Private equity firms are extensively moving into the transportation and logistics arena more and more. The transportation & logistic acquisitions include asset-light and asset-heavy transportation & logistic companies throughout the country. There is so much interest in the T & L industry that we are finding transportation & logistic focused PE firms. We are also seeing these private equity focused firms holding T & L businesses for the long-term in their portfolios.
PE (Private Equity) organizations are private investment funds that use institutional money to finance or buy established T & L businesses with attractive growth prospects. Private equity firms use a number of criteria to evaluate potential investments, and many prefer to EBITDA (earnings before interest, tax, depreciation and amortization). A multiple of EBITDA is the finance industry’s standard metric when discussing a T & L company’s valuation. Most recently we are seeing multiples of 3 – 5 of EBITDA in the current transportation & logistics valuation models. All else being equal, PE buyers value T & L businesses with less risk more highly than those with more risk.
Private equity firms are becoming more aware of how essential T & L businesses are to the domestic and global economies. PE’s are attracted to the fact that the industry has many players, and no single business holds an oversized share of the market. It is not uncommon for a private equity firm to use the “consolidated model strategy” of combining two or more companies in order to reduce duplicating operating costs, leverage economies of scale and gain market share. Efforts could be technology, operations, cash flow and/or equipment as areas PE’s will work on as they fold into the day to day operations to increase profitability. Also, Private Equity firms can better achieve positive investment results by adding service offerings, expanding into new geographies, and adding new markets.
An acquisition can usually be made as an asset purchase or a stock purchase. In a stock purchase, contracts are often part of the transaction, and they stay in place through the transaction. In an asset purchase, contracts typically need to be signed by the new owner. Private equity firms understand the importance of relationships and are seasoned enough to be very careful not to disrupt these very important established relationships. PE companies make every effort to minimize significant disruptions and are incentivized to have the Transportation & Logistics business become more efficient, strengthen customer/supplier relationships, and most critically, grow.
What makes a T & L company marketable to a Private Equity firm?
- Positive profit trend
- Well maintained fleet
- Strong management
- Clean financial records
- Strong history of earnings
- Technology advancements implemented
- Strong non-concentrated customer base