Driving the Value of Your Trucking Company
For any privately held transportation company, the topic of valuation is frequently top-of-mind for owners. There are numerous factors that impact the direction of valuations, and it is a challenge to keep track of, let alone influence, the abundant drivers of value.
In recent years, company valuations had been positively impacted by tax reform and an overall rising stock market. However, the COVID-19 pandemic resulted in various challenges that tested the ability of trucking companies to adapt to the “new normal” in the industry, which included customer shutdowns, supply chain issues, and fluctuating load volumes. Additionally, valuations have been impacted by certain industry trends: driver shortages, volatile fuel prices, and tight capacity.
So how has a company’s value been impacted overall by the movements of the economy? And more importantly to business owners, what is the most effective way to build a higher company value?
Buyers and sellers of trucking companies must consider a long list of factors when determining value. Some of these factors take into account the financial condition of the company – think of these as the quantitative factors like net book value and free cash flow margins. But several important qualitative factors, such as driver quality, customer relationships, and management experience also affect value and cannot easily be measured. These qualitative factors often separate the most valuable companies from the pack.
Three general methods of valuation are most commonly used to translate these quantitative and qualitative factors into a company’s overall value.
Three General Valuation Methods
1. Income Method
Buyers need to estimate the future cash flow that can be generated by a trucking company. Understanding the company’s historical cash flow performance provides the basis for developing a meaningful forecast. Is it possible to have a perfect ‘crystal ball’ when forecasting? Of course not. But analyzing the potential cash flow capacity of the company can help buyers (and sellers) understand the opportunities and risks ahead. Specific to trucking companies is the analysis of fleet replacement; Earnings before interest, taxes, depreciation, and amortization (EBITDA) alone does not factor in an aging fleet that will require significant capital expenditures to replace tractors and trailers. Analysis of projected net working capital is also required to gauge the future levels of free cash flow that a buyer would expect after a transaction.
2. Market Method
The value of publicly traded transportation companies is determined every day in the stock market. Real-time market information also has an impact on the value of smaller, privately held trucking companies. However, these stock market valuations are not always appropriate guides for the value of privately held companies due to the larger size and diversified operations of public companies.
There are many transportation companies that are privately held and not publicly traded. Transaction data on the sale prices for privately held trucking companies can provide a guidepost for “valuation multiples.” These multiples may be calculated based on a number of factors such as revenues, earnings, cash flow, or book value. However, transactions occur at a broad range of valuation multiples, so proceed with caution when using a valuation multiple as anything more than an approximate indication of value. As an example, data from DealStats, a leading private company transaction database, is highlighted in the accompanying chart. Note there is some correlation between median EBITDA margins and the respective median multiples but remember that every transaction is specific to that company’s financial performance, operations, and management. There are outliers on both ends of the spectrum and assessing which transactions to include in a valuation analysis requires appropriate diligence.
EBITDA is a common measure of a company’s profitability. What was the range of EBITDA valuation multiples observed by DealStats over the past five years? The lowest valuation multiple was less than 1.0 times EBITDA, and the highest valuation multiple was nearly 25 times EBITDA. As the saying goes: results may vary! Although EBITDA margins fell in 2020 according to the DealStats data, the EBITDA valuation multiples were strong during the year indicating that the negative impacts during the COVID-19 pandemic were viewed as “temporary” by buyers in the market.
3. Asset Method
Don’t forget the most fundamental way of looking at the company’s value: the net value of assets minus liabilities. When looking at value in this manner, be sure to consider the market value of transportation equipment, and the costs associated with selling equipment. This net total is called “Adjusted Book Value.” Owners desire to sell their companies for a value at least as much as this Adjusted Book Value, making this amount a potential “floor” value, or the lower-end of your valuation range. The value premium paid for a company above the Adjusted Book Value is commonly referred to as “Intangible Value,” or “Goodwill.”
Value Drivers: How Does an Owner Grow Company Value?
Positive Cash Flow
Profits are good, but cash flow pays the bills. Efficient operations will convert net income (as shown on the profit & loss statement) to cash flow. Converting receivables to cash and efficiently managing the level of capital equipment are keys to positive cash flow.
Develop Tangible and Intangible Assets
While it is easy to focus on tangible assets such as cash, working capital, and equipment, the development of intangible assets cannot be overlooked. Any purchaser of the company will care about issues such as the quality, experience, and tenure of its drivers, long-standing customer relationships, and the know-how that comes from an experienced management team.
The valuation multiples discussed in this article relate to the debt-free value of a business. Trucking companies often must use financing to purchase equipment, and in this era of low interest rates, the cost of capital for this debt financing can be attractive. But beware of using too much debt to finance the company. A balance between debt and equity must be maintained for a healthy balance sheet.
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