Trucking company valuation

Trucking company valuation

Valuation is always a topic of great interest to transportation company owners. Companies today have made the difficult decisions necessary to operate successfully through the Great Recession. While demand has increased in recent years, challenges persist due to regulation, driver demand and fluctuating fuel costs. How has the company’s value been impacted by the challenges faced during the Great Recession? And most importantly to business owners: how to build a higher value for my business?

Here's why you should care about an accurate valuation of your business, along with three specific methods for measuring it:

  1. Mergers and Acquisitions
  2. Succession Planning
  3. Growth and Development

Buyers and sellers of trucking companies must consider a long list of factors when determining value. Some of these factors take into account the financial condition of the company – think of these as the “quantitative” factors. But several important factors that affect value (such as driver quality, customer relationships and management experience) cannot easily be measured.

These “qualitative” factors often separate the most valuable companies from the pack.

The trucking industry for example in the U.S. comprises both local and long-distance freight transportation. Long distance trucking makes up approximately 85% of the industry, while local trucking encompasses the remaining 15%.

We are taking the U.S. as an example of trucking industry.

Trucking companies suffered declining revenues during the recent recession due to decreased consumer demand and increasing costs. Between 2008 and 2013, long-distance revenues declined an average of 1.5% annually, local trucking revenues declined even more sharply, at 2.7%.

This decline is expected to turn around as the economy recovers, with analysts predicting long-distance trucking revenue increases of 1.3% in 2013.

The U.S. trucking industry is highly fragmented and includes almost 230,000 for-hire carriers and more than 280,000 private carriers, with the top 50 companies generating approximately 40% of total industry revenue.

Industry Trends

Trends in the trucking industry are primarily driven by fuel prices and changes in the world economy. A few of the most significant trends are:

Hours-of-service regulations limit shift times:
More stringent limits on drivers’ hours-of-service have been proposed repeatedly over the past several years. Regulators hope to prevent accidents due to fatigue by limiting the length of shifts for truck drivers, who often drive 500 miles in a day. On July 1, 2013 new regulations went into effect limiting the average work week for truck drivers to 70 hours and requiring drivers to take a 30 minute break during the first eight hours of a shift.

Inventory management technology increases efficiency:
Many retailers and warehouses have instituted just-in-time (JIT) inventory management systems that enable companies to monitor stock and more efficiently transport goods on the most convenient routes. These programs increase trucking companies’ productivity and decrease turn-around times.

Fuel costs threaten profits:
Fuel and oil are the second highest operating cost for trucking companies, behind wages. Over the last several years, the price of oil has reached record highs. Many carriers have introduced fuel surcharges as a way to cover their increasing costs. As fuel prices continue to rise and freight trucking costs increase, customers will begin to look for alternative methods of transporting goods.

Key Performance Metrics

The following are performance metrics that managers in the trucking business use to benchmark their performance against others in the industry:

  1. Tonnage carried annually
  2. Percent full loads
  3. Ton-miles (cargo weight x distance traveled)
  4. Fleet capacity

Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing a trucking company. These methods are:

Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities. This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets.

Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations. The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).

Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.

Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded trucking companies and privately held businesses. The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Speak With An Expert advisor about your plan at (877) 810 - 4172