Rapidly deteriorating market conditions last year put the brakes on many mergers and acquisitions, but valuations are normalizing, paving the way for more activity this year.
Speaking on a Truckload Carriers Association webinar this week, Spencer Tenney, CEO of M&A advisors Tenney Group, said total transaction values of deals in 2023 were down 82% from the prior year, while the total number of deals fell 33%.
(Photo: iStock)
“There was a short supply of sellers. We’ve never seen anything like this. You’ve got the freight market causing major problems, 12 interest rate hikes since 2022, the rapid normalization of equipment valuations and a very dramatic swing in terms,” Tenney said in recapping the year that was.
Many prospective sellers put the brakes on the process after suffering 20-30% performance declines month over month after entering into a letter of intent, he added. The deals that did get done were structured to minimize the buyer’s risk.
“Deal structure played a major role,” Tenney said. “The only way to bracket risk is through the deal structure, or don’t do a deal at all. Buyers and sellers were creatively trying to understand what are the real risks – not blanketing everything – and putting structure around those defined risks in a way that allowed the seller to participate in the upside of whatever they produce, but also provide some protection for the buyer should conditions get worse.”
Trucking and logistics firms in niche markets continued to be sought after, Tenney added, as they were mostly insulated from volatility in the spot market. Strategic buyers continued to show interest in acquisitions, while some of the private equity firms sat on the sidelines. As such, Tenney said sellers should realize the majority of active buyers understand the transportation market and its cyclicality.
Rollover equity
Rollover equity was one solution for buyers and sellers, Tenney said. With such deals the seller retains shares in the company with the hope of increasing the value of the business and getting a better return when the buyer steps back in “for another bite of the apple.”
Looking ahead to this year, Tenney Group anticipates a busier year in M&A thanks to pent-up demand, and because valuations have normalized. Equipment values that doubled during the post-Covid shortage have returned to normal.
“We feel strongly that 2024 is going to create lots of opportunities because sellers have been conditioned to get back to where they need to be and the pain points in the market in terms of increasing costs created a certain level of urgency for buyers to come to the table in a fair-minded and effective manner to get something done,” said Tenney. He added there have never been more buyers lined up to do deals, including first-time buyers who are looking to acquisitions for growth as organic growth has become increasingly difficult.
Disciplined buyers
Those buyers, however, are exercising discipline. They see what happened to mega-brokers like Convoy, and the downsizing or bankruptcy of many carriers over the last year.
“We’ve been humbled based on what has happened in the last 24 months and that’s a good thing,” Tenney reasoned. “We are going to see a very aggressive approach toward acquisition, but much more disciplined. Companies are going to make investments that are highly defensible to their shareholders when it comes to strategic fit and value creation.”
Tenney anticipates a 10-year high in terms of companies entering the M&A space and beginning the exit process. This is because business owners who had planned to sell pre-Covid were unable to then, and that was followed by a year of record-breaking profits for many truckers, which had them hanging on longer. That was followed by a freight recession that saw values plummet. Now, with that in the rearview mirror, Tenney anticipates those sellers will resume the process of exiting the business.
Reduce dependency on owner
Meg Meurer, COO of Tenney Group, said fleets looking to sell should be benchmarking their business against peers. They also need to reduce the company’s dependency on the owner.
“Always try to reduce dependency on an owner early on in the process,” she advised. “Have a solid management team around the table.”
Tenney reiterated the importance of minimizing the company’s reliance on its owner, noting one deal it orchestrated saw the buyer increase its offer by 38% because the owner was “nowhere to be found” and the company was being run by a solid management team.
“They don’t want to get in there operationally and fiddle with it,” Tenney said of buyers, particularly private equity. “They want to select the right management team. If you’re not systematically empowering them [to run the business], you’re limiting what you can create from an exit scenario.”
Look to future
Tenney also advised prospective sellers to engage their tax advisors and transaction attorneys early in the process, and to educate themselves on their options upon sale. This includes considering what the next chapter of their lives will entail.
“When it becomes crunch time, you want to be focused not just on the past but the future,” Tenney said. This includes…hitting the gym? Tenney said the sale process is physically and mentally exhausting and those in good health tend to fare better in the end.
Consider what you’ll do with the proceeds. Tenney recalled one seller who chose to exit at the bottom of the cycle rather than waiting for the value of the business to improve, because they saw better opportunities in real estate investment and charitable giving that had to be acted on quickly.
In terms of what not to do, Tenney said poor communication can be a deal-killer.
“Once you get to the point where you’re under a letter of intent, you’re effectively on the same team [as the buyer],” he explained. “You’re trying to move toward the goal line together and satisfy third parties. You’re on the same team.”
Hiding bad news is dangerous, he added.
“What almost always kills deals is the delayed or partial dissemination of critical information around diligence,” he said. “If there is an issue during due diligence it’s very important for both parties, especially the seller, to get out in front of that, own it and provide context to what is happening. It will inevitably become an issue if the buyers discover it on their own and are left to conclude only the worst about what is happening. You’re never going to sneak something by, ever.”
