Market Transaction: Business Valuation

ABC Trucking
123 Main Street
Anytown, USA

All commercial transportation modes experience business cycles, to some degree, because demand for physical goods rises and falls with economic activity. Illustrating this trend, we have observed a general slowdown in the macro-economy in the second half of 2007, which has understandably caused a slow down in the trucking industry.

In light of the slowing economic and industry factors, firms competing in this sector and seeking to achieve growth similar to that generated in the stronger years of 2004 and 2005 now consider growth by acquisition as opposed to organic growth. With the exception of fuel surcharges, it is increasingly difficult for carriers to pass on price increases to customers. In the recent past, there was a driver shortage within the industry which made it more expensive for transport companies to recruit qualified drivers. Driver shortage is no longer a problem, due to the industry slowdown, but increasing costs have put downward pressure on earnings. As a result, we anticipate the number of mergers and acquisitions relating to the transport industry to pick up during this slower economic cycle.

This transaction involves a trucking company which was acquired by another carrier within the industry. Presented below are the salient details of the transaction. As can be seen, the acquisition target had revenues of roughly $16 million; however it was not generating any profit. Despite this fact, the company was still an attractive target because of its drivers (both employees and owner-operators), equipment, and customers in place. The deal value was about $6 million for these assets. This translates to a price to revenue multiple of 38% and a price to assets multiple of 2.0.

As a note, most of the value paid for the acquired company was allocated to equipment such as tractors and trailers. There was some goodwill or intangible component of the deal value that was paid for the company's drivers in place, its name, and its customer list, among other items. The acquired company's lack of profitability was not a major deterrent for the acquiring company due to the belief that, post-acquisition, the company would become profitable under its new management.

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