LP Gas, March 2010
Business Matters Return on pre tax operating income to historic cost 10 percent 100000 pre tax income 1 million historic asset value This is the net income before taxes your accountant will show you on your annual statements In our industry typically the primary difference between EBITDA and net income is depreciation Return on current earnings to possible market value 4 percent pre tax income of 100000 25 million of market value opportunity of 500000 EBITDA x fi ve multiplier In this example we assume this business is underperforming to the tune of 10 per gallon EBITDA a highly realistic possibility A nickel margin increase in all gallons plus operating expense reductions of 100000 gets you to the 200000 additional EBITDA or a total of 500000 25 per gallon EBITDA For whatever reason simply assume that the higher performance is achievable The point is that in comparing your current return to what can be its highly possible that your current pre tax return is substandard Here are some fi nal thoughts 1 Returns based on historic costs ignore the reality of the market value of your current investment in the propane business 2 If you have been deceived into thinking that your returns are adequate but in reality youve learned they are substandard compared to a return against fair market value you may not be asking enough of management in the performance of the business 3 As the underlying value of your investment in the company changes so should your expectations for a return on that investment LPG Carl Hughes is senior vice president of business development for Inergy LP He can be reached at Chughes@ InergyServices com or 816 842 8181 Model assumptions 2 million gallon retail propane distribution single plant operation no debt 1 million of original asset cost 15 million appraised value 300000 EBITDA x fi ve EBITDA multiple Per gallon metrics 60 per gallon gross margin 45 per gallon operating expenses excludes depreciation 15 per gallon EBITDA Operating metrics 1200000 gross margin 900000 operating expenses 300000 EBITDA 200000 depreciation 100000 pre tax income When assisting clients with the insurance bid management process I help create options Options that benefit my clients All brokers sharpen their pencils when they know they have a knowledgeable third party auditing B I D S their work Allow me to put their feet to the fire on your behalf My bid management services can create significant savings that will go straight to your bottom line Providing options that save you money JAYJOHNSTON BUSINESS INSURANCE CONSULTING The Safety Leader Call Toll Free Today @ 888 725 2705 Visit www thesafetyleader com to register for your free subscription to my safety newsletter SAFETY AUDIT INSURANCE AUDIT BID MANAGEMENT SAFETY PROGRAMS PRESENTATIONS www LPGasmagazine com March 2010 LPGas 61
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