Opinion: Exit Planning for Family-Owned Businesses

By Charles Tenney and Spencer Tenney

Managing Partners

The Tenney Group

Exit planning in trucking is unique for a variety of reasons. Add a family-owned business to the mix and things get complicated, especially in the current transaction market.

When family-owned businesses take the unique issues associated with exit planning in this industry head-on, they multiply their options, protect wealth and reduce financial risks. Maximizing an exit plan starts with communication within a family, early and often. Here are a few topics to help get the conversation started:

• Is asset-heavy industry a fit for the ideal successor?

When it’s time to transfer ownership to the next generation — through purchase or gift — a successor, who likely had very little debt prior to a transfer of ownership, immediately takes on 100% of the company’s debt. This issue often complicates exit planning for family-owned trucking companies. No matter how compelling the investment opportunity is to a family member, it is very possible that he or she does not share the same comfort level of carrying millions of dollars of debt on their shoulders.

The trucking industry is a powerful investment vehicle for building wealth. However, if the ideal successor of a family-owned trucking business is apprehensive about accepting complete responsibility for the company’s balance sheet, it may not matter. The challenge for family-owned trucking companies is making sure the exit plan aligns with the family’s financial and lifestyle goals.

• Do optimal market conditions conflict with successor readiness?

According to a recent study of capital markets by Pepperdine University, the valuation multiples in trucking and transportation middle-market purchases — $1 million to $50 million in earnings before interest, taxes, depreciation and amortization, or EBITDA — were higher in 2014 than at any other point since 2007.

This means the sources of capital — lenders and private equity groups — currently are approaching transactions very aggressively compared with historical activity. This creates more tools and leverage for buyers and sellers to apply to deals, which allows owners to enhance the financial outcome of the sale.

The opportunity in the current capital markets creates tension for many family-owned businesses. Many older owners feel they need to cash out and prefer to keep the business in the family. But the potential successor may not be ready, experienced or 100% committed to that role.

Depending on the current owner’s appetite and available capital to meet trucking’s growing challenges — such as the driver shortage, technological advances, new regulations, pending insurance requirements, etc. — waiting could create additional costs that diminish proceeds from a future sale.

The owner wants to take chips off the table, continue the family legacy and give the family member time to prepare and commit to the business while avoiding unreasonable financial risks, which is not an easy proposition.

• What are the possible outcomes for family businesses and what is at stake?

The possible financial outcomes of the sale of trucking companies vary greatly. This goes back to the asset-intensive nature of this industry. When a family member secures financing to purchase a trucking company, the lending source makes funds available based on company cash flow. The cash flow’s ability to service the debt from a purchase dictates the purchase price. Naturally, this creates limitations on what banks and other lending sources can make available.

Strategic buyers have more options and funding resources. The need to eliminate a competitor or replace quality drivers and other motivations can influence the financial outcomes of a sale. As part of planning, owners of family-owned fleets must define financial goals and, most importantly, define acceptable deal structures.

Then they will be more able to determine which approach —transferring ownership inside or outside the family — is the better fit.

Some owners have the option to finance a transaction directly to a successor over a long period of time. If Junior fails as an owner in that scenario, the proceeds of that transaction most likely will be lost. This option is a non-starter for some families. If the source of funds for an owner’s retirement is outside of trucking and does not hinge on Junior’s success, the risk is still the same but the family has more options to consider.

• Can legacy and wealth protection be addressed simultaneously?

Trucking is a symbol of movement, progress and growth — tangible evidence that the American Dream is alive and well. However, the challenge of ensuring the family legacy lives on and that ownership stays in the family while protecting the family’s wealth can be a difficult balancing act. In the interest of keeping a family connected with trucking, owners often structure transfers of ownership that place unreasonable risks on the family.

Many times, the successor of the family business may not yet maintain the creditworthiness or financial wherewithal to remove other family members from personally guaranteed debt. These arrangements, driven by family and industry pride, have great intentions but often undermine the primary purpose of exit planning — protecting family wealth created through the trucking business after a transfer of ownership.

After explaining all of this, it should be noted that the solutions around these issues are different for every family.

The Tenneys are certified business intermediaries and certified merger and acquisition advisers with 55 years of combined experience. Tenney Group is dedicated to the transportation industry, servicing clients across the United States with offices in Arlington Texas, and Nashville, Tennessee.