Business owners shouldn’t wait until they have to sell their business to begin the planning process, otherwise they’ll “lose control of the process.”
Mike McCarron, M&A consultant with Wheels Group imparted that advice and more during a discussion on mergers and acquisitions in transportation at today’s Surface Transportation Summit. He was joined on the panel by Doug Nix, vice-chairman, Corporate Finance Associates. Both speakers brought a unique perspective to the discussion; Nix has brokered many major acquisitions throughout his career and McCarron last year sold his own company, MSM Transportation, to Wheels Group.
McCarron said the trucking and 3PL markets are ripe for an escalation in M&A activity.
“I think trucking companies realize that without scale and technology, it’s going to be impossible to survive,” he said, citing that as one reason he and his partner opted to sell MSM when they did.
“We knew we were too big to be small and too small to be big. We had to decide, do we want to risk everything at this stage in our lives? Do we want to go to ground zero and raise money? The people I’ve talked to in the business are thinking the same thing, ‘What am I going to do to get out?’ I think that is going to drive a lot of acquisitions, that state of mind in the industry.”
As baby boomers near retirement age, they’ll have to devise an exit strategy. McCarron pointed out there could be a logjam of boomers looking to sell at the same time, driving down expected returns.
Asked how business owners will know when the time is right to sell, Nix offered this tongue¬-in-cheek advice: “Ask your wife.”
If you no longer wake up in the morning eager to go to work, Nix said it may be time to prepare your business for a sale. But first, you should determine if it’s even saleable. Commoditized trucking companies without an established, steady customer base may be disappointed to find their business has little value in the marketplace. When considering when to sell, Nix said “I’d say it’s better to sell a little too early than a little too late, because you’ll never get that time back.”
McCarron said the owners of mid-sized trucking companies, and any sized 3PL will find it difficult to keep pace in the current environment unless they add scale or invest a fortune into technology. American 3Pls are making capital investments into technology that dwarf what their Canadian counterparts can or will make.
McCarron suggested owners prepare their company for sale even before they’re ready to step aside, so that they are able to initiate negotiations as soon as a prospective buyer comes knocking.
It can take two years or more to clean up the minutes books, settle old lawsuits, and clean up the business, and by that time an interested buyer will have moved on to another pursuit.
Once you’ve been courted by a prospective buyer, it’s important to determine if the match is a good fit for your business. McCarron said he stopped returning the calls of a private equity firm when he sensed they were looking to cut costs, strip the company of its culture and then flip it for a quick profit, all while he’d be expected to stay on and assist with the process.
“It was about slashing and burning and ripping the culture apart,” McCarron said. “We felt far better with a strategic fit.”
But Nix cautioned against ruling out investment buyers. “We invite private equity groups into controlled auctions, because there’s half a trillion dollars sitting uninvested in North America. You can’t ignore that,” he said. “Oftentimes, the private equity guys will pay more money if it’s the right deal.”
However, he added few asset-based trucking companies will appeal to private equity firms.
When a good match is found, McCarron said it’s a good idea to solicit the help of an advisor, who acts as a buffer between the negotiating parties throughout the transaction. This helps keep negotiations from becoming too personal, McCarron said. This is important, since in most deals, the previous owner will be expected to stay on for a period of time during the transition, so a cordial relationship must be maintained.
“Where they bring the most value is the intangibles,” McCarron said of investment bankers.
It also frees up the business owner to continue running the business. McCarron said it’s a mistake to think that the dollars attached to the transaction on the letter of intent is the final value of the deal. Any losses suffered during the transaction process will affect the final value of the company at closing time.
“The price you sell your business for is not he price on the LOI,” he said. “I was terrified I would lose a large customer during the transaction. The advisor lets you focus on running the business.”
Having an advisor on-board also helps protect against “deal fatigue,” McCarron added.
“You cannot go through this process on your own,” he said.
Nix agreed, adding, “There’s a ton of emotional expenditure and effort and resources that goes into the sales process. If you’re not serious (about selling), don’t pull the trigger on this because it will sap your energy and your business will suffer for it.”
When choosing an advisor, Nix suggested asking them what they’ve accomplished lately.
“A lot of people will tell you what they’re working on, but few will actually say ‘I did this,”‘ Nix said. “There’s a difference. The reason they’re talking about what they’re working on is that they don’t have anything to talk about that they did.”
It’s important, Nix said, that both parties trust the advisors they’re dealing with.
If you’re looking to acquire another company, set out to find a target that fits a strategic need, not just to grow top line revenue, Nix said. Both Nix and McCarron agreed that buyers should pick up the phone and call a company of interest, even if it isn’t for sale.
When a fit is found, Nix suggested moving the transaction along as quickly as possible.
“Everything that drags gets dirty,” he said. “I’m a big proponent of shortening timelines.”
As for when M&A activity will pick up, Nix said a dearth of deals this year isn’t due to a lack of interest.
“I see in the industry lots of interest and lots of discussion,” he said. “But I also see lots of caution. People are hesitant to pull the trigger.”
Last year, Nix’s firm did 45 mid-market transactions across North America, and this year they’ve done only 20. He thinks the decline is partly due to the uncertain political environment in the US, and that “once that stability comes, I’m quite bullish on the future levels of M&A activity.”
Large-sized 3PLs are expected to be the most sought after targets, and are currently fetching valuations of 6-7xEBITDA. Asset-based trucking companies by comparison are commanding just 3-4xEBITDA.