One of the most difficult business decisions and processes for trucking company owners is developing a succession plan, or determining the best timing for a sale to maximize value. Often owner concerns involve the welfare of employees, or the impact on the community home to the business. If transition to the next generation is the desire, issues related to equitability among children participating in the business with those pursuing other dreams can be challenging.
A study by the Business Enterprise Institute, Inc. found in 2012 41 percent of businesses were transitioned to key employees, co-owners, or Employee Stock Ownership Plans (ESOPs). While 29 percent were sold to third parties and 24 percent were transferred to children. Regardless of the potential acquirer of the family business, understanding and knowing the trucking company’s value is paramount.
Valuation professionals commonly use three approaches in determining an estimated value of closely held businesses.
1. The income approach, or discounted cash flow method, analyzes the projected free cash to be generated by the business. This cash stream is discounted to determine a value.
2. The market approach, or guideline public companies method, compares the target company with publicly-traded companies. The market approach will compare price to earnings, revenue and book of public companies in calculating the value of the closely held business.
3. Lastly, the asset approach is simply relying on the appraisal of the underlying assets as if the equipment is to be sold. The asset values can differ depending on if an orderly liquidation, or forced liquidation scenario is assumed.
Family succession of transferring leadership and ownership to the children usually works best when done over time. It is difficult to predict the future success of the business under the next generation without mentoring and time spent learning the business before the hand-off. Complete or partial transfers of ownership can be done through various tax strategies such as Grantor Retained Annuity Trust, Defective Grantor Trust and Family Limited Partnerships. If planned properly in advance, these strategies can minimize, or eliminate, estate and gift taxes.
Selling to an outside buyer can occur through an IPO in the public markets; however, for family-owned trucking companies this can be an expensive endeavor and usually only practical for the largest of the large privately-held carriers. Private buyers often fall into one of two categories; strategic buyers and financial buyers. A strategic buyer is often a competitor, or in the industry, and can justify a premium valuation for the business knowing savings and profit will be achieved through synergies and gains in market share. A financial buyer will be driven primarily on the investment return the business can generate. The financial buyer is capitalizing on ways to improve and increase the business valuation for a not so distant flip of the company.
An ESOP transaction is the sale of the company stock to a qualified pension plan. An ESOP allows trucking owners to reward employees and maintain jobs in the community in a tax efficient manner. Attributes of an ESOP candidate include capable management team, debt capacity and cash flow to support ESOP debt service, company size and motivation of tax advantages. Cash flow of a post-ESOP S-corporation is greatly improved since there is no federal tax on the ESOP-owned portion. A sale to an ESOP can be for 100 percent of the stock or a lesser percentage. An ESOP’s purchase price is often less than what a strategic or financial buyer can offer for the company since an ESOP can only pay what the business cash flow can service. However, because of advantageous tax treatment to the seller, after tax proceeds could be greater.