Tow Times Magazine
What’s the Value of Your Towing Business?
By Tim Jackson, Editor
In the not-too-distant future, there could be a lot of towing company owners looking to determine the value of their businesses as they contemplate retirement. Steve Ridgley, owner of Pathfinder Financial Services LLC of Louisville, Ky., explains: “One: The Baby Boom phenomenon. Owners in their 60s and 70s are wanting to do something with their businesses. Lots of businesses are going to be available to buy. There will be a lot of businesses to be sold or transferred. More than any other time in our industry’s history.
“Two: Towing companies are primarily family-owned. And it’s a 24-hour business. The owner’s children will work at the business, or manage it, but they don’t want to take over ownership.”
Many offspring of towing company owners want to be involved in school, sports and other activities or pursue careers outside of towing not a 24-hour business that includes weekends.
“Owners are wondering what they are going to do with the business,” Ridgley says.
“Something that is happening in my state of Kentucky is a macrocosm of a trend that is happening nationally” Ridgley adds. “Of the heavy-duty towing businesses in Kentucky, there are currently three towing outfits in which the kids will take over ownership of the business.
Over the next 10 years, the towing industry will see a lot more mergers and acquisitions across the country.”
As baby boomers reach retirement age and want to sell their towing businesses, towing company owners are faced with the question: What’s my towing company worth?
While there can be numerous factors to consider in a merger or buyout, there is a basic approach that an give towing company owners an idea of their company’s value. Here are some factors to consider:
Get Your House in Order
“If I was a towing company owner interested in selling or merging, step one would be to make sure my financial ‘house’ is in order,” says Mike Welch, chief financial officer of Guardian Fleet Services Inc., featured in the October and November 2017 issues of Tow Times. The company was created by the merger of three Florida towing businesses to form the industry’s first employee stock ownership firm.
“This means having financial documents that go back several years.”
Ridgley echoes that opinion! “For an initial valuation to give a business owner a thumbnail sketch of the company’s worth, you will need three years of financial statements and tax returns for each year.”
With three years worth of financial and tax information, the process of determining the true cash flow of the business gets underway.
“Determining value in the towing industry is generally based on cash flow,” Welch says, “which is earnings before interest, taxes, depreciation and amortization – EBITDA.”
The website lnvestopedia states, “EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. EBlTDA is often used in valuation ratios and compared to enterprise value and revenue.”
This presents a cash flow perspective on a business, and what the business is worth pre-debt. Once this figure is established, a multiplier is added to refine the estimation of a business’s worth. “We look at EBITDA or cash flow for those three years and then come up with a one-year average among three,” says Ridgley. “Then a multiplier of four to five times is added, because that’s usually what cash flow is worth. This gives me a thumbnail view- a preliminary valuation of the company.”
Value of Your Assets
Next, the value of the company’s assets is considered. For towing companies, this would be the fleet of trucks it operates.
“How new is the fleet? How well is it kept up?” Welch says. “As an investor, I need to know how much more capital is needed to keep the business growing, or to make it grow. Is it a high investment or a low investment? The multiple of cash flow is affected by the quality of the fleet.”
Arriving at the value of the fleet would mean having an appraisal of the fleet by an outside firm familiar with truck appraisal using factors such as mileage, age, equipment condition, current investment and so on for each truck in the fleet, Ridgely says. “If I’m a buyer and you have a fleet of 20 trucks, how many am I going to have to replace, or how much am I going to spend to upgrade the fleet in the next four to five years?”
An In-Depth View
Once cash flow and the condition of the fleet is determined, other considerations include:
- Contracts. “Police contracts, rotations, strong fleet contracts, these have value,” Welch says.
“How many years are left on state, city, etc., contracts?” Ridgley says. “Are they about to expire? Then the value drops. In towing, the majority of contracts are built on business relationships. If a key person with the company, such as the owner, is gone, will that relationship continue?” There may be a need to have the owner remain with the company until contracts are renewed, he says.
- Whether the company owner leaves or stays with the company. Typically, the value of a company increases if an owner stays with the business after the sale.
- Client diversity. “A mix of revenue sources affects value,” Welch says, adding that a distributed mix of heavy-duty and transport customers along with light-duty work can add value. The number of clients and how much the work is spread out between them is also considered. Too much business devoted to a single client can decrease the company’s value. “If 70 percent of a company’s business is motor dub work, this puts the value in a lower range,” Welch says.
“If a single customer generates more than 10 to 15 percent of the company’s revenue, this will have a negative impact on a business’ value,” Ridgley says. “If I buy the business and that client leaves and revenue drops 10 to 15 percent, all of my profit has left the business. That’s one of the top things banks look at very closely: What percentage do your customers represent as revenue?”
Location, location, location. A key location can add value.
While you may not be ready to sell or merge your business at this time, getting the numbers together and figuring your company’s basic worth can provide valuable insight on the financial health of your operation, and measures needed to get it into the best economic shape to make more profits now, or be an attractive purchase for whatever the future holds.