BUYERS OR SELLERS?: Buyers like Mullen tend to seek out companies with solid management, a good customer base and interesting specialties.Photo by James Menzies
TORONTO, Ont. – Consolidations continue to be all the rage in the Canadian trucking industry, with large corporations routinely gobbling up smaller, family-run trucking fleets.
It’s a trend many experts claim is not going to reverse itself anytime soon – largely because the average age of trucking company owners is increasing and there aren’t a whole lot of young entrepreneurs with grandiose visions of starting their own trucking firms.
The Canadian Federation of Independent Business reports that in the next five to 10 years, 71% of business owners plan to sell their companies. However, only 35% of those surveyed had a clear exit strategy and only 7% had a written plan in place. The study found 60% felt planning could simply wait, but the time to start planning is now, Sean Figueroa, finance advisor with BMO Nesbitt Burns, warned at the recent Ontario Trucking Association convention.
He pointed out that only one-third of family businesses survive the transition to the next generation, and many failures can be attributed to lack of planning.
“There are costs to not having a plan – it significantly limits your options,” he said. “Without having a plan, you have an increased rate of failure.”
One of the first steps in selling your business is establishing its value. Business valuation experts such as Lorne Kirsch, a chartered business valuator with American Appraisal, can assist with this process.
In its simplest form, fair market value can be established through this formula: Multiple x Earnings = Company Value. But what factors drive the ‘multiple’?
“I’m not going to buy your company because I like the rugs – I’m after cash flow,” Kirsch said. “If you have cash flow, people are going to be interested.”
Variables that positively influence value include: A buyer’s desire to eliminate you as a competitor; your involvement in a niche market; a substantial customer list and solid, long-term contracts; company stability; and a reliable stable of drivers.
The ‘multiple’ can be negatively impacted by factors such as: Rising fuel/maintenance/insurance costs; unrelated assets (such as that condo in Florida); and government regulations (such as the recently-announced revamping of income trust taxation laws).
“All of these factors put together drive the multiple,” Kirsch said. “You can’t take a specific multiple and apply it across the board.”
A business valuator can help you determine the selling price before listing your business. There are two main types of acquisitions in the trucking industry: Asset- and earnings-based. Pricing an asset-based company is very simple, Kirsch explained, as the price can be reached by totalling up the value of a trucking company’s vehicles and facilities. In an asset-based transaction, the buyer is not paying for cash flow.
An earnings-based transaction focuses on cash flow, profit and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
In most recent acquisitions, buyers are looking for more than just assets, said Cameron Turner, CFA with M&A Advisory Corporate Development International.
“Buyers aren’t paying for hard assets, they’re paying for something else like location,” he said, adding the Alberta market is hot right now, inflating the value of carriers based there.
Other soft assets (which amount to about two-thirds of the purchase price in most recent deals) include: routes/customers; load types; drivers; management staff; and technology.
Cameron pointed out today’s buyers are looking for companies that have a solid workforce and management team.
“Well-managed businesses are something that attract attention,” he insisted.
Kirsch has analyzed some recent trucking industry transactions and determined some sample ‘multiples’ (see chart).
(*Harmonic multiples give a smaller value to instances where the transaction value was skewed by numbers that were either outlandishly high or low. This could occur, for instance, if a company is sold to a family member for well below market value.)
You can get a rough idea of what your company is worth by using the above chart. If it’s a private company, you can tally the value of all your assets (minus liabilities) and then multiply that figure by 1.63 to determine the average recent selling price of a company similar to yours. (The figures above were based on trucking companies with annual revenues between $4.2 million and $60 million).
Clearly, the multiple tends to be higher for public companies – a fact Kirsch attributes to the liquidity of public companies. Buyers can sell their shares in the company at any time. Selling your business may seem overwhelming, which is why Kirsch advises hiring a business valuator.
“Your company is probably the biggest asset you’ll ever own, so don’t sell it short,” he said.