Generational Transitions for Trucking Business Owners

This paper offers high-level guiding thoughts to family-owned trucking and logistics carriers assessing strategies to protect their wealth and legacy. It provides an overview of various options for an owner in the course of a generational transition, including selling the business to a third party, selling to key employees, or handing the business to the next generation through gifting or sales processes. It emphasizes the importance of incorporating technology to ensure the sustainability of cash flows, the preservation of wealth, and leveraging technology to address challenges that traditionally surface during generational transitions.

The paper then delves into the critical exercise of estimating the value of a trucking business during succession planning. While technicalities are best left to experts, 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.

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 the business, typically free cash flow or 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 purchasing price. Therefore, trucking company owners should demonstrate the ability to sustain or grow the current level of income even after the departure of the previous owner.

Technology, in particular, smart workflow technology has become one of the most powerful levers for owners in a generational transition. It digitizes the business end-to-end, builds operating standards, institutionalizes the wisdom of the retiring generation, and offers visibility to senior ownership in their task of governing the incoming management. It also increases the confidence that the business remains competitive and that cash flows projected in a valuation are truthfully sustainable. Given the extent of technological change, owners should consider moving off traditional legacy systems that may provide the comfort of habit, but are no longer in tune with the rapidly changing technological context.

This paper offers high-level guiding thoughts to family-owned trucking and logistics carriers assessing strategies to protect their wealth and legacy. It provides an overview of various options for an owner in the course of a generational transition, including selling the business to a third party, selling to key employees, or handing the business to the next generation through gifting or sales processes. It emphasizes the importance of incorporating technology to ensure the sustainability of cash flows, the preservation of wealth, and leveraging technology to address challenges that traditionally surface during generational transitions.

The paper then delves into the critical exercise of estimating the value of a trucking business during succession planning. While technicalities are best left to experts, 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.

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 the business, typically free cash flow or 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 purchasing price. Therefore, trucking company owners should demonstrate the ability to sustain or grow the current level of income even after the departure of the previous owner.

Technology, in particular, smart workflow technology has become one of the most powerful levers for owners in a generational transition. It digitizes the business end-to-end, builds operating standards, institutionalizes the wisdom of the retiring generation, and offers visibility to senior ownership in their task of governing the incoming management. It also increases the confidence that the business remains competitive and that cash flows projected in a valuation are truthfully sustainable. Given the extent of technological change, owners should consider moving off traditional legacy systems that may provide the comfort of habit, but are no longer in tune with the rapidly changing technological context.

1. INTRODUCTION

The 1980 Motor Carrier Act signed into law by President Nixon marked the beginning of the deregulation of the interstate transportation industry. Before 1980, the Interstate Commerce Commission had granted only 18,000 truckers operating licenses with only a handful allowed to work across state lines. By 1990, the number of licensed motor carriers had reached 45,000 of which 20,000 move goods freely across the 48 contiguous states (Moore, 1995).

Deregulation brought significant entrepreneurial opportunities for trucking companies founded in the 1980s and 1990s. As a result, today - thirty to forty years later - 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 alternative, balancing their personal financial needs, and protecting their legacy.

The purpose of this paper is to offer ownership at family-owned carriers high-level guiding thoughts to assess strategies to protect the wealth and legacy created in their trucking and logistics businesses. We will cover those strategies under various options an owner may contemplate in the course of a generational transition, including (a) a straight sale of the business to a third party (b) sale to key employees, or (c) handing the business to the next generation as part of succession planning using either a gifting or a sales process.

Today, in an era where new trucking companies get created as “digital native” businesses and disruptive business models can shake up the profitability of long-established incumbents, it is more important than ever to incorporate aspects of technology: both to ensure the sustainability of cash flows and the preservation of wealth, but also to leverage technology to address challenges that traditionally surface during generational transitions. In other words, technology is taking an unprecedented role in protecting and creating trucking companies’ enterprise value.

This is why two leading providers in the areas of technology, accounting, tax and estate planning have teamed up to produce this guide[1] [2] . Aside from the basic frameworks we are providing, we acknowledge the limitations of their generic nature and encourage you to reach out directly to us for more specific conversations.

1. INTRODUCTION

The 1980 Motor Carrier Act signed into law by President Nixon marked the beginning of the deregulation of the interstate transportation industry. Before 1980, the Interstate Commerce Commission had granted only 18,000 truckers operating licenses with only a handful allowed to work across state lines. By 1990, the number of licensed motor carriers had reached 45,000 of which 20,000 move goods freely across the 48 contiguous states (Moore, 1995).

Deregulation brought significant entrepreneurial opportunities for trucking companies founded in the 1980s and 1990s. As a result, today - thirty to forty years later - 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 alternative, balancing their personal financial needs, and protecting their legacy.

The purpose of this paper is to offer ownership at family-owned carriers high-level guiding thoughts to assess strategies to protect the wealth and legacy created in their trucking and logistics businesses. We will cover those strategies under various options an owner may contemplate in the course of a generational transition, including (a) a straight sale of the business to a third party (b) sale to key employees, or (c) handing the business to the next generation as part of succession planning using either a gifting or a sales process.

Today, in an era where new trucking companies get created as “digital native” businesses and disruptive business models can shake up the profitability of long-established incumbents, it is more important than ever to incorporate aspects of technology: both to ensure the sustainability of cash flows and the preservation of wealth, but also to leverage technology to address challenges that traditionally surface during generational transitions. In other words, technology is taking an unprecedented role in protecting and creating trucking companies’ enterprise value.

This is why two leading providers in the areas of technology, accounting, tax and estate planning have teamed up to produce this guide[1] [2] . Aside from the basic frameworks we are providing, we acknowledge the limitations of their generic nature and encourage you to reach out directly to us for more specific conversations.

2. HOW MUCH IS YOUR BUSINESS WORTH

Estimating the value of your business is a critical and sobering exercise during succession planning. The technicalities of a company valuation are best left to experts, but understanding the rationale and drivers behind value is critical for owners of trucking companies to prepare their company for a sale or a hand-over.

Company appraisers have in their quiver a variety of valuation techniques to arrive at what your company’s worth (see box 1) or what’s commonly referred to as its fair market value (FMV). FMV 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. In other words, it is the price that would be agreed upon in an open and competitive market, where both the buyer and seller have equal bargaining power and are free from pressure to act.

To understand this price point, it is 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 the purchase price by evaluating the income potential of the trucking company and applying their target return rate to such income level. For illustrative purposes, if a carrier, generates $1M in net income and the buyer targets at least a 10% return, the price the investor is willing to pay is at most $1M/10%, i.e. 10 times its net income or $10M. Buyers may upward or downward adjust their target return rate 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. Let’s further break this down.

Income

In most market environments, the potential lies in the value of the business to generate future income as a going concern in perpetuity. A typical approach for investors to determine the value of the business would be to assess the carrier’s operating income generated during the ordinary course of the business, i.e. 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 which are more sensitive to accounting assumptions. More recently, we have seen a few unusual cases where, as a result of spiking equipment prices during the pandemic, the value of the company’s tangible asset was higher than the going concern value. In those instances, trucking companies traded as “fleets of equipment” rather than the “value of the business” using operating income approach.

Risk

A variety of risk factors may result in an investor applying a higher risk premium to your business, i.e. demand a higher return which ultimately lowers the purchasing price the buyer is willing to offer. Such risk issues can be embedded in hidden liabilities (e.g. unresolved lawsuits, shipper or other third party claims) or the sustainability of income projections. To optimize for better pricing in a sale, it is important that trucking company owners, especially those where the business is anchored around one individual, demonstrate the ability to sustain or grow the current level of income even after the departure of the previous owner.

BOX 1: KEY VALUATION METHODOLOGIES

Appraisers can estimate the value of your trucking company using multiple techniques.

Discounted cash flow analysis: This technique involves forecasting the future cash flows of your trucking company over say 5 to 10 years, and discounting them back to the present using an appropriate discount rate.

Asset-based valuation: This technique 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 involves determining the value of the trucking company based on revenue and/or profit and a multiple of such revenue/profit to arrive at a valuation. Reference points for multiples are typically public trucking companies’ PE or TEV/Rev ratios and the sale of private trucking companies, that get adjusted based on the subject carriers’ idiosyncrasies.

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.

2. HOW MUCH IS YOUR BUSINESS WORTH

Estimating the value of your business is a critical and sobering exercise during succession planning. The technicalities of a company valuation are best left to experts, but understanding the rationale and drivers behind value is critical for owners of trucking companies to prepare their company for a sale or a hand-over.

Company appraisers have in their quiver a variety of valuation techniques to arrive at what your company’s worth (see box 1) or what’s commonly referred to as its fair market value (FMV). FMV 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. In other words, it is the price that would be agreed upon in an open and competitive market, where both the buyer and seller have equal bargaining power and are free from pressure to act.

To understand this price point, it is 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 the purchase price by evaluating the income potential of the trucking company and applying their target return rate to such income level. For illustrative purposes, if a carrier, generates $1M in net income and the buyer targets at least a 10% return, the price the investor is willing to pay is at most $1M/10%, i.e. 10 times its net income or $10M. Buyers may upward or downward adjust their target return rate 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. Let’s further break this down.

Income

In most market environments, the potential lies in the value of the business to generate future income as a going concern in perpetuity. A typical approach for investors to determine the value of the business would be to assess the carrier’s operating income generated during the ordinary course of the business, i.e. 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 which are more sensitive to accounting assumptions. More recently, we have seen a few unusual cases where, as a result of spiking equipment prices during the pandemic, the value of the company’s tangible asset was higher than the going concern value. In those instances, trucking companies traded as “fleets of equipment” rather than the “value of the business” using operating income approach.

Risk

A variety of risk factors may result in an investor applying a higher risk premium to your business, i.e. demand a higher return which ultimately lowers the purchasing price the buyer is willing to offer. Such risk issues can be embedded in hidden liabilities (e.g. unresolved lawsuits, shipper or other third party claims) or the sustainability of income projections. To optimize for better pricing in a sale, it is important that trucking company owners, especially those where the business is anchored around one individual, demonstrate the ability to sustain or grow the current level of income even after the departure of the previous owner.

BOX 1: KEY VALUATION METHODOLOGIES

Appraisers can estimate the value of your trucking company using multiple techniques.

Discounted cash flow analysis: This technique involves forecasting the future cash flows of your trucking company over say 5 to 10 years, and discounting them back to the present using an appropriate discount rate.

Asset-based valuation: This technique 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 involves determining the value of the trucking company based on revenue and/or profit and a multiple of such revenue/profit to arrive at a valuation. Reference points for multiples are typically public trucking companies’ PE or TEV/Rev ratios and the sale of private trucking companies, that get adjusted based on the subject carriers’ idiosyncrasies.

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.

3. OPTIONS

Naturally, most trucking company owners deliberate a sale only after having assessed whether existing family members are able or willing to manage the business in the future. We acknowledge that this may take precedence over pure economic considerations which we outline in this section, but recommend owners to nevertheless assess a sale as one of the possible options to unlock wealth from the business and re-allocate their assets.

3.1. SELLING THE BUSINESS

We are proposing a few strategic questions that trucking company owners with an intent to sell should ask themselves to assess and maximize sales proceeds. This section may also be helpful in preparing the company for a sale a few years down the road. Many actions that can enhance the financial proceeds from a sale require time to improve the optics of strongpoints, or mitigate weaknesses in your trucking company today.

Unique strategic advantages: What unique competitive assets does the company have that no or few others possess? How do these affect the level and certainty of future profits?

Examples would be location advantages anchored by ownership or long-term leases of critical facilities or provide access to drivers and equipment in strategic locations.

Keyman risk: How much is the business anchored around the founder? How sustainable are profits after the founder exits from the business and is no longer personally involved? What incentives does the founder have to support an orderly transition whereby the value of the business stays intact?

Examples that show low keyman risk include governance and management structures that balance both delegation and critical controls in the organization, succession and transition plans as well as reliance on systems to maintain standard operating procedures even when ownership is not involved in the day-to-day.

Strategic synergies: Can a buyer unlock more value from the fleet than the seller? What buyer would that be?

An example would be a 3PL targeting large national accounts who can benefit from capacity in the location where the fleet is located. In that instance, the buyer may rely on its unique presence in a specific market to win national contracts for the rest of its business across the country, even though the fleet acquired serves only a small subset of it.

Market timing: Freight markets are cyclical. Understanding expected market trends can help to determine whether the multiple applied to your cash flows should be higher or lower than historical transactions. It is noteworthy that all sellers are exposed to market forces and market data is generally public information, meaning that market timing is not necessarily a source of unfair advantage, but can still offer certain advantages to a seller.

An example would be a trucking company that decides to sell shortly after freight rates have bottomed out. The owner understands and can convincingly relay that current profits are depressed and that the future is much brighter; this may be an easier sell than selling at the peak market where buyers are skeptical about the sustainability of revenues as everyone expects rates to decline.

Opportunities to bridge price gaps: What happens if you won’t secure the price you expect for your business? What flexibility do you have to bridge price gaps?

An example would be a trucking company owner expecting $30M for the business of which he needs to use $20M to pay off a loan on the company’s office building. What would he do if he could only secure $20M in a sales price?