The former operator turned M&A specialist and business consultant is having a crazy busy 2022. With the industry fire sales mostly out of the way, his clients are making plans for their futures—which means they are preparing to sell soon or in the not-too-distant future. He’s up for the task, which involves crunching the data for realistic valuations, managing expectations between the buyer and seller, and, sometimes, a dose of tough love.
Ken Lucci
Chauffeur Driven: Are mergers and acquisitions still hot in the transportation industry?
Ken Lucci: I never thought in my wildest dreams that we would be this busy. We have people who want to get out in the next 90 days—they are tired of the labor issues, spending money on repairing equipment, and the higher costs of the business. Other clients are aging out and want to condition their business for sale over the next 18 months or so. The third, the ones I enjoy the most, are those who are looking to prepare their business for sale in the coming years.
CD: What does that process look like?
KL: There is no company that is ready for immediate sale in my experience. At a minimum, it’s a 90 to 120 day process of review and analysis on the business and getting the information packages together. There are three stages: conditioning, where you’re getting your financials in a state that the banks want to see; positioning, where you’re discussing opportunities for the sale; and going to market, where you’re actively engaging buyers.
The first thing we do is give clients the highlights of the analysis of their financial situation, including revenue and direct costs. We calculate gross profit margins and, depending upon the data the customer keeps, we can get as detailed as they want. For example, we find that for the average company, no more than 6-8 percent should be tied up in their reservations and dispatch functions. We’ve seen companies as high as 11-12 percent. For every $100 they bring in, they’re spending $12 for reservations and dispatch. If they move 30 percent of customers to online reservations, they could be adding 3-4 percent to their bottom line, which is huge in an industry with a thin profit margin.
CD: What are some other common mistakes?
KL: Few operators are granularly familiar with their financial situation: they run their business by the checkbook and a reservations system. They’re conditioned to tell me how much the top-line revenue is growing, but that’s only a small part of the picture buyers want to see—and especially after the pandemic, it’s not as important as gross profit and net income. We’re not a bookkeeping service, but we become their financial arm, and we format their financials for success.
CD: How did the pandemic impact valuations?
KL: It made valuations easier. If you have not recovered substantial revenue at this point compared to pre-pandemic levels, there’s something fundamentally wrong with your business. Starting the process right now is fantastic because in most cases your overhead is lower and demand is higher, so your gross profit margin had better be higher. We’ll first assess 2017-2019. Then we look at ’20 to see how far you fell, how you got back up in ’21, and how you kept that going through ’22. Those data drive valuations.
CD: What happens if the valuation isn’t what they expect?
KL: A seller may think that their business is worth twice or three times our valuation, but you have to understand the buyer: they are willing to buy only if it’s less expensive than duplicating your company in the same market and building a client base in a reasonable amount of time.
Our clients get a lot of information that can help them make changes to their businesses. I wish when I was growing my company that I had someone analyzing my financial situation on an ongoing basis—and that I ran it based on monthly financial statements and not by revenue reports from my reservation software. I was a good top-line operator, but I was never focused on the bottom line. It’s great that revenue is up 15 percent, but if expenses are also up 22 percent, then you’re losing ground.
CD: Are you seeing more mergers or acquisitions?
KL: Maybe 80 percent are acquisitions. There are two types: fold-in, where the buyer takes the customer list and eventually that brand disappears, versus those who are acquiring the brand to grow it. The toughest sales are when a minority owner is trying to buy out a majority owner, or when there are multiple partners with lousy shareholder agreements.
CD: When do you involve buyers?
KL: This is the other side of what we do. We work with buyers to make sure that they’re in good condition to buy. If they have a toxic balance sheet—a lot of loans on their equipment, for example—purchasing another entity is going to impact the original company. If you’re already short-staffed, buying a customer list is going to make things worse. But if you buy a company that has a solid team, that could add value for you. We’re also seeing interest from buyers outside the industry.
CD: Is that a good thing? We’ve seen corporations buying real estate and pricing individuals out of the market.
KL: That’s an interesting parallel. Many times, outside buyers have more money than solid industry experience, but in the current situation we see buying due to a critical need. I have one buyer who handles large amounts of transportation as a routine course of their business, but until now had subcontracted the work. Other outside buyers tend to be disruptive technologies that feel they are better and more efficient than what’s available in the market today. There are also private equity firms that use this type of transportation but question why the industry hasn’t done a better job in consolidating.
CD: How difficult is it to get financing to buy right now?
KL: No one is writing a check and paying cash. The problem is, all operators want to buy on the cheap and sell for the highest price. I think we’ve been successful in structuring a win-win for both parties. The buyer puts down a deposit and the remainder is paid out over time. Sellers sometimes expect a big check instead of an earn-out, but that’s not typically going to happen because most company value is proven by the flow of future revenue. You’re going to get paid for your fleet and a down payment, but the rest is going to be an annuity over a few years.
CD: Aren’t you putting a lot of faith in the new owner to run the company well?
KL: You mitigate that in two ways: by choosing a qualified buyer who already is running a top-shelf company, which is part of the pre-qualification process, and with legal terms and conditions built in the transactional documents. You put mechanisms and protections in the documents so that both parties are bound by specific obligations—maintaining service levels, taking care of their best clients. You can even add to the contract that the brand must remain in the marketplace until the owner is 100 percent paid, or if anything is done to the detriment of the asset that it’s considered a default and returns to the previous owner. There’s a lot of legal teeth in that kind of agreement.
CD: What about generational sales?
KL: I come from a family business background. We’ll come in as a neutral third party and assess from a 30,000-foot view what the founder needs to get out of the transaction. In some cases, we’ll structure it so that a new corporation is formed by the next generation, which pays out the founder over time. But we’ll also assess if the new generation truly has a passion for the business, and if are they capable of running it as well or better than the founder. We’ll make our recommendations if they need to bring on additional staff to shore up the operational deficiencies.
CD: What are your thoughts on selling to a qualified employee?
KL: The key word here is ‘qualified.’ I wouldn’t recommend selling based on faith, but with bulletproof transactional documents—absolutely.
CD: When we spoke in 2020, you advised operators to get into the retail space stat, which is where most of the recovery has been. What do you think will happen with other segments of the business?
KL: Corporations are treating employee travel differently. They’re Zooming more and going to see clients maybe once or twice a year rather than a dozen, so corporate travel may never return to 2019 levels. But also, I’m keeping an eye on gas prices, what’s happening in Ukraine, the precious metals that are used in motherboards that make up everything—when people smarter than I am are saying that there’s a greater than 50 percent chance of a ’23 recession, I pay attention. So, my message to operators is very simple: focus on gross profit and low overhead. Get gross profit to a level above 40 percent and your cost of goods sold to under 60 percent with low overhead and you can survive almost anything. Also, diversity: Those I see suffering the most are corporate transportation-only operations.
CD: Any advice for the larger global networks?
KL: The relationship between the locals and the globals has changed. Local companies not only downsized but they discovered that they could make more money by building up their regional clientele, so farm-ins have become a lower priority for many. Much like the worker-boss dynamic has changed—it may lean back toward the employer, but the boss will never ever have it over labor again—the globals no longer have it over the smart regionals. Globals either must have better rates, terms, and reciprocity with affiliates, or they’re going to have to create a deeper network.
CD: What about smaller local companies?
KL: The challenge I see for them is upping their game to serve the needs of the highest-touch corporate client. At the same time, the safest thing is for them to be totally diversified. I’m a huge proponent of having different brands for different clients. The goal is to get their gross profit margin above 40 percent so they can hold their own against the globals and the owner can make a nice living.
CD: Any final thoughts?
KL: Selling a business the right way is not a sprint, but a marathon. [CD0622]