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Mid-Management: Dreams of Owning a Business

Have you always dreamt of owning your own business? What about having your boss’ job? If you are in management and in a privately owned company, it might be possible for you to be the boss and the owner one day. However, many mid-level managers do not know how to accomplish their dream of owning a company that currently employs them. The good news is that your dream can become a reality.

One of the challenges of transitioning from an employee to a business owner is thinking like a business owner. As an employee, your manager/owner provides guidance, and often you may not question the guidance. As a business owner, you make all the decisions, set goals, and create a plan that will drive the future of the company. Then, you will be the one that has to drive and financially fund the vision. Yes, you will develop mentors around you, but as a business owner, you are the one that benefits and suffers from the positive and negative outcomes of your decisions.  

While you may work long hours currently, be prepared for a more immense workload and additional hours. Employees have a work schedule, and business owners that operate the company do not have work schedules. You are on call 24/7, and it is hard to get away from the business as you always carry that burden with you. Vacations are interrupted and weekends are often spent at the business. However, if you are in a place in your life where you can dedicate the required time, mentally and physically, to the business, the long term pay-off, whether it be financial or time freedom, can be significant.

Interview your owner and shadow him/her if possible. Ask the company owner for insight into their day. Understand the stresses that the business owner deals with daily. Some of the stresses will be confidential, such as employee issues or financial issues, so anticipate that your receiving limited insight.

 

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Then commit to making your dream a reality. Ask the business owner their exit strategy. Some owners may be open to a slow exit where you can purchase the company over a few years, or they may want a clean exit where you have the option to purchase the company immediately and the current owner walks away after a short handover period. Having an introductory conversation about your interest in purchasing the company is going to be important. Once you understand the business owner's personal goals regarding their exit, it will allow you to structure a deal to achieve both parties' goals.

It is important to prepare your financing so you know how much you can afford. This knowledge is key to structuring an offer. The business owner will need to share the information around the business' performance for a bank to underwrite an acquisition. The company's current banker might be a good starting point. After your conversation with the business owner, ask if they would be open to making an introduction to the company’s banker. The banker understands the business and risk as they have underwritten the business previously. Their goal would be to underwrite the business to incorporate the new ownership. 

Be patient and ask for help when needed. Purchasing any business can be an emotional process. If you have never been through the process previously, you may need to seek help from your advisers or hire an experienced buyer side M&A advisor. There are many resources available to you to help with the purchase.

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Understanding Working Capital

Working capital, also referred to as net working capital, is the measure of a company's liquidity, operational efficiency, and short-term financial status. It is the difference between a business’s current assets, its inventory of materials and goods, and its existing liabilities. Net operating working capital is the difference between current assets and non-interest-bearing current liabilities. Typically, they are both calculated similarly, by deducting current liabilities from the current assets. So, essentially, if a business’s current assets total $500,000 and its current liabilities are $100,000, then its working capital is $400,000. But there are a few variations on the calculation formula based on what a financial analyst wants to include or exclude:

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Reasons For Optimism In An Uncertain Oil & Gas Market

In December 2020, U.S. Energy Secretary Dan Brouillette told CNBC's Hadley Gamble that American shale producers should be concerned about their industry's future.[1] Secretary Brouillette stated: “…there are some in Congress who are going to drive a climate policy that's going to be very aggressive. So there may be a concern on the part of those folks, I know the ESG (Environmental, Social, and Corporate Governance) movement is very strong.” Secretary Brouillette also added that, “The investment money may become a bit more difficult to get,” and, “Those are all policies where we’ll have to wait and see what happens with this new Congress.”

While it may be politically convenient for those in a Republican administration to criticize their incoming Democratic successors, oil and gas investors should be hesitant to trust outgoing bureaucrats' economic analyses. Reasons for investor optimism can be found in past administration precedents' realities, current stakeholder adaptions, and the future uphill battle facing any reforms backed by President Joe Biden and his cabinet.

Obama-Biden Administration Precedents

For more than a decade, President Barack Obama’s Democratic party was conveniently used as the boogeyman for Republican politicians’ intent on gaining the favor of oil and gas companies and investors. However, in retrospect, the Obama administration—which included then-Vice President Biden—was a far greater friend to the industry than most pundits speculated. That administration’s treatment of the industry can be a useful precedent for setting appropriate expectations for the Biden administration’s treatment of the industry.

Obama’s tendency to favor working with the energy industry rather than to impede it led to drastic and unexpected results.[2] By the end of his two terms in office, natural gas had realized a massive uptick in both production (a 35% increase) and consumption (a 19% increase). In December 2015, Obama threatened to veto the North American Energy Infrastructure Act, which would have repealed 40-year-old oil export bans.[3] This would ultimately prove to be posturing for political negotiations, as Obama would go on to approve the export of U.S. crude by signing the 2016 omnibus budget just weeks later.[4] The Obama-Biden administration also loosened restrictions on LNG exports. Under their administration, the U.S. Department of Energy approved 24 LNG export licenses and denied none.[5]

This unexpectedly moderate approach by Obama can be accredited to two primary domestic policy issues: national security and climate change. Commentators frequently constrain their negative analyses of oil and gas's future with a reminder that domestic energy independence remains an important consideration in national security. While debate exists on whether American “energy independence” could indeed ever exist given the reality of American import trends, regulations on the industry will continue to be tied to deliberations on the country's reliance on foreign producers.

The second factor in the Obama-Biden administration's relatively moderate industry regulation was, surprisingly, climate change concerns. In particular, Obama's unexpected friendship towards natural gas has been credited to his administration’s belief that natural gas could assist in mitigating climate change. Forbes wrote in 2019 that President Obama, “supported natural gas as an essential strategy to cut greenhouse gas emissions by displacing coal and also backing up intermittent wind and solar power.” His treatment of LNG exports ultimately proved consistent with President Donald Trump's treatment of the natural gas industry. At a press conference in early 2019, Dr. Fatih Birol, the Executive Director of the International Energy Agency, stated that over the past decade, “the emissions reduction in the United States has been the largest in the history of energy.”[6] Standing by his side at this press conference—which essentially credited the energy policy continuity of Obama/Trump with this success—was Trump’s own Secretary of Energy, Rick Perry.

 

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Stakeholder Adaptions in the Face of Progressive Policy Initiatives

Secretary Perry’s comments in that same press conference are indicative of what the private sector has worked to accomplish while operating under burgeoning public pressure to address climate change concerns. He stated that, “without carbon capture, any planned climate target is impossible to meet.” Carbon capture, commonly referred to as carbon capture and storage (CCS), uses technology to capture the release of carbon dioxide during fossil fuel usage. After capturing the gas, operators transport it to an underground storage facility. The method has become an increasingly popular solution amongst producers to manage emissions and mitigate environmental damage.

While elected officials continue to negotiate and posture on broad regulatory changes like the Green New Deal, private sector stakeholders are already acting to appease investors and the general public. While some in the industry may complain of the costs associated with mitigating environmental damage, industry leaders are exploring and embracing new climate-friendly technologies as a necessary pivot to maintain vitality. Dr. Vijay Swarup, Vice President for Research and Development at ExxonMobil, stated, “breakthroughs like the deployment of carbonate fuel cells at power plants are essential for reducing emissions, while at the same time increasing power generation and limiting costs to consumers.”[7] ExxonMobil developed those carbonate fuel cells in partnership with FuelCell Energy, Inc. as a tool for capturing CO2 during the CCS process.

Integrating alternative energy into existing operations has also proved to be a successful survival strategy for oil producers. Chevron announced in July 2020 that it would make a major investment in renewable energy plants to power its oil production facilities in the Permian Basin and abroad.[8] This was by no means the first investment by a major player to test such a production structure. ExxonMobil made a similar investment in 2018, purchasing 500 megawatts of wind and solar power in Texas. And Chevron had already run a pilot program by purchasing a smaller amount of West Texas wind energy to power some of its operations, as well.

At the time of their 2020 purchase, Chevron spokesperson Veronica Flores-Paniagua wrote: "What has changed is the cost of wind and solar power, which is becoming more competitive, and the technology, which has also progressed substantially. This makes opportunities to increase renewable power in support of our operations a feasible option for reliability, scale, and cost-effectiveness."

Ultimately, each producers’ bottom line will determine whether such ventures into renewables are sustainable. But while producers find creative ways to appease shareholders and adapt, any future inhibiting regulatory actions still face significant challenges to be enacted.

Political & Legal Hurdles for Biden Energy Regulations

On January 20, 2021, former Vice President Joe Biden was sworn in as the 46th President of the United States. Some experts predict his administration will bring major regulatory changes for the oil and gas industry to appease his own Democratic party's growing progressive subsection. Others are more hesitant, noting the relatively moderate nature of his cabinet selections and campaign pledges to refrain from banning fracking.[9]

Most onlookers, experts or not, expect some energy-related regulatory changes. Among the most common expected policy shifts is a ban on new fracking on federal lands. This led to a mass fire sale by former President Trump’s Bureau of Land Management, auctioning off parcels of land in various parts of the United States to accelerate drilling before the change in administrations. Producers are gearing up for a fight, both in the courtroom and in the eyes of the public. Mike Sommers, Chief Executive of the American Petroleum Institute (API), told Reuters in November 2020 that API would “use ‘every tool at its disposal’ including legal action” to prevent restrictions by the Biden administration.

Potential regulations and green initiatives could go either way in reaching Biden's desk for a signature. Republicans, who are historically more friendly to the oil and gas industry, hold 50 Senate seats, but with Vice President Kamala Harris casting the tie-breaking vote, they are formally the minority party. President Biden has already signed an executive order revoking the permit for the Keystone XL Pipeline, a move which many experts in the U.S.’ Permian Basin are optimistic about for those in West Texas as it reduces direct competition to those producers.

Conclusion

While fears on the future of oil and gas have merit and can be validated by recent trends, production will not cease for the foreseeable future. If Biden's administration reflects the values of the Obama administration, things may not be as negative as has been suggested. Within the oil and gas industry, private stakeholders have already spent the better part of a decade learning to adapt and continue production through carbon capture and storage methods. And any future regulations will face difficulties every step of the way, with major players vowing to fight tooth and nail to defend the industry. Investors should proceed with caution, but there is still room for optimism and opportunities for growth and success into the near future.

Sources: 

[1] CNBC 

[2] Forbes 

[3] Reuters 

[4] Investor's Business Daily 

[5] Lexology 

[6] Oilprice.com 

[7] ExxonMobil 

[8] GTM

[9] API

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Why You Should Consider Private Equity

How Private Equity Works

Private equity firms raise financing from institutions and individuals and then invest those funds into the buying and selling of businesses. Once a pre-specified amount is raised, the fund closes to new investors and is liquidated. All of the fund’s businesses are sold within a set timeframe that is typically less than ten years. The more successfully a PE firm’s funds perform, the better its ability to raise money in the future.

PE firms do accept some limitations on their use of investments under fund management contracts, such as the size of any single business investment. Once the money has been committed, investors have nearly zero control over its management, unlike a public company’s board of directors. 

The leaders of the companies within a private equity portfolio are not members of the PE firm’s management. Private equity firms control its portfolio companies through representation on the boards of those companies. It is common for a PE firm to ask the CEO and other business leaders in their portfolios to invest personally. This offers a way to ensure their level of commitment and motivation. In return, the operating managers can get significant rewards that are linked to profits when the company is sold.

With large buyouts, PE funds usually charge investors a fee of around 1.5 to 2 percent of assets under management, plus 20 percent of all profits (subject to achieving a minimum rate of return). Fund mostly profit through capital gains on the sale of portfolio companies.

How Private Equity Improves Value

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