January 5, 2015 4:00 AM, EST

Reasons Nobody Wants to Buy Your Company

This Opinion piece appears in the Jan. 5  print edition of Transport Topics. Click here to subscribe today.

By Michael Schwerdtfeger

Managing Director, Chapman Associates

Now is a great time to sell a trucking business. The steady economic uptick and correlating demand for freight has created a shortage of the trucks and quality drivers needed to meet these increasing demands. As a result, large and midsize trucking companies are looking for ways to increase capacity, and many are finding the acquisition of smaller fleets a cost-effective solution.

The problem for potential sellers is that too many owners neglect to implement fundamental business practices that have a direct effect on their company’s marketability and value to prospective buyers. There is a crowded field of owners who, because of that neglect, are merely managing assets rather than a business in the eyes of an acquirer. Common flaws include low-quality drivers, outdated equipment and unsustainable systems — and these shortcomings will directly affect an owner’s ability to sell.

Here’s a brief analysis of how to mitigate those flaws:

Low-Quality Drivers

Quality drivers are currently in short supply, so most buyers will want to make sure they are able to acquire them in any purchase. It is crucial that a business not only possesses a stable of drivers, but it must be one full of quality drivers that the purchaser will be able to retain.

New regulations have complicated how potential buyers define quality drivers. The Federal Motor Carrier Safety Administration is expected to publish an electronic-logging mandate in 2015. This significant change highlights an industrywide safety push.

Some sellers think that rather than complying with new regulations, they can sell instead and make it someone else’s problem. The truth is that buyers do not want to solve regulatory problems any more than sellers do.

If owners do not make drivers comply with the best safety practices, they are not going to be a valuable asset when it comes time to sell.

Larger trucking businesses typically have more stringent rules and policies for drivers than smaller outfits. This creates a problem because the larger company looking to buy may view those drivers as low-quality, because these drivers are not accustomed to complying with the policies in place by the larger company. If the buyer sees them as unfit or as hires who won’t be retained, it could kill the deal or significantly reduce the offer.

The solution to this problem is staying ahead of these regulations and safety requirements. If an owner wants to develop his stable of drivers as an asset for when he is ready to sell, he must make them abide by regulatory guidelines and best safety practices.

Outdated Equipment and Technology

Owners who intend to sell in the next five years or so must continue to run a business, and that requires maintenance on existing equipment and purchasing new equipment when appropriate. Owners simply cannot defer maintenance and capital expense and expect to get top dollar for their business.

It is difficult to sell a company with old equipment. Lack of fuel efficiency, compliance shortfalls and other issues raise red flags for buyers.

Lack of automated technology systems is also an issue that can affect a potential deal. If an owner is still working with paper logs and systems (e.g., accounting and dispatch) do not link up, the buyer will not view it as a real business. At that point, the owner is just selling used trucks.

The bottom line is buyers do not want outdated equipment or systems. Businesses that lack modern, compliant equipment are not interesting to buyers. On the other hand, owners with more modern, well-maintained equipment and technology will be well-positioned when it comes time to sell.

Lack of Management and Systems

Owners need to have people and systems in place to make it a sustainable business after the sale. If an owner is doing all the dispatching and customer management, a potential buyer probably will have concerns about how the business will function when the seller is out of the picture. This highlights the importance of planning. It is critical for the owner to build a management team. Buyers often want people in place who can continue operating the business even after the transaction is completed.

Similarly, in terms of processes, owners should make sure that operational and financial processes are in line with what a potential buyer is going to want to see. I have heard a lot of people over time tell me that they keep their systems running in a way that is “good enough for me.”

I understand that sentiment, but at the end of the day, a buyer wants what best matches its current operation. Putting in place a set of operational and financial processes that fit most buyers is going to make a company much more valuable.

Financials are particularly important because they need to tell the company’s story. Owners need to be able to explain their profitability to prospective buyers, but that is a difficult task if everything is on paper and they cannot figure out exactly how much money they are making from each customer.

The best way to avoid these pitfalls and best position a trucking business for sale is to get expert advice. Owners should bring in professionals to help them identify weaknesses and formulate plans to overcome them.

Beyond advisers in the mergers-and-acquisitions space, owners planning to sell should seek counsel from their attorneys, wealth planners, accountants and other trusted business advisers. For many trucking business owners, the company represents the majority of their wealth, so it is important for them to create a solid plan for what could be the biggest deal of their lives.

Chapman Associates is a nationwide mergers and acquisitions firm.