Oil and Gas Industry Business? Have a Backup Plan

Planning for a business succession is difficult for most business owners. Perhaps you grew the business from the ground up, or you took it over from your family and built upon a proud tradition. Naturally, you want your company to continue growing and thriving, and you want to be sure your employees are taken care of after you have turned over the reins to someone else.

But it’s a changing world, and the oil and gas industry is a volatile place. Planning for your exit – whether you intend to succeed the company to your children or sell it to a third party – will require internal preparation and external vision. Above all, it will require honesty and realism, as owners of oil and gas companies face complex issues that are unique to the industry, and that require careful consideration years in advance of a business sale.

Like all business owners, oil and gas operators and service company owners can get a handle on succession planning by breaking it down into three primary segments – time horizon, preparation of the company and determination of who will be the next owner.

Time Horizon

Owners should start planning a minimum of five years in advance of their planned exit, and more optimally 10 or more years. It takes time to prepare a business for sale and identify the next owner. If that owner will be one or more of your children, it may take time for them to gain the education and experience necessary to run the business.

Advance planning in the oil and gas industry can be tricky, though, as economic conditions can change radically, throwing well-laid plans into disarray. Moreover, the unpredictability of accidents, injuries, and illness also can alter succession plans unexpectedly. Be flexible and have a backup plan.

By having these discussions now with accounting and tax advisors, they can offer ideas about how to prepare your business to maximize its value.

Preparing your Company

You’re going to need that five to 10 years to prepare your company for succession by making improvements, cleaning up the balance sheet and identifying a buyer if the company will be sold to an outside party. If you are keeping the business in the family, this is the time for the new owners – perhaps your children or other relatives – to rotate through the company, learning every facet of its operations and gaining the trust of employees.

Obtain a business valuation at the beginning of the planning process. Why at the beginning? It will give you a benchmark valuation against which you can compare another valuation when you are three to five years into the preparation process. You will be making changes and improvements that should boost the valuation, such as:

Technology – You may not have made significant investments in technology at this point if market conditions didn’t support them. But looking out to the future, would prospective buyers find more value in your company if you made the investments now or in the next couple of years? If your children are taking over the business, would technology improvements help them streamline staffing and operations by automating some functions? After all, you may not be the only one retiring. Some of your key managers may also decide it’s time to go fishing, and technology improvements may help fill the skills gap.

Software programs that are developed for the oil and gas industry can help compensate for labor shortages that continue to impact Kansas operators. In particular, accounting programs that are specific to the oil and gas industry – coupled with staff training – can help maximize the value of your business by streamlining operations and broadening the knowledge base of your people.

Financials – As an operator oil and gas leases, now is the time to look at the wells and leases you hold that should be plugged and abandoned to get them off the balance sheet. A prospective buyer will look at those assets and ask if they have been properly abandoned or if the buyer will assume any responsibility. This will impact your valuation.

Family Ownership

If your plan is to succeed your company to the next generation of family owners, planning for years in advance is critical. Some of the questions to consider are:

  • If the company will be owned by one son or daughter, is he/she sufficiently educated and qualified to own a business in the oil and gas industry? If it will be owned by two or more siblings, are their skills and roles clearly defined?
  • Have they learned the business from the ground up?
  • Have they earned respect within the industry?
  • Most importantly, does your son or daughter want to own the business? This requires forthright communication within the family. If that’s a problem, call in a trusted outside advisor to help facilitate the conversation and serve as an objective moderator.

Succeeding an oil and gas operator or service business to a son or daughter can be fraught with emotion. The roller coaster nature of the business leads some owners to not want the highs and lows for their children.

In some families, one child may be involved in the business while others have pursued other careers, and the owners worry about how to be fair to all their children when they exit the business. Don’t let these issues delay your succession planning. Discussing these concerns now with your advisors will give you more time to put plans in place that meet your needs and work for your entire family.

Selling to an Outside Buyer

If selling or transferring your oil and gas industry business to a family member is not in the cards, then you are looking for an outside buyer.

Consider working with a business broker who knows the oil and gas market and is connected to potential buyers. It could be beneficial to talk to bankers who are involved in your local industry. They usually know who is doing well in the marketplace, and who might be looking for an acquisition.

Alternatively, you could create a strategic merger with someone you know – perhaps a competitor, a supplier or a long-term customer.

There is a lot to do to prepare a business for sale or succession, and even if you think it’s too early to start planning, it’s not. Getting your house in order can take years, but it will enable you to maximize the value of your business and yield a successful transition.

If you would like to start the conversation about your eventual business succession, please contact an Adams Brown advisor.