The road haulage sector accounts for approximately 77% of all goods moved (c3.7 million tonnes) in the UK. The sector is highly fragmented with the largest player in the market having only a 5% market share, and approximately 85% of businesses having fewer than 5 staff.
The above creates significant opportunities for consolidation, and the Corporate Finance team at MHA Moore & Smalley have advised a number of businesses in relation to their acquisition and exit planning strategies.
This blog focuses on the key factors which should form part of an exit planning strategy in this sector. Based on our experience the key areas to consider include the following:
In common with other sectors, acquirors will typically attach more value to those businesses which have strong management teams, and therefore a lower degree of reliance on the exiting shareholders.
This is particularly important in the highly competitive road haulage sector where customer relationships are often critical (and contracts can be difficult to obtain). Strong 2nd tier management will provide continuity to an acquiror, and therefore lower the perceived risk profile of the potential acquisition.
It is important to ensure that acquirors are presented with management information which is sufficiently detailed to enable a clear understanding of the business to be obtained.
The Information Memorandum provided to acquirors should also contain a financial projection. This projection should set out the projected short and medium term financial performance of the business.
The projection should clearly outline the potential financial impact of future opportunities, and should be accompanied by supporting assumptions. The assumptions provided will need to include clear explanations for significant variances between the projected performance and recent trading performance.
When forming a view on the valuation of the business, acquirors will consider the degree to which they are prepared to take into account future opportunities. Providing the above information can significantly increase the weighting which an acquiror will attach to future performance, thus resulting in a higher valuation of the business.
Effective cost control
Effective cost management is important to the success of road haulage businesses, particularly because one of the main expenses is fuel, the price of which can be volatile.
Fuel prices impact on road haulage to a greater degree than other forms of transport (due to current limitations on vehicle fuel efficiency). Therefore management should ensure that customer contracts incorporate automatic adjustments for changes in key input prices such as fuel.
It is also important to ensure that other costs, particularly those which are subject to less uncertainty, are clearly understood and tightly controlled. This will provide a buffer for unexpected fluctuations in costs such as fuel, which are subject to more uncertainty. C
Consider obtaining long term sales contracts
Acquirors will typically apply a higher valuation multiple to those businesses with future earnings underpinned by contracts.
Operators are increasingly subject to regulations on vehicle emissions (such as the Euro VI emission standard). Acquirors will therefore expect owners to be aware of their current vehicle emissions, to enable the impact of future changes in regulations to be understood
Management should also consider obtaining 3rd party green accreditations as a way to differentiate the business. For example some operators have obtained the Carbon Trust Standard, and obtaining such accreditations can help to enhance the reputation of the business.
It is important to ensure that the business keeps abreast of key technological changes (such as advanced route planning software to maximise fuel efficiency) and ensure that technology is implemented in the most appropriate way for the business.
This will ensure that the business benefits from improved efficiency and increased profitability, therefore increasing the valuation of the business.
The above are just some of the areas which should be considered as part of an exit planning strategy. If you would like to discuss further, please contact Ian Waddingham from the Corporate Finance team at MHA Moore & Smalley on 01772 821021