Know your worth: how to value a trucking company

JULY 2019

TRANSACTION ADVISORY

Know your worth: how to value a trucking company

The question of how to value a business is not an easy one to answer for many trucking company owners or investors.

Like many sectors, the trucking industry in Canada is going through significant change. Technological advancements, a shifting labour force, increased external competition, and a number of other market factors present both opportunities and challenges. Owners must now ask themselves--are they in, or are they out?

Whether investing or divesting, a credible business valuation is an essential first step in the process.

Why does a trucking company need a valuation?

Obtaining an accurate, realistic assessment of your trucking company's worth can offer two key advantages.

For owners who plan to exit or retire, a valuation is a fundamental step in selling the business for a fair market price. For those who want to grow and invest, or simply aren't ready to make their exit yet, a valuation is part of a smart business strategy. The process can help you identify strengths and weaknesses and enhance the company's key value drivers for future growth.

What factors drive the worth of a trucking company?

A trucking company valuation is based on numerous factors, both tangible and intangible. A qualified valuations advisor can help assess a company's financial history and unique elements. Owners should consider the following in particular:

XXHistory and consistency of earnings

For an investor, volatility means increased risk. Demonstrating a history of steady cash flow, stable margins, and consistent profit can put potential buyers at ease and help drive valuation multiples in your favour.

Non-recurring or personal items often impact a company's financial statements and cloud the true operations of the business. Reducing the occurrence or normalizing for such items will provide a more accurate depiction of performance and operational efficiency. XXThe condition of the fleet

Your vehicle fleet is a key value consideration for your trucking company, especially for asset-based carriers. Consider the age, composition, and size of the fleet. Older, less modern vehicles could mean an investor will have to spend more capital on maintenance or upgrades.

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The fleet's condition, historical maintenance costs, and number of idle vehicles are important considerations when entering the negotiation phase of a transaction. These factors can demonstrate the business's ability to generate profit even under lean operations, or the potential for additional revenue through increased capacity.

XXThe market a company operates in

Operating in a niche or specialized market, such as bulk transportation, can command higher valuation multiples. Diversifying your operations can also raise the value of your company. The ability to offer both LTL (less than truckload) and FTL (full truckload) shipping options, or to provide logistics and warehousing services, can present a potential buyer with more opportunities to generate revenue.

XXCompany-specific attributes

Understanding the competitive differentiators and key performance indicators (KPIs) that make a business unique can help enhance a trucking company's value.

Proprietary technology, a low percentage of empty miles, limited driver turnover, strong safety ratings, customer diversification, long-term contracts, and other factors can all contribute to a higher multiple. Company owners can use these factors to demonstrate operational efficiency and value for investors. Be prepared to address potential liabilities as well as KPIs.

What should business owners do next?

As a business owner, you get one shot at selling your company. To achieve the best possible deal, it's crucial to have the right information and guidance to make a fully informed business decision.

Trucking company owners should consider the following steps: 1. Be proactive - Owners who plan to sell or retire in the near term

should obtain a valuation at least three to five years in advance. Even if retirement is still part of the distant future, knowing the true worth of your company is vital. Otherwise, company owners could find themselves accepting an unfavourable deal if life throws a curveball.

2. Understand the market trends - The last few years have seen a positive market and analysts predict that growth will continue. However, owners must stay aware of the external market factors that can affect the company's value and competitiveness, such as developments in automation, increased consolidation, or a looming driver shortage, among others.

3. Engage a professional valuations advisor - An experienced advisor can provide a realistic pricing target for your company. It's important to strike the right balance--a price that is too low is disadvantageous, while one that is too high could deter potential buyers.

4. Work on value enhancements - Understanding your company's worth can help you increase operational efficiency and build on value drivers to improve revenue. When involved early in the process, a valuations consultant can help identify these drivers.

How BDO can help

BDO's team of Chartered Business Valuators (CBV) has experience working with trucking and transportation companies across Canada. We work closely with our clients to understand what makes them unique and to provide an accurate, credible business valuation that can help them achieve their goals.

Contact us today to learn how we can help you.

The investor perspective

A potential buyer relies on a number of factors when deciding whether they will invest in your trucking company and at what price. Some of the questions investors may ask themselves include:

XXWhat is the risk appetite vs. the potential for improving operational efficiency and profit margins?

XXWhat is the capacity of the fleet? How will it influence the scalability of the business?

XXDoes the company's specialization or diversification lend itself to paying a premium multiple?

XXAre there hidden liabilities that could influence company performance?

XXWhat is the unique value of the company?

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TO LEARN MORE, CONTACT YOUR LOCAL BDO OFFICE OR BDO'S TRANSACTION ADVISORY TEAM:

GTA

Paul Gill Partner, National Valuations Leader Ontario 416-865-0200 pgill@bdo.ca

Megan Mistry Director Ontario 416-369-6453 mmistry@bdo.ca

WEST

Spencer B. Cotton Partner British Columbia 604-443-4715 scotton@bdo.ca

Keith Jensen Partner British Columbia 604-688-5421 kjensen@bdo.ca

Michael Devonshire Partner Alberta 403-266-5608 mdevonshire@bdo.ca

CENTRAL

Daniel Bernard Partner Manitoba 204-926-7270 dbernard@bdo.ca

Joe Hilton Partner Ontario 705-797-3961 jhilton@bdo.ca

EAST

Patrice Dumais Partner Quebec 514-931-2444 pdumais@bdo.ca

Dan Jennings Partner Nova Scotia 902-444-5540 djennings@bdo.ca

ABOUT BDO BDO is a leading provider of professional services to clients of all sizes in virtually all business sectors. Our team delivers a comprehensive range of assurance, accounting, tax, and advisory services, complemented by a deep industry knowledge gained from nearly 100 years working within local communities. As part of the international BDO network, we're able to provide seamless and consistent cross-border services to clients with global needs.

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The information in this publication is current as of July 2, 2019. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

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