a quadrant analysis would reveal that the network you have express interest in has a high percentage of the former site type and a reasonable percentage of the latter.
Reasons for Current Performance
Once you're examining sites within the under-performing, but high potential quadrant, a quality acquisition analysis will then reveal the reasons for lower-than-potential performance. The state of the facility might be an issue, or it could be poor operations or the lack of brand strength. An ideal model will detail a volume calculated based on ratings in each of the categories described above. Some issues are harder to solve than others: if you found that poor facilities were the biggest issue in the network, you could determine a cost to upgrade facilities and reach volume potential. If you discovered, however, that brand is the key problem, you have another consideration on your hands and a re-branding effort ahead.
How Acquisition Analysis Results in Wise Investment Decisions
Understanding whether the network you intend to spend capital on is worth that investment means understanding how the total network is currently performing and how it will perform in the future. With best-in-class analysis, you will be able to clarify which percentage of a network's sites fall into high potential quadrants, understand the average actual volume for each quadrant, and compare to competitors. Identifying under-achieving service stations in a high potential network, establishing the underlying causes of the lack of performance and calculating the volume impact of fixing these weaknesses will allow you to make conclusions about how your acquisition will unfold. This helps you understand how to hit the maximum volume at every site before spending the capital. In this way, wise investors make informed decisions before committing capital to an acquisition plan.