Thinking of selling? It pays to first know what you're worth.
As a trucking business owner it's critically important to know how much you're worth. Why? A few key reasons: you may want to sell one day; or maybe just plan for retirement. Perhaps you're planning your estate and/or succession; maybe you'd like to take some chips off the table and sell to key employees or another shareholder; or you may be involved in a court battle.
While different methods can be used and the process can be complicated, business valuation essentially comes down to knowing the value of the business's assets; ongoing cash flows; and the going rate for comparable businesses. When it comes to determining the fair market value of trucking companies specifically, business valuators generally turn to three main approaches.
1. The Income Approach
This is generally the go-to valuation method when the business is expected to remain profitable on an ongoing basis. In this approach, typically a multiple is applied to the normalized earnings of the business. How do you know what future profitability will look like? Valuators start with historical earnings and then make adjustments to expense items such as management salaries and bonuses and removing non-recurring expenses in order to predict profitability that a prospective purchaser is likely to realize.
2. The Asset Approach
This is used in situations where the trucking company is not earning a fair return on its capital (i.e., where the capital could generate a higher rate of return elsewhere), or where there is no commercial goodwill transferable to a prospective purchaser. An asset approach values the assets and the liabilities of the company at their fair market values.
3. The Market Approach
In this approach, business valuators look to the recent sales/purchases of comparable trucking companies to determine the implied multiples and also look to benchmarks of comparable public companies. The chart above illustrates average multiples in Canada and the United States based on actual transactions in the trucking industry as well as trading multiples of public trucking companies. Valuators assess the comparability of the company being valued to the benchmark companies.
KEY VALUE DRIVERS:
How to Augment the Value of your Trucking
One of the most important value drivers is profitability. The chart above presents average performance metrics of trucking companies in Canada. These statistics can be used to determine whether or not your company is outperforming the average trucking company.
Another important value driver is having contracts in place. Customer contracts that are transferable will provide secured revenue to a potential purchaser and can sometimes be the sole reason a business is being acquired. Contracts with key employees can also add value to the company because they will help ensure business continues as usual after the acquisition.
Reputation in the trucking industry is also critical. Companies with an established track record for reliability, in terms of goods arriving on time and safely, will be more attractive to prospective purchasers and will likely lead to higher purchase prices.
There are many other factors that can drive value such as proprietary routing software, reciprocal arrangements with other trucking companies, relationships in the industry, etc. Owners and managers should be aware of these factors and use them to maximize value.
A Chartered Business Valuator (CBV) can assist you with estimating the value of your business.
This post was originally published in Today’s Trucking, August 2014 issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.