Opinion: Sold! Buying or Selling a Trucking Firm

By Chad Rash, Senior Manager, Transactions Advisory Services

and Timothy Gallagher, Tax Manager, Grant Thornton LLP

This Opinion piece appears in the July 2 print edition of Transport Topics. Click here to subscribe today.

Going once . . . going twice . . . do I hear another bid? The pages of Transport Topics read like an auction ledger these days, reflective of what’s happening in the market.

At the annual conference of American Trucking Associations’ National Accounting and Finance Council on June 11-13, we had discussions with a number of carriers regarding the overall acquisition process. Acquisition activity is becoming more important to trucking companies as driver shortages and revenue equipment prices push smaller carriers out of the marketplace, while regional and national carriers add capacity and drivers.

In preparation for an acquisition or divestiture, carriers must be conscious of the challenges associated with these transactions. Too often, owners and management come to the deal table wishing they had been better prepared.

Whether you are a buyer or a seller, you need to develop a strategy in advance to maximize the overall transaction value. Here, then, are some guidelines to follow if you are considering acquiring or selling a transportation company, beginning with performing your due diligence.

Buyers should include due diligence as a condition of purchase in the letter of intent. Due diligence allows the buyer to further understand the overall operations of the business, the consistency and quality of the financial information and to further refine the perceived value of the entity.

Sellers should go into a transaction prepared for due diligence scrutiny. Conducting an analysis of key risk areas now is time well spent. The seller often negotiates around these items if they are identified and addressed prior to due diligence.

Both parties should be prepared to address three main areas as part of the due diligence process:

• The quality of earnings before interest, taxes, depreciation and amortization (EBITDA) and working capital.

• The quality and availability of data.

• Potential strengths or weaknesses that could affect value.

First, consider the quality of EBITDA and working capital. For certain transactions, EBIT (including depreciation and amortization) or EBITDAR (excluding rent) may provide a better indication of the earnings quality. Look at historical financial results for any nonrecurring or unusual items in addition to any potential deficiencies in the accounting function that might have an effect on the quality of earnings. A buyer will pay more attention to unaudited information, so if a seller has not completed an audit in several years, he or she should prepare for increased scrutiny in due diligence prior to putting the company on the market.

Next, determine the quality and availability of data that will be scrutinized during due diligence. Preparing these data can be time-consuming but is critical to closing the transaction in an efficient and timely manner with minimal interruptions for management. Most transactions employ an online data room to hold key information requested in the due-diligence process.

Finally, consider potential strengths or weaknesses that could affect the perceived value of the entity. Areas of focus include: customer concentration, related party transactions, commitments and contingencies, customer and vendor arrangements, key employee agreements and seasonality.

After due diligence, the next step is to understand your tax implications — both sides.

Savvy buyers and sellers plan in advance for the tax effects of a transaction. Transactions can be structured as immediately taxable or tax-deferred, depending on each party’s needs.

Buyers acquiring a carrier almost always will want the benefit of tax “step-up” from a transaction characterized as an asset purchase.

Sellers, on the other hand, may prefer a transaction characterized as a stock purchase so as to maximize the benefit of lower capital gain tax rates.

Alternatively, owners of the selling company may want to defer all or part of the gain on the sale by maintaining some equity interest with the company after the deal.

Both parties should realize flexibility and limitations prior to initial proposals.

Sellers should anticipate the optimal tax-entity structure before entering the market. Pass-through entities provide greater flexibility for both buyer and seller to obtain optimal tax results.

Owners who anticipate selling in the near future may wish to convert the company’s tax status to an S-corporation or limited-liability company, after consulting tax advisers.

Buyers should anticipate all these tax consequences for themselves and the seller before approaching the seller. The buyer should set forth the proposed structure in the letter of intent to avoid last-minute disputes and maximize the value received.

Then there are post-transaction tax issues for the buyer to consider. For example, the buyer must address any required benefit plan and employment tax changes. The buyer must understand any resulting change to the company’s tax structure in order to determine all tax implications (income/franchise and operating taxes).

Finally, the buyer must address the tax accounting in the financial reporting for the transaction. Purchase accounting often requires an opening balance sheet calculation including deferred tax balances. Complexities include the tax accounting for goodwill, the need for a valuation allowance and the reserve for uncertain tax positions.

It is crucial to record the opening balance sheet tax accounts correctly. Subsequent “fixes” often are material to the financial statements and may result in a restatement. Smart buyers address these issues before the transaction is complete and during the transaction process.

Acquisitive growth provides numerous opportunities in today’s transportation industry. Buyers and sellers alike can maximize their value by addressing these key areas with their advisers. If they do, their efforts will be rewarded when they hear . . . “Sold!”

Grant Thornton LLP, Chicago, is the U.S. member firm of Grant Thornton International Ltd., London, and is one of the firm’s six global audit, tax and advisory organizations.