Advising Family-Owned Businesses in the Transportation & Logistics Sector

Advising Family-Owned Businesses in the Transportation & Logistics Sector

For decades, Stephens’ Transportation & Logistics (“T&L”) group has focused on serving the unique needs of family-owned, closely-held and owner-operated businesses. As a family-owned business with a 90+ year legacy, Stephens has a deep appreciation for the importance and complexity associated with the sale or partial monetization of a privately-owned business. Closely-held businesses are a core part of our T&L franchise. In this whitepaper, we reflect on the most common issues we encounter with our clients, and how owners can address them to help improve market readiness.

Our relationships with closely-held and owner-operated businesses are typically developed years before any material transaction or liquidity event. That lead time allows owners to address a few key areas that can help improve marketability, transaction efficiency, and ultimately value. Our preparation with owners begins with understanding their unique objectives, including desired liquidity, post-close involvement, and priorities related to legacy and company culture. Below, we summarize the functional areas where focused improvement can help position a business for stronger valuation outcomes, greater transaction certainty, and a more efficient process. While not exhaustive, these items apply across the T&L landscape, regardless of subsector.

• Finance:
  • Audit: completing a financial audit with a reputable accounting firm, covering three years of income statements and two years of balance sheets, before contemplating a liquidity event helps buyers and capital providers verify reported financial information with confidence. In many cases, audited or independently reviewed financials may be required to access certain debt financing markets. Without them, financing alternatives can narrow, which can negatively impact valuation and increase the diligence burden. While time-consuming, the audit process establishes rigor within the financial reporting system and helps ensure compliance with GAAP.
  • Financial reporting: the marketplace seeks timely, easily digestible financial data. CFOs should target an efficient, GAAP-compliant month-end close of no more than 15 calendar days, enabled by the use of established financial software that is appropriate for the scale of the business. Ideally, the financial reporting system will interface directly with key operational systems, so executives can make KPI-informed decisions and produce insightful business intelligence reports.
  • Financial planning & analysis: monthly and quarterly reporting can help key stakeholders contextualize recent business trends. A robust annual budgeting process along with a long-term forecast can promote internal accountability and can force management to consider day-to-day decisions in light of longer-term company goals.
  • Earnings quality: limiting one-time / non-recurring add-backs and pro forma adjustments can improve the credibility of adjusted EBITDA and support valuation. Buyers and lenders expect adjustments to translate into cash flow. As add-backs become a larger share of adjusted EBITDA, scrutiny increases and “full credit” becomes less likely. As a general rule, any aggregate add-backs in excess of 25% of adjusted EBITDA are unlikely to be fully underwritten.

• Management Team:
  • Full team: having a complete and established executive team in place is important when going to market. Ideally, the team will have been working together for at least one year, allowing key responsibilities and areas of expertise to become well established across the leadership group.
  • Bench strength: demonstrating depth across the management team is important when engaging with prospective acquirers and helps mitigate concerns around “key man” risk. Similarly, having a strong internal bench of future leadership talent can help address succession risk.
  • Market compensation: the team is appropriately compensated, incentivized around KPIs, and aligned with ownership.

• Legal & Tax Readiness:
  • Legal / contracts: owners should review and organize material contracts and corporate records, identifying any change-of-control provisions, contingent liabilities, and near-term renewals that could create friction during due diligence or delay closing.
  • Tax planning: at least one year in advance of a liquidity event, and ideally more than two years in advance, owners of closely-held businesses should review their legal and tax structures with their legal and tax advisors. Doing so well in advance of a sale provides time to make any necessary changes and evaluate strategies that may improve after-tax proceeds.

• Scale:
  • Scale is an important valuation factor. Larger businesses are often perceived as less risky and can attract a broader buyer and lender universe. Across the T&L subsectors analyzed, businesses with more than $10 million of EBITDA have historically commanded higher average transaction multiples. Where practical, achieving greater scale, including, in many cases, approaching or exceeding $10 million of EBITDA, may broaden the buyer universe and support valuation.¹

• Operations:
  • Equipment / PP&E: for asset-intensive businesses, maintaining regular maintenance and replacement schedules is imperative. Deferring necessary capital expenditures to improve near-term cash flow can negatively affect valuation, as buyers may account for the future investment required to restore asset quality. For growth-related capital expenditures, maintain rigorous return on capital metrics that stand up to historical backtesting.
  • Systems: information technology systems should be able to scale. If IT investments are not adequate, buyers will likely assess the resulting “technical debt” and incremental costs required to bring systems up to standard, which may reduce buyer interest and negatively affect valuation.
  • Risk management: insurance coverages should be assessed annually, with policy limits adjusted as the business grows. As the risk of “nuclear” verdicts has increased, buyers are scrutinizing excess coverage more closely relative to a company’s size and risk profile. A company’s internal risk management strategy has also become a core focus in confirmatory diligence, with regular safety training, inspections, reporting, and, where appropriate, third-party audits increasingly viewed as important indicators of a well-managed risk program.

• Growth & Customers:
  • Commercial: customer diversity is an important measure of buyer risk assessments. The more revenue is concentrated among a small group of customers, the greater the perceived risk, which can negatively affect valuation. Conversely, a diversified customer base with long-standing relationships can improve a buyer’s underwriting thesis.
  • Growth: proving a repeatable ability to grow can be an important factor in supporting a premium valuation. The best growth strategies are programmatic and supported by a refined, repeatable blueprint. There are many ways to grow, but having one or two primary channels with a demonstrated history of success and runway ahead is critical for buyer conversations.

For more information on Stephens’ capabilities and experience with family-owned businesses in the T&L sector, please contact any of the authors below: