5 Trucking Merger & Acquisition Takeaways from 2020
The trucking merger and acquisition arena was anything but ordinary in 2020. Within the liquid/dry bulk vertical we saw several transfers of ownership. A few notable transactions included: Kenan Advantage’s purchases of Fort Transfer, Paul’s Hauling, & Beaulac Transport, TFI’s purchase of CCC Transportation, and Fraley and Schilling’s purchase of KBT Enterprises*. 2020 offers some unique merger and acquisition insights that can help business owners understand what to expect in 2021 and how to navigate the road ahead. Below are five trucking M&A takeaways from 2020.
Deal structures account for new risks yet contain fair-mindedness.
Ordinarily, a performance dip in a seller’s company generates an unforgiving response from buyers. That is not what happened in 2020. Because almost everyone in the trucking space was affected by COVID-19, both buyers and sellers approached the deal table with an unusual amount of fair-mindedness. As opposed to offering a long earnout period (3-4 years) that shifted all the risks to the seller, many buyers recognized the non-reoccurring, universal aspect of the moment and adjusted earnout clauses appropriately (6-12 months in some cases). Moving beyond 2020, this issue will evolve as more risks enter the market and broader economy. Jay Robinson, Partner at Scopelitis, shares, “As evidenced by 2020, unforeseen risks affecting the economy as a whole will likely have the greatest influence on deal structures in 2021 and into 2025. Using the prior Obama administration’s policy focuses as a guide, it seems likely we may be entering a period of time where increased regulation of carriers’ employment practices, independent contractor contracting and safety policies combine together to create heightened transaction risks with a resulting influence on deal structures.”
More hurdles, attorneys, and risks to consider when addressing the purchase agreement of a sale.
When the market presents new risks around a transfer of business ownership, those risks must be properly accounted f
or within the purchase agreement. That has been a challenge in 2020. Heidi Hornung-Scherr, Partner at Scudder Law, explained it this way. “2020, COVID-19, and the related uncertain economic environment (including with respect to freight) has resulted in increased volatility in successfully negotiating, documenting, and closing M&A transactions. While it has become more difficult to forecast timelines and likelihoods of success on the front-end, committed principals are still considering, negotiating, and closing M&A transactions. Sellers, buyers, and their advisors and attorneys are building in additional contractual provisions to address COVID-19 and any CARES Act contingencies, increasing the amount of time it may take to obtain third party consents, and devising creative solutions to accomplish more due diligence through remote processes.”
Diversification becomes driver for growth/acquisition strategy.
One of the most interesting trends in 2020 was the number of experienced acquirers in the trucking space that approached our firm with new strategic goals. COVID-19 seemed to reward one vertical within trucking while arbitrarily punishing another. This humbled many trucking business owners and heightened their sensitivity to having all of their eggs in one basket. Dozens of buyers updated their acquisition profiles within our system and cited “diversification” as a top strategic priority.
New administration signals tax changes that may profoundly affect business value/sale proceeds.
The new administration is proposing to treat any gain over $1M as ordinary income. Currently, the long-term capital gains tax rate for gains over $1M is 20% plus a 3.8% surcharge (total of 23.8%) plus any state tax. If Congress votes Biden’s plan into law, the federal tax rate on gains over $1M will be over 43% (39.6% plus 3.8%). That increase equates to an additional $1,960,000 in taxes for every $10M of sale price above $1M. That is a remarkable amount of personal wealth moving from the hands of business owners to the hands of our government. For owners that have been considering an acquisition, merger, or business sale over the next 1-3 years, you need to be watching Washington and the developments around this proposed plan closely. It is also important to consider how this proposed plan could affect the way buyers, particularly private equity groups, value your business and approach acquisitions. If the available after-tax return on investment of purchasing your business is reduced (due to the proposed tax plan) then you should expect the valuation of your business to adjust accordingly. Investors are not going to pay the same money for a lower return on capital.
Disruption to supply of companies available to purchase will influence surge of transaction activity in 2021.
In response to 2020’s extreme challenges, many trucking business owners literally reinvented how they did business and who they did it for. Consequently, business owners who had scheduled to begin exiting the trucking industry in the last three quarters of 2020 didn’t. This created a temporary shortage of available trucking companies to purchase. The smaller pool of sellers experienced rare leverage at the closing table. Other deals that should have closed in 2020 pushed into 2021 due to additional steps required to get a deal done. Our recent sale of NRX Logistics is a good example. The deal was under contract and weeks away from closing in August. Out of nowhere, the buyer’s bank placed a blanket moratorium on all acquisition financing (because of the risks and uncertainty around COVID-19). We helped our client pivot to a new buyer (Cardinal Logistics) and closed the deal the second week of January. In 2021, the public will see a surge of deal announcements. The activity represents 12-15 months of normal activity squeezed into 6-9 months’ time. As the supply of available trucking companies to purchase normalizes, so will the leverage at the negotiating table.
Spencer Tenney is President and CEO of Tenney Group, a merger and acquisition advisory firm that has been dedicated to the transportation and logistics space since 1973. *Most recently, Tenney Group advised the seller in Fraley Schilling’s purchase of KBT Enterprises. For more information on Tenney Group, please visit www.thetenneygroup.com or email firstname.lastname@example.org .