A trucking company's worth depends on expected cash flow, market transactions, and net asset value, while driver quality, customer relationships, management experience, and debt influence the premium a buyer may pay.
Transportation company owners have long been interested in valuation. By 2013, many had made difficult decisions to operate successfully through the Great Recession, but regulation, driver demand, and fluctuating fuel costs continued to create challenges.
Owners therefore needed to understand both how those conditions affected value and how to build a more valuable business.
Quantitative and Qualitative Value
Buyers and sellers consider a long list of factors. Some reflect the company's financial condition and can be treated as quantitative.
Other important factors are harder to measure. Driver quality, customer relationships, and management experience are qualitative attributes that often separate the most valuable companies from the pack.
Three general valuation methods translate those factors into an estimated dollar value.
Income Method
The income method estimates the future cash flow a trucking company can generate.
Historical cash flow provides the basis for a meaningful forecast. No forecast is a perfect crystal ball, but evaluating the company's cash-flow capacity helps buyers and sellers understand the risks and opportunities ahead.
Market Method
Public transportation companies receive a market value every trading day, and capital-market information influences the value of smaller private trucking companies.
Public-company values are imperfect guides because those businesses are usually larger and more diversified.
Private trucking-company transactions can also provide valuation multiples based on revenue, earnings, cash flow, or book value. Those multiples vary widely and should be used only as approximate indicators.
The article cited Pratt's Stats data for trucking-company transactions from 2008 through 2012. The median-multiple analysis defined invested capital as the debt-free value of the company and EBITDA as earnings before interest, taxes, depreciation, and amortization.
The lowest observed deal multiple was 0.39 times EBITDA. The highest was 18.11 times EBITDA. Results varied substantially.
Asset Method
The asset method begins with the market value of assets minus liabilities. Transportation equipment should be considered at market value rather than simply at its accounting value.
The result is adjusted book value. Owners generally hope to sell for more than that amount.
The premium above adjusted book value is commonly called intangible value or goodwill.
How an Owner Can Build Value
Generate Positive Cash Flow
Profits are useful, but cash flow pays the bills. Efficient operations convert net income on the profit-and-loss statement into cash.
Collecting receivables and managing the amount of capital equipment are important parts of that conversion.
Develop Tangible and Intangible Assets
Cash, working capital, and equipment are visible assets, but a buyer also values driver quality, durable customer relationships, and the know-how of an experienced management team.
Those intangible strengths can support a value above adjusted book value.
Manage Debt
The valuation multiples discussed in the article represent debt-free business value. Trucking companies often finance equipment, and low interest rates can make borrowing attractive.
Excessive debt can still weaken the company. A healthy balance sheet requires an appropriate balance between debt and equity.