When it comes to sub-jobber agreements, the parties involved can have opposing goals.
For marketers planning a short to midterm business sale and industry exit, an improperly configured sub-jobber agreement could pose many costly challenges. We have addressed numerous sub-jobber agreements over the years and based upon this experience several common areas can be addressed in the formulation of an optimal agreement.
The creation of sub-jobber agreements accelerated 10 or 15 years ago when oil companies increased their annual minimum gallon requirements in an effort to cull the herd of smaller marketers.
Operational efficiencies were gained by decreasing the number of marketers without the loss of overall volume. Some suppliers proactively promoted the formation of joint ventures and/or encouraged the formation of sub-jobbership relationships through workshops and seminars. Essentially the smaller sub-jobbers became customers of the larger primary marketers, who would be the source of product while assuming the direct branding responsibilities with the respective oil companies.
Over the years ,sub-jobber agreements have ranged from informal relationships between friendly marketers to very formal arrangements. They generally involve a one half to one cent per gallon (CPG) markup for the primary marketer, with the prompt pay discount (PPD) passed on to the sub-jobber. Without the benefit of the PPD, the monetary value of a sub-jobber agreement is limited.
A purchase multiple is assigned based upon the expected gross profit and remaining term of the agreement. As such, many primary marketers have developed comprehensive agreements to maximize value, much like tight dealer supply agreements. These agreements are long term in nature and have definitive lost profit, “make whole” provisions, whereby early termination results in a requirement that the sub-jobber pay the expected CPG margin to the end of the contract. Other provisions add further complexity in the event of early termination. These iron clad agreements may pose significant problems in the event that the sub-jobber business is sold prior to the expiration of the agreement.
When viewed from a business valuation and divestiture standpoint, the parties involved have diverse opposing goals. Primary marketers seek maximum contract ratability and value, while the sub-jobber desires the ability to easily and inexpensively exit the contract in the event the business is sold. For marketers planning on a short to midterm industry exit, care must be taken that the agreement is properly crafted.
For smaller marketers where the sub-jobber relationship is the sole or primary source of branded supply, following are some tips that will prove beneficial should the agreements have to be terminated early:
- Consent to the sale: With assumption of full brand responsibility, including unamortized monies and other oil company concessions, the primary marketer should agree to freely release the account to the buyer. Other contract clauses including Right of First Refusal provisions should be avoided.
- Lost profit damages: In the event of a sale, the agreement should be allowed to terminate without damages being incurred.
- Confidentiality: The primary marketer should maintain confidentiality to the existence and terms and conditions of the agreement. Optimally, the dealers and motoring public should continue to believe that the sub-jobber still maintains a direct relationship with the subject oil company.
The optimal arrangement is to maintain an arm’s length relationship with the primary marketer, focusing solely on the seamless supply of branded product, while limiting direct brand-related or other monetary investments with the sub-jobber dealer accounts. The less intertwined the two businesses are, the easier it will be to unwind the relationship in the event of a sale. Although many sub-jobber agreements are entered into in a seemingly friendly and informal posture, when the sale of a business is imminent, rest assured that the documented terms and conditions of the agreement will guide the unwinding of the relationship. Great care and diligence must be taken when assessing a primary marketer with whom to formally engage.
Primary marketers entertain sub-jobber relationships for varying reasons; don’t assume that the best option is the one located closest to the business. Explore various alternatives and be upfront about your strategic needs and expectations. Given the timing of a possible sale, sometimes accepting a higher CPG mark-up in exchange for the other key concessions is smart business and will pay dividends in the end.
Mark Radosevich is a 40-year petroleum professional and active industry advocate. He is president of PetroActive Real Estate Services, LLC, offering confidential mergers & acquisition advisory support and financing services exclusively to petroleum wholesalers. Contact him at [email protected] or call (423) 442-1327. Additional company info can be found at www.petroactive.net.