By Edward Kaye
One thing is for sure, the pandemic prompted most transportation company owners to determine if it was a good time to buy, sell, or simply close the doors and pack it in. Chances are you’ve read about several deals that have closed recently. In fact, Chauffeur Driven has reported at least a dozen acquisitions in the space this year, while there are many more that closed and go unreported, and even more quietly in the works—including some that my firm has been involved with.
The benefits of selling or acquiring companies is clear: For sellers, it’s a way to cash out after years of building a business; get out from under debt, stress, and personal guaranties; or stay on and expand the business with new ownership that will keep employees and take the enterprise to the next level. If growth, rather than retirement, is what you are after, the acquiring entity may have access to capital, technology, infrastructure, and sophisticated back-office operations that aren’t in your budget.
For buyers, it’s an efficient way to grow your book of business, operations, footprint, drivers, staff, fleet, and, most importantly, customer list. Acquiring a company can be a much easier, although sometimes expensive, path to growth than building an organization organically.
According to Tim Rose, a partner in Dolphin Transportation Specialists, based in Naples, Florida, his company has acquired six operations so far this year and is looking for more. Although every situation is unique and the terms are often kept confidential between the parties, Dolphin has had success by offering sellers a valuation based on 2019 performance with an earn-out over five years.
“I want to partner with people to achieve the maximum value for them and for us,” says Rose. “We give (operators) a consulting contract that gets them out of debt, a payout based on net revenue, and an opportunity to get their business back (to pre-COVID performance).” After the transaction closes, sellers are “not going to be payroll managers, fleet managers, etc. They can now focus on growing their business.”
“... the problems start ‘when the deal structure is too tight for buyers and they can’t repay the sellers.’” – Charles Tenney of The Tenney GroupHowever, buyers and sellers need to be aware that many opportunities do not work out as planned. Pre-closing promises are made and not kept, corporate cultures clash, the seller does not like being an employee rather than the boss, or the business does not bounce back as all parties to the transaction expected. And there are consequences when things don’t work out.
According to Charles Tenney, founder of the Tenney Group, a Franklin, Tennessee-based industry merger and acquisition firm since 1973, the problems start “when the deal structure is too tight for buyers and they can’t repay the sellers.”
This is critically important in today’s uncertain market where most deals are getting done with little or no cash paid up-front and the seller earns the purchase price based on a percentage of bookings over a negotiated period (usually three to five years). Depending on the size of the transaction, earn-outs can be as low as 5 percent or as much as 15 percent of net revenue per month, excluding various adjustments.
“Most operators don’t realize they have more value than they think they do because buyers need to add to their revenue stream post-COVID,” says Tenney. The challenge is aligning the sale price with expectations, not an easy feat given the market volatility.
When expectations are not met and the business is not able to bounce back, buyers may think they overpaid for an underperforming company. Conversely, if the business exceeds expectations, the seller may have remorse for selling their company for less—sometimes much less—than expected.
In any event, all the experts agree that unmet expectations often lead to mistrust and a waterfall of complications between the buyer and seller.
“Every company needs conditioning prior to the sale and things need to be fixed,” says Ken Lucci of Driving Transactions.com, a boutique M&A advisory firm with offices in Boston, Tampa, and Washington, D.C. “You cannot be too detailed prior to the sale.”
Trying to sell the business without outside professionals can be problematic.
“There are always dangling issues that come up before and after the closing that need expertise to be managed, without emotional involvement,” Lucci adds.
“Every company needs conditioning prior to the sale and things need to be fixed. You cannot be too detailed prior to the sale. – Ken Lucci of Driving Transactions.comFinding advisors, accountants, and attorneys in the industry that will be with you before, during, and after the deal closes is crucial.
Even though today’s buyers are not paying sellers up-front, there are substantial buy-side investment, integration, and transition costs associated with any acquisition: legal, accounting, advisory, insurance, IT, and human resources, to name a few.
This is not to say that having the wherewithal to buy a company guaranties success. In some instances after a deal closes, the two companies cannot figure out how to integrate policies, processes, and procedures. Not having a solid integration and transition plan in place to hit the ground running after the closing takes place makes the likelihood of long-term success questionable.
Additionally, loans and grants like the PPP, SBA, and now CERTS grants (motorcoach companies) add a new wrinkle to the M&A landscape and have made the business valuation process more difficult. Accurate financial reporting of these funds is something all parties need to be concerned with, not to mention the legal use of the funds post-closing, according to the experts.
“Operators have about a year to spend CERTS money or they have to send it back,” says Dan Goff, owner of A Goff Limousine and Bus Company and Supermax Motors in Charlottesville, Virginia. “They may have more money in the bank now than they ever had,” making the point that some operators will be reluctant to sell in the current environment. But he cautions that many of them will need to get their revenue back up to pre-COVID numbers to survive when the grants run out.
His opinion is to act now, leverage the funds you are sitting on, and make strategic acquisitions, or consider selling the business while it still has value.
As a former business broker, Goff has been involved in hundreds of transactions in and out of the transportation industry and is experienced in getting deals done. He says the most important thing for both buyers and sellers to do early in the process is to figure out what motivates each of them.
“Figure out what the other guy wants and get it to them,” he says, which generally makes for an easier path to close the deal without surprises.
Goff has found that hiring the former owner as a commissioned outside salesperson in the territory aligns interests. Specifically, the seller gets paid less up-front but more over time and is motivated to make the acquisition a success. The buyer has comfort in keeping the former owner who founded the business, understands the processes in place, and knows the market.
While the transportation sector still faces considerable uncertainty, savvy buyers and sellers need to closely analyze what works post-pandemic and what to avoid before deciding if a sale, merger, or acquisition is the right strategy for everyone. Find advisors with experience in the industry, weigh the pros and cons, study the pitfalls, divorce yourself from the emotion, and understand that one model does not fit all. . [CD1021]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Edward Kaye is a partner in the law firm, Schickler Kaye. He can be reached at ekaye@skfinancelaw.com.