‘Fiscal Cliff’ Sparks New Deals as Carriers Ponder Tax Changes

This story appears in the Dec. 10 print edition of Transport Topics.

The nation’s pending “fiscal cliff” and uncertainty about future federal tax rates are turning up the pressure to complete trucking industry acquisitions and sales before the end of the year, according to industry experts.

“We are working on eight deals right now,” said Ben Gordon, managing director of BG Strategic Advisors, which specializes in trucking and logistics deals. “Lots of sellers are eager to complete transactions before year-end. All of them would be eager to sell before tax rates go up.”

See this week’s Editorial: Growing ‘Cliff’ Worries

Congress and the Obama administration last week continued to negotiate revenue and spending changes before automatic spending cuts and tax increases — widely referred to as the “fiscal cliff” — take effect on Jan. 1 if no action is taken.

Those changes include raising capital gains taxes from 15% to 20%, raising individual income tax rates to as much as 43% and imposing a new 3.8% Medicare tax.

Trucking is especially affected because many businesses are limited liability corporations, or LLCs, in which the tax liability falls directly on the owner, said Gordon and Lana Batts, a principal at merger adviser Transport Capital Partners of Chattanooga, Tenn.

“An LLC is typically paying 35% taxes on profits,” said Gordon, who is based in Palm Beach, Fla. “Those rates are likely to go to 43%. A trucking company making $10 million profit is going to have to pay an extra 8%, or $800,000.”

“A lot of carriers say they want to sell before the end of the year,” said Batts, noting that truckers typically are LLCs that fall in the 2% of Americans whose taxes the Democratic Party wants to raise. “They may be buyers or sellers, but in the end they’re individuals, and a 3% or 6% tax increase comes out of their cash.”

Two other merger experts, Andy Ahern, CEO of Ahern and Associates, Phoenix, and Pete Lieberman, managing director of Schneider Downs Corporate Finance, Pittsburgh, agreed that the acquisition pace is quickening.

“A lot of customers are saying, ‘Get us out of here,’ ” Ahern said, referring to their trucking business.

“There is clearly a meaningful incentive to move forward now,” said Lieberman. There is no question in my mind that the fourth quarter will be the busiest quarter of this year.”

“We don’t know what is going to happen after Dec. 31,” Lieberman added, “but we know rates are not going down.”

Everyone interviewed by Transport Topics stressed the difficulty in completing transactions in the next several weeks because the typical transaction takes four to six months.

Gordon offered one approach that might still be done in 2012 — payment of a dividend or distribution that gives the owner immediate cash in addition to a recapitalization funded by debt at low interest rates.

“But they have to get started immediately, as time is very short,” Gordon said of that approach.

Even if acquisitions aren’t done by the end of 2012, deals still could happen. Three deals were announced last week.

“We are also working with sellers who are focused on maximizing total value net of taxes,” Gordon said. “If we can help a client to sell for 20% to 25% higher in 2013, then in most cases, they will be better off, even after taxes are factored in.”

Buyers, Ahern said, also are saying they are willing to work out a way to include any excess capital gains taxes that have to be paid by the seller into the overall structure of the deal.

There may be a “window” in early 2013 when deals can be completed under the current, lower tax rates, Ahern said, adding that buyers in general don’t believe there will be any immediate changes in federal tax policy.

Batts raised the prospect that a “fiscal cliff” deal could further complicate the tax picture.

Buyers and sellers can’t be sure there won’t be retroactive tax increases back to Jan. 1, she explained.

The fiscal cliff particularly affects private equity buyers, Batts said.

“They are thinking five years out,” she said, referring to buyers outside the trucking industry who view a fleet as an investment. “They want to flip those companies in five years, but they don’t know what the tax rate will be.”

On the other hand, a trucking company that’s a buyer should be willing to wait longer to complete an acquisition if it makes business sense, she said.

Ahern, who said 2012 is his company’s best year ever, stressed realistic seller expectations.

Some asset-based carriers may get only 4.5 times the company’s annual earnings before interest, taxes, depreciation and amortization, or EBITDA, he said, though some have said they are holding out for 10 times EBITDA or more.

Non-asset-based carriers may get as much as seven times EBITDA, Ahern said. The higher amount reflects higher potential profit because the buyer doesn’t have to pay the costs of operating assets.