A version of this article was originally published in Beyond Trucks in February 2023.
The 1980 Motor Carrier Act signed into law by President Richard Nixon marked the beginning of the deregulation of the interstate transportation industry. This deregulation brought significant entrepreneurial opportunities for trucking companies founded in the 1980s and 1990s.
Some trucking companies founded during this era have become sizable, family-owned businesses. Their founders, many of which are still actively involved in the day-to-day operations, are assessing their transition alternatives, balancing their personal financial needs, and protecting their legacy.
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Overview of Business Valuations
During succession planning, estimating the value of a trucking business is a critical exercise. Owners need to understand the rationale and drivers behind value to prepare their company for a sale or handover.
Company appraisers use a variety of valuation techniques to arrive at the fair market value (FMV) of a company, which is the price a willing buyer would pay to a willing seller for a trucking company, with both parties having reasonable knowledge of the relevant facts.
Before You Sell
In preparing a company for sale, owners should assess and improve the income prospects and risk profile of the company to achieve maximum value. Most investors determine the value of the business by assessing the carrier’s operating income generated during the ordinary course of business, typically using free cash flow or earnings before interest, taxes, depreciation, and amortization (EBITDA) as a proxy.
Risk factors, such as hidden liabilities or the sustainability of income projections, may result in an investor applying a higher risk premium to a business, resulting in a lower purchase price. Therefore, trucking company owners should demonstrate the ability to sustain or grow the current level of income even after the departure of an owner.
How Much Is Your Business Worth?
Estimating the value of your business is a critical and sobering exercise during succession planning. Understanding the rationale and drivers behind value is critical for owners of trucking companies in preparing for sale or transfer.
Company appraisers have in their quiver a variety of valuation techniques to arrive at the FMV of your company.
To understand FMV, it’s indispensable for sellers to not solely articulate their own expectations, but also understand how buyers shop for trucking companies. Buyers, whether institutional or not, take into account whether the purchase is worth the money. Buyers typically derive their purchase price by evaluating the cash flow potential of the trucking company and applying their target rate of return to such cash flows.
For example, if a carrier generates $1 million in net cash flows and the buyer targets at least a 10% return, the price the investor is willing to pay is at most $1 million divided by 10%, which is 10 times its net cash flows or $10 million. Buyers may adjust their target rate of return based on their perception of risk to be compensated appropriately for taking on more or less risk.
As a seller, carriers need to understand that there’s little they can do about a buyer’s target return expectations, but there’s a lot to enhance a buyers’ perception of income potential and risk. Therefore, in preparing a company for sale, owners should assess and improve the income prospects and risk profile of the company to achieve maximize value.
Income
In most market environments, the potential lies in the value of the business to generate future cash flow. A typical approach for investors to determine the value of the business would be to assess the carrier’s operating cash flows generated during the ordinary course of business such as providing transportation or logistics services.
Most investors prefer reviewing income in the form of cash flow—typically free cash flow or EBITDA as a proxy—rather than accounting profits, US generally accepted accounting principles (GAAP) net income, which are more sensitive to accounting assumptions and certain non-cash income and expense items. There have been a few unusual cases where equipment prices spiked due to supply chain congestion and the value of the company’s tangible asset was higher than the traditional FMV model based on a company’s operating cash flow .
In those instances, trucking companies traded based on the value of their fleet of equipment, the cost approach valuation model, rather than by the value of the operating business, the income approach valuation model which generally relies heavily on discounted operating cash flows.
Risk
A variety of risk factors may result in an investor applying a higher risk premium to your business, demanding a higher return which lowers the price the buyer is willing to offer. Such risks can be embedded in hidden liabilities such as unresolved lawsuits or other third-party claims, potential state and local tax exposures, or the sustainability of income projections.
For better pricing in a sale, owners, especially those where the business is anchored around one individual, should demonstrate the ability to sustain or grow the current level of income even after the departure of the owner.
Key Valuation Methodologies
Appraisers can estimate the value of your trucking company using multiple techniques.
Discounted Cash Flow Analysis
This technique, which is an income approach to valuation, involves forecasting the future cash flows of your trucking company over a period, often ranging from five to 10 years, and discounting them back to the present using an appropriate discount rate.
Asset-based Valuation
This technique, which is a cost approach to valuation, involves valuing the trucking company based on the value of its assets, including both tangible assets such as property and equipment and intangible assets such as patents, trademarks, customer relationships, or data.
Earnings Multiple Analysis
This technique, which is a market approach to valuation, involves determining the value of the trucking company based on revenue, profit, or both, and a multiple of revenue or profit to arrive at a valuation. Reference points for multiples are typically public trucking companies’ price-to-earnings or total enterprise valuation to revenue (TEV/Rev) ratios. These ratios are then adjusted based on the subject carriers’ unique facts and circumstances.
It's important to note that no single valuation technique is perfect, and it’s often necessary to use a combination of techniques to arrive at a reliable estimate of value.
We’re Here to Help
For guidance preparing your business for a sale or estimating the value of your business, contact your Moss Adams professional.
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