Opinion: Navigating the Deal Market With Confidence

By Chris Rowe and Miller Welborn

Managing Director and Senior Adviser

FourBridges Capital Advisors

This Opinion piece appears in the Jan. 11 print edition of Transport Topics. Click here to subscribe today.

The deal market in the transportation industry currently is in a rare position — it’s good for both buyer and seller. Deregulation in the 1980s made it a good time to buy or start a transportation company, and entrepreneurs flooded the market. Now, with regulators taking renewed interest in the business, owners are motivated to sell — a motivation bolstered by the fact that they are approaching retirement age, a low interest rate environment, a good economy and capital is ready to be deployed. These factors make the current environment a “perfect storm” for selling.

For buyers, investment in the industry remains strong, thanks to economies of scale that lead to solid margins and the reality that transportation of goods is an essential component of every company in the product-based business.

All of this is evidenced by the rising tide of transactions. According to an August 2015 PricewaterhouseCoopers report, merger and acquisition activity in the transportation and logistics industry in the second quarter increased from the first quarter and year-over-year — with trucking and logistics accounting for more than 50% of all deal volume.

But while M&A activity in the industry is strong, a transaction isn’t a sure thing, or the right thing, for every transportation company.

Many factors can make an outright sale the wrong move, such as timing, personal motivation or owner’s value objectives. Additionally, many owners are ready to reduce their risk, but they’re not ready to bow out of the business. Many others are hungry for growth, but they aren’t sure where to get the capital needed for it.

With the deal market ripe for transactions, it’s important to understand that forgoing a sale doesn’t limit a transportation company’s strategic business opportunities. Owners have many alternatives ready to enhance their position:

• Strategic Partnerships: Strategic partnerships allow transportation companies to focus on the core competencies of their business by having a partner company execute other tasks. This can include outsourcing administrative processes, fleet maintenance or even distribution and hauling. Partnerships can be highly valuable to small fleets, in particular, because working with a successful logistics company offers access to shipping lanes and a larger pool of customers without compromising ownership.

• Joint Ventures: A joint venture combines the resources of two companies and creates a new entity for what typically is a specific opportunity. The companies do not formally merge, but they do formally agree to work together in a limited capacity. For example, a joint venture may combine the resources of a logistics company and a trucking company to pursue a contract with a key client in an emerging market. The stakes are raised in joint ventures, as both parties take on risk, but they allow companies to take advantage of opportunities they may not be able to pursue alone, thereby increasing profitability.

• Employee Stock Ownership Plans: An ESOP, which provides employees with stock ownership, might be an ideal fit because it can allow a company owner to exit without bringing the company directly to market. Arranging an ESOP can be legally complex, but for many owners who value their teams, it may be the best option for sustainability and culture.

• Private Equity: Pursuing private equity allows owners to sell a portion of their company and obtain the capital resources necessary to stimulate growth.

While private equity hasn’t historically been pervasive within the transportation industry, investors’ interest has risen in recent years. That’s because, with an estimated $400 billion in equity cash chasing down deals, investors are looking beyond the usual suspects to deploy this mountain of capital.

Knowing the external options on the table, you must then look internally to make a smart decision that’s right for your particular company.

For instance, have you examined your own financial narrative? Where are your company’s strengths and weaknesses with profitability, assets and customers?

If you notice high customer concentration, for example, perhaps a joint venture will provide an opportunity to strategically diversify your company within a new market.

When considering an investor or a partner, ask what factors are not negotiable: Safety records? Management style? Existing book of business? It’s important to do your due diligence to ensure it will be mutually beneficial to move forward under a new structure and gain maximum value to your bottom line.

Take a recent transaction in the Southeast. An oil jobber was concerned about the profitability of its retail fuel distribution.

Selling retail fuel is highly competitive and demanding. Management recognized that the company’s core competency was in selling the fuel, not in delivery of the fuel, so it decided to partner with a logistics expert.

The company solicited bids for contract and received many competitive offers. But rather than looking at financials only, it was essential to the company to work with an outsourced hauler that valued safety to the same degree as it does and was a good cultural fit. Ultimately, the company chose a partner in the same region with an award-winning safety program. With core values aligned, the companies could move forward with full confidence in the partnership.

Savvy transportation company owners will keep a close eye on emerging opportunities to grow profit margins and reap maximum value out of their businesses — whether that’s through a sale or the many other transaction opportunities that exist in today’s healthy deal environment. No matter what the next move looks like, it’s always wise to walk through it with your trusted advisers — lawyers, accountants and investment bankers — who have a thorough understanding of your business and what you want to accomplish.

FourBridges Capital Advisors champions business owners who are planning or executing transactions such as selling and buying businesses, and borrowing and raising capital.