This article originally appeared on ttnews.com.
Recent company mergers and initial public offerings have brought the value of trucking companies to the forefront.
Knight Transportation and Swift Transportation merged, and Schneider raised $550 million in its IPO. Daseke shares debuted as part of a deal valuing the company at about $700 million.
While these big deals grab headlines, it seems as if every week there is an announcement that a private equity group has acquired an interest in a transportation company. Given that private equity firms are financial buyers, this isn’t surprising: They are attracted by the size of the transportation space and the positive industry tailwinds that are the subject of many stakeholders’ conversations.
The lessons learned from these acquisitions are valid for every mid-market company — maximize your value now so you are worth more money later. Even if there are no current plans to sell, trucking company owners can take immediate action to increase their company’s value. That means focusing on continued growth, key metric improvement and increased profitability. The byproduct of a heightened focus on company value will be improved EBITDA (earnings before interest, taxes, depreciation and amortization) or FCF (free cash flow).
Financial buyers look at a trailing three to five years of EBITDA performance and a forward projection. However, history is more important than projections as that is what the buyer is paying for. Projections and industry trends are simply the buyer’s upside. In addition to the company’s economics, financial buyers look at the leadership team’s strength, the company’s technology platform, and any other issues that impact financial performance.
The ‘Big Picture’
Due to the day-to-day demands of running a business, it is easy for trucking company owners to focus their efforts on managing staff, financial and technical issues and working with customers.
Andy Manchir, director in Katz, Sapper & Miller’s Valuation and ESOP Services groups, views these efforts as “working IN the business” and cautions against losing sight of the big picture. He suggests that company owners not forget to “work ON the business,” which includes efforts to build a higher company value by focusing on positive cash flow, managing debt, and developing tangible and intangible assets.
The biggest opportunity for a trucking company to increase its value is by improving margins through the active management of its revenue model or freight network.
Freight Network Engineering
Carriers make their money by hauling freight, as that is where the margin is generated. It is an area that is often overlooked or avoided by carriers as it touches the company’s customers, who are the source of the freight, and the drivers that actually haul the freight.
That being said, carriers that invest in freight network engineering technology and professional services to analyze and actively manage their networks can significantly improve their rate per total mile in any market. Additionally, they tend to beat the market and gain more in up markets and lose less in down markets.
Successful freight network engineering initiatives that, by definition, generate a higher margin will translate to a significant reduction in operating ratio. A lower OR translates into higher cash flows, or EBITDA, but more importantly, higher EBITDA has a “multiplier effect” on a company’s value.
For example, if a company were to sell for a five times multiple (or five times its EBITDA), every $100,000 of profit improvement would be worth $500,000 in improved company value. A carrier in this position enjoys a higher valuation and more earnings, and also cash that can be strategically reinvested into the business or distributed to the owners.
Work ON The Business
When establishing a valuation, it is important to assess a company’s overall health in addition to its financial performance. Buyers and sellers of trucking companies must consider a long list of factors when determining value including, but not limited to: driver quality, customer relationships, rolling stock, management strength and experience, risk management, technology platform and more. These are all areas that need to be worked on by the company owner to improve value. It is rare for a potential buyer to automatically offer full asking price for a transportation company on the market — there must be a history that demonstrates the business’ true worth.
The current and near-term environment should continue to attract financial buyers. Trucking company owners need to work ON their business and not just settle for price improvements from a favorable trucking market.
Creating a history of continued growth, key factors improvement and profitability supported by a strong management team and company story will provide trucking companies with more cash to invest in the near term, and their owners with more exit value in the longer term.
About the Author
David Roush is president of KSM Transport Advisors, LLC, part of the Katz, Sapper & Miller Network. With 30-plus years of experience, David’s focus includes freight networks, financial management, operational metrics and optimization strategies. Connect with him on LinkedIn.
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