Mergers and acquisitions have been heating up in the industry as of late for a variety of reasons. At the owner level, many operators are getting ready to cash in on their life's work, and larger operators are looking for ways to expand their reach and take advantage of economies of scale. And in terms of employees, most non-chauffeur positions can now be performed remotely.
Beyond our industry, trends in the banking sector make cash flow more important than ever when it comes to expanding a fleet without spending exorbitant amounts on interest. Outside threats like ride-sharing apps are making it increasingly difficult to remain profitable in the sedan space, but large capital investments are required to enter the motorcoach and shuttle markets.
With all these factors at play, it's time to start considering long-term plans and whether selling your company might be right for you.
During the decision-making process, it is important to scrutinize all your assets and outstanding debts. Assets will include the book of business itself, vehicles, and any real estate holdings used for the operations of the company. It is common for the buyer of the business to have first right to purchase the fleet as well; however, real estate holdings are often n
During the decision-making process, it is important to scrutinize all your assets and outstanding debts.The vast majority of sellers will also offer financing to a potential buyer, with the expectation that a down payment will be made at closing. Put some thought into what you consider to be fair payment terms in an acquisition situation, including length of the loan, interest rate, and down-payment percentage, and then discuss this with your broker. It is also important to consider your personal expenses and cash flow required when deciding whether or not to sell your business, so consult a personal financial advisor or personal accountant. Once you've decided what assets you'd like to part with and what your required cash payments will be, it is time to move on to the valuation process.
The first and most important step in valuing your business is data collection. Whether you hire a broker or another third party to perform the valuation, the required data will be similar. At a minimum, you will need to provide three years of profit-and-loss statements or tax returns, a balance sheet, detailed fleet information, and trip logs. Ensuring that these data are readily available and that they are transparent, accurate, and complete are essential to getting the most value from your business. The party performing the valuation will calculate various key performance indicators using the data you provide, offer the potential buyer an opinion on the overall state of your financial statements, and point out any indications that you are not being entirely truthful.
Once the valuation is complete, the negotiation process will begin. While there are several proprietary methods for valuing businesses within the livery industry, they are generally based on revenue and/or net income along with a standard multiplier set by the marketplace. The formulas can be very straightforward, but having other positive factors related to performance will allow you to ask for and receive a higher value for your company. The opposite is also true.
The Top 10 Ways to Increase the Valuation of Your Business
1. Grow your revenue.
- Revenue is a factor in many valuation formulas. It may be averaged over multiple years, but your goal is to increase that average in any way possible.
- Another way revenue is considered when performing a valuation is growth over time. If your book of business has been steadily shrinking over the past few years, it signals that your business may not be a good investment.
- Pay attention to revenue per trip and how yours stacks up to industry standards. A low revenue per trip can signal a business mix with primarily airport sedan transfers, which is not an area where many operators are growing.
- Net income is equally as important (if not more so!) than revenue, for each of the first two reasons listed above.
- As opposed to looking at net income per trip as you would with revenue, pay close attention to your profit margins and how they stack up against competitors—even your potential buyer. A net profit margin less than 5 percent might raise some concerns about efficiency in your operation, and a net profit margin higher than 30 percent may signal to buyers that your data are not accurate or you are not being truthful.
- Generally, it is best to remove non-cash or owner-specific expenses from your net income and profit margin calculations. For example, owner and executive salary is not an expense that would carry over to the purchaser of your business, and depreciation expenses are a non-cash item that impacts only the personal tax situation of the owner or corporation.
- Standard industry expenses include things like fuel, insurance, chauffeur and administrative payroll, maintenance, and tag fees.
- Many of these common expense types are not controllable but will be very informative to those potential buyers who may not currently be operating in your state or region. For example, insurance rates might be much higher in Florida than they are in Oklahoma.
- Controllable expense items can also make or break your valuation, depending on how you manage them. A potential buyer may not want to purchase your company if the rent you are paying to store your vehicles is higher than market rates, meaning that they would have to source a new location.
4. Shed unprofitable business.
- Despite the priority that top line sales and fleet size get within the industry, profitability is truly the name of the game. In terms of valuations and getting the most for your business, it makes more sense to intentionally shrink your top line if your bottom line will not be impacted. This will only increase your profit margins and make your business more efficient. It may also allow you to shrink some of your infrastructure accordingly and strengthen your position.
- Growth, growth, growth! However, make sure that the new trips you are adding are in the sectors that are most desirable to potential buyers, such as events and motorcoaches.
- Generally, each vehicle is expected to produce an annual average revenue of at least $100,000. There will be vehicles in your fleet that earn less and vehicles earning much more, but on average you'll want to shoot for a minimum of $400,000 in revenue with a four-vehicle fleet and $4,000,000 in revenue with a 40-vehicle fleet. If your vehicles are sitting idle, this signals to the potential new ownership that your expectations of sales did not come to fruition.
- The balance sheet doesn't get nearly the attention that it should, especially when it comes time to sell your business. The amount of debt you hold on your current assets is important to not only you—you'll have to pay off those debts with the proceeds of the sale, reducing your net cash payout—but also the potential buyer, who will want to see that you are not underwater on any of your holdings and that you've kept up with your previous obligations.
The balance sheet doesn't get nearly the attention that it should, especially when it comes time to sell your business.
8. Write a brief summary explaining your important affiliate relationships and any corporate or public contracts.
- If there are any extenuating circumstances surrounding your business that will either increase or decrease its value to the potential buyer, it is important to provide a brief summary and be forthcoming with the information.
- Large and profitable contracts that are just in their beginning stages are of the utmost value to a potential buyer. Definitely make sure to mention them.
- Non-standard expenses can hurt your bottom line but may not be transparent enough to remove from valuation calculations all together, as owner salary would be.
- Some examples of non-standard expenses are sponsorships, comped trips, trade relationships, violations and penalties, and club memberships.
- The balance sheet also includes key information about receivables and payables, with receivables being the primary concern of any interested parties. While you may have many corporate accounts and they may have a high average revenue per trip, it won't do much good to a new owner if the account makes a habit of paying late ... or not at all.
Jessica Boulerice is a financial consultant for the LMC Group. She can be reached at jessica@lmc.group.