When Charles Dickens wrote in A Tale of Two Cities, “It was the best of times, it was the worst of times,” he could’ve been writing about the last two years in the trucking industry. He wasn’t. But, he could’ve been.

Trucking companies who enjoyed record profitability amid strong freight demand and limited capacity just one short year ago have seen their fortunes come crashing back to earth as a sudden tightening in freight availability coincided with an increase in capacity and rising costs to create a challenging environment in 2023. Margins were squeezed, profitability crushed, and spot market volumes evaporated. What a difference a year makes.

Those conditions have merger and acquisition experts adapting to a new reality when trying to place valuations on businesses that are up for sale.

“It takes more elbow grease to work through the business; you can’t trust the prior years’ [earnings] like you could before,” Jordan Nix, executive vice-president of M&A advisors Stillwater Capital told TruckNews.com in an interview. “The headline financials just don’t stand on their own anymore.”

That volatility in earnings seen over the past two years may also have temporarily scared some prospective buyers from the transportation and logistics space altogether, adds Peter Stefanovich, president of Left Lane Associates.

“There are fewer private equity companies interested in buying transportation and logistics businesses because of the volatility,” he said. “They’ve kind of taken a step back, whereas transportation and logistics companies and other strategic buyers have come in looking to find accretive purchases that will benefit them in an upcycle market.”

Reviewing 2023, Blaine Mitton of Mitton & Associates tallied more than 20 transactions in the Canadian transportation sector. Indeed, most of the buyers were existing transportation companies making strategic and accretive purchases. Some of the largest deals saw Canadian firms expanding their presence into the U.S. market; Titanium made its first U.S. asset-based acquisition buying Georgia-based Crane Transport and Canada Cartage established a U.S. foothold with its purchase of GTI Group.

Canada’s largest trucking company, TFI International, accounted for nearly a quarter of Canadian trucking M&A deals in 2023.

“It was bigger companies with cash that did deals, but they bought out significant companies,” Mitton said in recapping the year that was.

The effect of higher interest rates

Buyers, after years of access to free money, are now contending with higher interest rates. But Nix doesn’t feel they are a deterrent to deal-making. “I’d say interest rates have impacted it less than other factors have,” he said, citing the aforementioned volatility in earnings and uncertainty around valuations.

But Stefanovich said higher borrowing costs do impact how deals are structured. Higher interest rates give some buyers less purchasing power, which can weigh on the multiples offered. It is also causing buyers to conduct deeper due diligence to ensure their limited capital is prudently deployed.

“The diligence level being done on transactions today versus a year ago is substantially more because of the higher risks associated with high borrowing costs,” Stefanovich said. “The banks, from a borrowing perspective for M&A transactions, require a lot more diligence to satisfy them before they lend the money to the purchaser. So, it takes longer to get deals done and some multiples have come down slightly.”

Buyers in some instances are offering less cash on close than they were in a lower interest rate environment. Stefanovich said in the boom years of 2021 and 2022, it wasn’t uncommon for buyers to offer 80% or more cash on close.

“In today’s market, you’re looking at anywhere from 60-80% cash on close,” he added.

2024 M&A outlook

The struggles faced by truck fleets over the past year, particularly smaller ones exposed to spot market price and volume volatility, mean 2024 is shaping up to be a buyer’s market. Mitton said the reality is some struggling fleets may currently be priced at little more than the value of their assets.

“The economy has not been good this year,” he said. “Profits are down, and volumes and margins are tight, so companies are not as profitable and they’re having to sell on asset value versus a multiple of earnings. A multiple of earnings gives you a lot more money, so people are hesitant to sell these days because they’re not going to get the full value for the company they worked at building for the past 20 or so years.”

Some segments will remain more attractive than others. Stefanovich said there’s always a market for well run companies, and those with a niche or speciality continue to be sought after and command a premium, even during market downturns. Taking cues from the federal banks, Stefanovich thinks interest rates have likely peaked and will begin to come down in future quarters, which should lead to increased deal-making in the second half of 2024.

‘There is always a market for good businesses.’

Jordan Nix, Stillwater Capital

“That’s going to increase the amount of interest, from a psychological space, of getting back into the transportation sector for buyers that have stepped out of that market,” Stefanovich said. “Even a 25 or 50 basis point [decrease in interest rates] in the second quarter of next year will help increase deal activity.”

Nix expects 2024 to be similar to the year that’s currently winding down, as uncertainty persists in the market. In M&A, Nix said a down market doesn’t result in a feeding frenzy, because while valuations may be lower, sellers are also reticent to sell at the bottom of the market. But deals will continue to get done.

“I would say the prevailing wisdom holds true, particularly in these times when there is some uncertainty, in that there is always a market for good businesses,” Nix said.

Positioning for a sale

Prospective sellers should be looking to increase the value of their business by growing earnings, and not focusing on revenue alone.

“Buyers are shrewd enough to know if you’re adding revenue for the sake of adding revenue,” Nix said, adding a buyer will generally be more attracted to a company that earns $12 million profit on $80 million in revenue, than one that makes just $8 million profit on $100 million in revenue. “It’s just a better business.”

‘I’d say 2024 is looking better than 2023, especially now that we know we’ve reached peak interest rates.’

Peter Stefanovich, Left Lane Associates

He urges sellers to clean the business up, knowing any dirty laundry buried in the financials will be uncovered by lawyers during the due diligence process. Mitton said steps can be taken well in advance of selling a business to mitigate capital gains taxes, such as setting up a family trust. That must be done a couple years before a sale, so planning is crucial. The key is to be ready to sell when the right buyer comes knocking, and for many, Stefanovich said that could come as soon as this year. He remains bullish on the space heading into 2024.

“I’d say 2024 is looking better than 2023, especially now that we know we’ve reached peak interest rates,” he said. “I would say, late Q2 is when we’re going to see the cautionary outlook toward transportation go away, even with nominal interest rate decreases. We know we have seen the bottom [of the cycle], if you will, and now we see the light at the end of the tunnel and it’s not that far.”