FIVE THINGS to Consider Before You Sell Your Oilfield Services Business

A Western Canadian Perspective

By Reece Tomlinson, President and CEO, RWT Capital

For many Western Canadian oilfield service entrepreneurs, selling a business represents the culmination of decades of hard work, personal sacrifice and calculated risk.

These businesses are rarely built in boardrooms. They are built in shops, field offices and worksites—often through volatile commodity cycles, difficult winters, changing regulations and intense competition. Owners have invested their capital, reputations and countless hours establishing relationships with producers, employees, suppliers and communities.

However, successfully selling an oilfield services company requires more than finding an interested buyer. The decisions made well before the business goes to market can significantly affect its valuation, deal structure and the amount of money the owner ultimately retains.

Here are five important considerations for Western Canadian oilfield service business owners contemplating a sale.

1. Understand Why You Want to Sell

Before beginning a transaction, owners should be clear about what they want to accomplish.

Is the objective to retire completely? Reduce personal financial risk? Bring in a growth partner? Create liquidity while retaining an ownership interest? Provide opportunities for the management team? Or position the company for expansion into new markets?

The answer will influence almost every aspect of the transaction.

An owner seeking immediate retirement may favour a complete sale to a strategic buyer. Another may prefer to sell a majority interest to a private equity firm, continue managing the business and participate in its future growth. Some owners may pursue a management buyout or a transition to the next generation.

Price is important, but it should not be considered in isolation. The highest offer may come with conditions, earnouts, restrictive terms or expectations that do not align with the owner’s personal objectives.

A successful transaction begins with a clear definition of success—not simply a target valuation.

2. Prepare the Business Before Taking It to Market

Many owners wait until they are ready to sell before preparing their company for a sale. By then, opportunities to strengthen value may be limited.

Ideally, preparation should begin well in advance of a transaction. Buyers want reliable financial information, defendable earnings and confidence that the company can continue performing after the owner steps away.

Preparation may include:

• Producing accurate, timely and consistent financial statements.
• Separating personal or non-operating expenses from business expenses.
• Documenting recurring revenue and long-term customer relationships.
• Reviewing equipment condition, ownership and capital expenditure requirements.
• Resolving outstanding legal, tax, environmental or regulatory matters.
• Ensuring employment agreements and corporate records are current.
• Developing credible budgets and financial forecasts.

Owners should also understand the difference between reported earnings and normalized earnings. Privately held businesses often contain discretionary expenses, owner compensation adjustments or unusual one-time costs. Properly identifying and supporting these adjustments can materially affect the earnings figure on which buyers base their valuation.

Preparation creates confidence. Confidence reduces perceived risk, and lower perceived risk can result in a stronger valuation and better transaction terms.

3. Recognize How Buyers Will Assess Risk

Western Canadian oilfield service companies operate within a cyclical and highly specialized market. Buyers will closely examine the risks that could affect future earnings.

Customer concentration is often one of the first areas reviewed. A company may be highly profitable, but if one producer represents a large percentage of its revenue, a buyer may discount the valuation or require additional protections in the transaction.

Other common areas of concern include:

• Dependence on the owner for sales and customer relationships.
• Reliance on a small number of key employees.
• Exposure to one basin, commodity or service line.
• Aging equipment or significant future capital requirements.
• Short-term contracts or limited revenue visibility.
• Safety performance and environmental liabilities.
• Seasonality and sensitivity to producer capital budgets.

Not every risk can or should be eliminated. The goal is to identify material risks early, address those that can be corrected and clearly explain how the remaining risks are managed.

For example, customer concentration may be less concerning when relationships have existed for many years, work is supported by master service agreements and the company provides a specialized service that is difficult to replace.

Owners know the strengths behind the numbers. The challenge is documenting those strengths so that a buyer can recognize and value them.

4. Choose the Right Buyer and Transaction Structure

Different buyers value businesses differently.

A strategic buyer may be willing to pay more because it can combine operations, eliminate duplicated costs, add new customers or expand geographically. A private equity buyer may place greater value on the management team, recurring cash flow and opportunities to grow through additional acquisitions. A management team or family successor may provide continuity but require more creative financing.

The structure of the transaction can be just as important as the headline purchase price. Owners should carefully evaluate:

• How much will be paid in cash at closing.
• Whether part of the price is tied to an earnout.
• Whether the seller is expected to provide financing.
• The amount and duration of any escrow or holdback.
• Working-capital requirements at closing.
• Whether the owner must retain or reinvest equity.
• Employment, consulting and non-competition obligations.
• The tax consequences of an asset sale compared with a share sale.

A higher offer containing a substantial earnout may ultimately be less attractive than a slightly lower offer that provides greater certainty at closing.

Owners should compare the complete economic and personal implications of each proposal—not just the number appearing at the top of the offer.

5. Assemble the Right Advisory Team Early

Selling a business is typically one of the largest financial transactions an entrepreneur will complete. It should be approached with the same care used to build the company.

An experienced advisory team may include a mergers and acquisitions advisor, transaction lawyer, tax specialist, accountant and wealth advisor. Each plays a different role in protecting the owner’s interests and helping the transaction move efficiently.

Bringing advisors in early can help owners:

• Establish a realistic valuation range.
• Identify issues before buyers discover them.
• Organize financial and operational information.
• Develop a confidential marketing strategy.
• Create competitive tension among qualified buyers.
• Evaluate offers and transaction structures.
• Plan for taxes and the investment of sale proceeds.
• Maintain confidentiality with employees, customers and competitors.

Confidentiality is particularly important in the Western Canadian energy services sector, where companies, customers and employees are often closely connected. An uncontrolled sale process can create uncertainty, encourage competitors to target customers or staff and potentially damage the business before a transaction is completed.

A disciplined process allows the owner to continue operating the company while the advisory team manages buyer outreach, information requests, negotiations and due diligence.

Planning Ahead Protects Value

The strongest time to sell is generally when a business is performing well, its outlook is positive and the owner is not under pressure to complete a transaction.

Oilfield service owners cannot control commodity prices, producer spending or capital markets. They can, however, control how prepared their business is, how effectively its value is communicated and how the sale process is managed.

Even owners who are several years away from a transaction can benefit from understanding what buyers will eventually examine. Early planning provides time to strengthen management, diversify revenue, improve reporting and address issues that could otherwise reduce value.

Selling an oilfield services business is not simply a financial event. It is a transition involving the owner’s employees, customers, family, reputation and legacy. The best outcome is one that recognizes the full value of what has been built while positioning both the owner and the company for their next chapter.

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Reece Tomlinson is President and CEO of RWT Capital, an investment banking firm advising business owners on mergers and acquisitions, capital raising and strategic transactions.

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