Merger & Acquisition Insights

Valuing a Transportation Business

Posted on June 22, 2020 by Fusebox Marketing

Business value in the transportation industry is widely misunderstood by business owners, accountants, general business brokers, consultants, and lenders. At an industry event, I asked 6 business owners how they thought transportation businesses were valued and I received 6 different answers. The suggested formulas included:

• The average of the last 5 years’ annual sales
• 2 times annual sales (last complete fiscal year)
• 3 times profit + the value of the furniture, equipment, and fixtures
• 4 times “net”
• 24 times monthly profit (using most profitable month in last 12 months)
• 1 times annual sales + the value of the equipment

The wide variety of answers from such a small sample of owners underlines a serious disconnect in our industry. Business owners obtain valuation information from many sources. The most common source comes from other business owners. Industry colleagues, with the right intentions, share what they know, have heard, or what they “think” they understand. Unfortunately, others misinterpret, misunderstand, or misapply the information to their own businesses.

The consequence of applying questionable or completely inaccurate valuation information can leave transportation business owners susceptible to financial risks they may not otherwise take. Further, using poor valuation information when taking a business to the market can prolong a business sale by 1-3 years, even after the price is adjusted to market value. Even more damaging, this mistake can end the possibility of a sale all together.

When business owners clearly understand the value of their business, they make sound re-investments into their business, with risks proportionate to the potential rewards. When it is time to sell their businesses, they are positioned to experience the process in the most seamless and rewarding manner possible.

Understanding the value of your transportation business is critical, even when selling is not in the foreseeable future. Unfortunately, many owners are confused about what is involved in valuing a transportation business.

The following valuation methods are a sample of many that have been used in transportation business sales and thousands of limousine & charter/tour business valuations completed by Tenney Group.

Balance Sheet Value Approach
There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.
The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets too much to gain prior tax advantages.

The liquidation value is the amount that could be realized if all assets – equipment, furnishings and inventory – were sold separately. This value is typically much lower since it doesn’t consider a company’s intrinsic value.

Income Approach
The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company value. Selecting the proper level of earnings – after-tax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.

The income approach often creates confusion for many transportation business owners. Example: I received a call from a business owner this week. He shared that he heard his business value was based on a multiple of 3 times discretionary earnings. However, it quickly became clear that his definition of discretionary earnings was inaccurate and making decisions with inaccurate information is a dangerous business. It is critical to develop your financial intelligence so you can communicate apples to apples in the transaction arena.

Discretionary earnings (DE) equals:
DE = Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) + (Owner/Manager compensation).
Smaller transportation businesses, with $200,000 -$2 Million in annual sales often attract multiples of 1 to 3 times discretionary earnings. According to the International Business Brokers Associations the average multiple of Discretionary Earnings applied to all small business sales across all industries over the past 30 year has been 2.3.

Market Approach
The market approach sets a value based on the values of other businesses that have been sold recently. Setting the market value involves researching the sale prices for similar businesses in a geographic area. It can be very difficult to obtain public information about a transportation sale that also contains market data that is applicable to your particular business unless you were involved in similar sales and have knowledge of the details that influenced the sale price of similar transactions. Many factors can influence the sale price of a transportation business. Some of these include but are not limited to:

• Terms. Cash offers look much different than transactions paid out over time.
• Customer concentration. If one client comprises 20%, 50%, or 75% of the total business, it is going to influence the sale price and terms.
• Capex requirements
• The business location, market footprint, and how meaningful these are to the buyer.
• Pricing strategy
• Technology
• Human capital
• Permits that apply to a geographical area
• Liabilities assumed in purchase
• Employment agreement with seller
• Goodwill and reputation
• Buyer type: strategic or financial

These methods are just a sample of many methods used in valuing the unique characteristics of a transportation business. “Rules of thumbs” rarely apply to the transportation industry and can greatly mislead business owners. Applying a combination of 7-8 different methods and weighting them accordingly is the most reliable approach to valuing a transportation business.
Though the process of accurately valuing a transportation business can be very complex, the purpose is simple. The current value of your transportation business should influence almost every significant financial decision throughout your company’s life cycle–not just the final decision to sell it. When business owners clearly understand the value of their businesses, they make sound re-investments with risks proportionate to the potential rewards. When it is time to sell their businesses, they are positioned to experience the process in the most seamless and rewarding manner possible.

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