At a recent Driving for Profit Seminar in Toronto, Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics Magazine, led two trucking company investment advisors, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc. through a discussion of how to buy and sell trucking companies in 2012. Here is what they had to say.
From a buyer perspective, they encouraged companies to be proactive in seeking out prospective acquisition candidates. Since so much about buying is timing, it always important to plant the seed and remain in contact. While a trucking company’s leaders may not be ready to sell their enterprise in the second quarter of 2012, it is at least important as a purchaser to express your interest. One should also keep in mind that the purchase process itself can take six to nine months or more complete.
The buyer should carefully think through some key questions such as “why” make this purchase, what are the underlying business risks of a potential acquisition, do they have the investment advisor team in place to guide them through the process and do they have the “bandwidth” (management team) to manage the acquisition? In other words, can the company manage its current base of business while it is trying to assimilate new customers, new employees and possibly fit two cultures together?
The two advisors mentioned that they use a valuation multiple for an asset-based business of 3.75 X normalized EBITDA. The word “normalized” is an important concept since this refers to what the earnings will look like when certain expenses or withdrawals that are taken out of the company by the current owners are removed from the income statement to better reflect what the business will look like on a going forward basis.
The purchaser must look at a number of variables in determining how to pay for the company. The advisers related it to buying a home. The purchaser looks at what they can make in terms of a down payment and the level of mortgage they wish to carry. Similarly, when buying a trucking company, one needs to consider the financial structure of their offer. This involves an evaluation of cask payment, business loan and earn-out. The latter is a common term that refers to principle of paying the seller part of the purchase price from monies earned by the business over a period of years. If the sellers remain with the business after implementation and help maintain the income flow, they are rewarded with a business retention bonus for their efforts....