Trucking companies, similar to many small businesses, are often family affairs involving the work of multiple generations. A couple of siblings start a company, and some of their children take over the reins and help it grow, and perhaps decades later a potentially large group of cousins are determining whether and how to sell it. They will soon learn that selling a trucking company is a huge undertaking. They may consider various possible exit strategies, such as a family member stepping forward to buy all the other members' shares, a strategic buyer emerging with whom the family builds enough comfort to trust them with the family business, or the members hiring an advisor to conduct an auction to find the best possible price.
Every aspect of the business, from the type of legal entity to the age of its assets, will affect the transaction. The desired structure of the sale, be it an asset sale or the sale of the stock of the entity, will carry with it tax implications for the selling owners and can impact the proceeds they will receive. EBITDA (earnings before interest, tax, depreciation and amortization: a mark of a company's operating performance) and cash flow will, as much as anything, drive the price the sellers can feel justified asking and the buyer might be willing to pay. If a sale is in your ownership's future, next year or in ten years, today is the right time to begin preparing for it.
Often a business owner, who is rightly focused on the financial and operational aspects of the business in preparing for a potential sale, will not identify fundamental legal and tax considerations that can have as large an impact on value as the operations themselves.
The business owners, who have been successfully operating for years, may not even realize what a key role the state of their transportation law compliance programs will play in their ability to sell their business and the ultimate value they receive, but they can be sure that the potential buyers will.
During due diligence those buyers, with the assistance of able transportation counsel in addition to specialists in other legal areas, will delve into every aspect of how the target company does business. This includes customer/shipper contracts, equipment, technology, management, drivers, accident liabilities, environmental, health, and safety management, and the many laws and regulations governing the business. If the potential buyer's review finds issues with the target company's compliance with transportation laws, or even potential risks, the sellers can expect the potential buyers to seek holdbacks, indemnification rights, or even reductions in the purchase price to protect themselves from that risk.
From the buyer's point of view, lifting the hood of each respective area reveals a more complete picture of the company's value. In this process, it is critical that the sellers have transportation law experts on its side to both (i) evaluate and remedy weak points ahead of time and (ii) respond to challenges from the buyer's counsel to practices and procedures in an informed and persuasive manner to minimize impacts to achieved purchase price for the sellers. And a potential purchaser of a transportation business who does not arm itself with transportation law expertise will miss critical issues that will impact its ability to successfully capitalize on its new acquisition.
If you are a seller, your first step should be a conversation with a transportation law expert about the various laws, regulations, and permit requirements applicable to your transportation business and how they are being addressed by your company. Some common discussions points would be informal or formal audits by the DOT, CSA scores, run-ins with the EPA, EEOC, DOL, or other regulatory agencies, ELDs, and similar items. If you are a buyer, your transportation law expert should be working hand-in-hand with your M&A team to make sure you are buying a business that can deliver the returns you are paying for in the years to come.
Once the regulatory regimes have been reviewed, examine how the company conducts its business in hot button areas such as multi-employer pension plans, driver classification concerns, and hours of service. To highlight just one common source of risk, if your company uses owner-operators, consider your Independent Contractor Agreement. You can be confident this will be one of the most carefully analyzed documents during the diligence process. Everyone is at least somewhat cognizant of employee misclassification risks thanks to the ever-present risk of class action suits from eager plaintiffs' attorneys. Hopefully as a result you have already engaged transportation law experts to help you craft that document. However, does your IC Agreement also adequately protect you from potential risks under the Federal Truth-in-Leasing Regulations or state fraud laws and regulations? And even if you have a well-crafted, protective IC Agreement, do your real world practices and procedures undercut all that hard work and result in no discernible difference between how you treat employees and owner-operators? If an interested buyer identifies any of these risks and you cannot provide them the comfort they need, the prudent buyer will protect itself by making adjustments to the agreement to make sure you bear the cost of that risk rather than them.
It's important to ensure you have both mergers and acquisitions-focused counsel, as well as an experienced transportation attorney on your legal team. Attorneys from separate firms are usually happy to work together to create a multi-faceted team, however Smith Moore Leatherwood can work across our various practices to provide you with all those services internally. There are many transportation specific topics to uncover in due diligence. If you are selling or purchasing a trucking company, we welcome the opportunity to provide counsel to assist in your deal.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.