It’s like clockwork. Whenever someone calls me about selling their company, they respond to my spiel with the exact same question: “What’s my business worth?” My answer is always the same but never the one they expect: “It depends.”
There’s no magic formula for determining the price of a trucking business. In fact, what a buyer eventually pays has zero correlation to the estimated presale value. Everything depends on what someone will pay for it. Many different methods are used to value enterprises. The one favored in transportation involves applying a multiplier to normalized EBITDA (earnings before interest, taxes, depreciation, and amortization).
There’s very little negotiating when it comes to your normalized EBITDA. The multiplier is a different story. Think of the multiplier as the neighborhood in which you live. The market determines the price of the houses: bigger, fancier abodes sell at the top of the price range while unkempt teardowns sell near the bottom. Your final sales price will depend on whether you built a mansion or an outhouse. Of course, one man’s shack is another man’s castle. If you’re thinking of selling your company, be prepared to fight for and defend your multiplier. Here’s where I would focus:
Don’t ask. I’ve never known a company that absolutely had to make an acquisition, but every day I speak with owners whose only option is to sell. Far too often the circumstances—not planning—dictate the need for a deal. When you stop negotiating and start asking, you lose your negotiating power.
Team negotiation. If your potential buyer bought five companies last year, it probably looked at hundreds of deals. On the other hand, you probably don’t have a clue as to how to sell your company. Loading up your team with seasoned M&A 50-goal scorers is expensive, but it’s worth it once the puck starts moving. The mere fact you have them on your team sends a strong message that you’re serious and won’t get pushed around on your multiplier.
What’s next? When a potential buyer can see the synergies between the two companies, it’s usually willing to pay a higher multiplier. Using that to your advantage will depend on how much information on long-term plans the buyer is willing to share with you. If the buyer is close-lipped, draw on your industry experience to try and figure out their anticipated savings. The more you can uncover about the buyer’s intentions, the more power you’ll have to drive the number up.
Naughty movies. The purchaser’s biggest challenge is how to sustain the long-term value of your company, so it will look hard at the size and make-up of your customer base. “Bigger” is better in more than naughty films. Buyers see larger companies as being less risky, so the multipliers tend to be higher. Relying on a handful of customers who are also golfing buddies will cost you money. Buyers will drool if you have a large base of repeat, dependable customers in a growing sector of the industry.
How? The multiplier will depend on the terms of payment and the tax structure you negotiate. Getting most of the cash up front sounds great but will reduce the price. Companies will pay higher multipliers when they can distribute the proceeds over time, making portions of it contingent on the performance of your former company. Too many owners balk at earn-out options before considering all of the ramifications, including the restrictions in the non-compete agreements they’ll be signing.
I always tell people it’s probably best not to ask a question if they think they won’t like the answer. Considering the look on their faces when they ask me what their business is worth, I might suggest they put on some Depends before they ask.
Mike McCarron was one of the founding “M”s in MSM Transportation before the company was purchased by the Wheels Group. Based in Toronto, he currently works for Wheels in mergers and acquisitions and can be reached at [email protected]. Follow Mike on Twitter @AceMcC.
