For a majority of owners, their business is their most valuable asset. Financial security for owners in the long run heavily depends on maximizing value and, at some point, converting that asset to cash.
HOW TO GROW YOUR TRANSPORTATION COMPANY
Many factors go into determining what generates value in a company. Business owners often question, how does the specific industry and economy affect my company’s value? What is the most effective way to build a higher company value?
This article will address factors that go into creating and maintaining value for a transportation company. The transportation industry relates to airlines, buses, freight forwarding, postal/CEP (courier, express, and parcel), rail, shipping, trucking, and contract logistics.
When looking at the value of a business, there are components of tangible and intangible value that make up the business’s value as a whole. Tangible value is most commonly understood as the value surrounding the underlying cash, equipment, inventory, and other assets the company holds. In the transportation industry, there may be debt associated with various assets that would reduce the value of the assets accordingly.
A more complex concept for business owners to grasp is the intangible value that a company holds. Intangible value is much tougher to measure. Intangible value, also referred to as Goodwill, typically consists of business longevity, relationships developed, reputation, name recognition, specific employee knowledge and experience, and sustained profitability and cash flow.
To put a dollar amount on the value of a business, a company will seek a business valuation professional to provide business appraisal services. When it comes to valuing a transportation company, or any business for that matter, there are three general approaches most commonly used to determine a value. Those include:
- Income Approach
The Income Approach serves to estimate value by considering the income (benefits) generated by the assets over a period of time. This approach is based on the fundamental valuation principle that the value of a business is equal to the present worth of the future benefits of ownership. The term income does not necessarily refer to income in the accounting sense but to future benefits accruing to the owner (income or cash flow). The appraiser considers the time value of money, inflation, and the risks associated with ownership in a business.
- Market Method
A fundamental method for estimating the value of the stock of a closely held business is an analysis of prices paid by investors in private, or most often due to the availability of information, the public markets for the stock of other companies in the same or similar lines of business. Application of this methodology under this approach requires adequate information concerning prices paid in transactions of controlling interests in companies or prices paid for the minority stock of a business in the same or similar lines of business. Business valuation professionals use databases and other resources that provide information regarding recent sales of companies.
- Asset Method
In the Asset Based Approach, primary emphasis is placed upon the fair market value of the assets and liabilities of a business. As a result, this approach uses various methods that consider the value of individual assets and liabilities, including placing a value on intangible assets. A well-known method under this approach relies upon reported balance sheet assets and liabilities generally termed as book value. However, it should be recognized that under the book value concept, assets may be reported at a value that does not reflect the actual value that would be received if sold on the open market.
Now that we have a general sense of what a business valuation professional and potential buyer will look for in terms of the value, how do we start to build it? In terms of growing and maintaining value, IBISWorld reports six critical success factors in the transportation industry that profitable businesses will need to have:
- Good Reputation – Reputation acts as a basis of competition and a point of differentiation from competitors. Reputation can consist of nurturing relationships with customers and suppliers. Often, businesses that work together to meet each other’s needs will both receive the benefit.
- Maintenance – Carrying out all necessary maintenance to keep assets and facilities in good condition demonstrates a commitment to safety and security. Maintenance also can relate to employees. By maintaining a strong management group and dedicated employees, a business will generate value.
- Automation – This helps to reduce costs, particularly those associated with labor. The use of automation technologies enables prices to be kept as low as possible. Automation in the transportation industry can take form in many aspects of operations and administrative procedures to reduce costs.
- Environment Regulations – Operators must adapt to environmental requirements for the continued viability of the sector. With constant technological changes and increased concern for ecological sustainability, businesses will need to adjust to grow.
- Competition – Monitoring competition is significant for industries where low-cost operators are a dominant force, such as airline carriers. To be successful, a business should understand the marketplace they operate in and demonstrate a marketplace presence.
- Government Regulations – Government compliance is vital for a variety of the highly regulated industries in this sector.
From an operations standpoint and creating measurable financial value, some of the most critical attributes relate to efficiency and stability.
Obtaining financial efficiency is a goal that cannot be achieved by simply doing one or two things well in a business. More often than not, efficiency is created by combining things a company does exceptionally well and continuously improving upon weaknesses. The transportation industry is one that heavily revolves around a company’s cost of capital. The industry is very capital intensive and requires a significant investment to break the barrier of entry. The most successful companies in this industry understand the right amount of debt needed to grow and not stunt their growth due to unmanageable debt service.
Stability in a company can be primarily attributed to ownership and management. Companies that frequently reinvest in the business typically find success for a more extended period. This usually involves buying new machinery and equipment that increases productivity. It may also mean furthering the workforce’s progress in providing training or other benefits to staff.
IBISWorld has provided an analysis of the transportation industry as of July 2021. The database reports the following information:
- The transportation industry is in the mature stage of its life cycle. The sector is responsible for transporting most goods within the United States and all passengers not using personal vehicles. Consequently, sector performance broadly mirrors the economy. When the economy is doing well, more goods are transported to the market, and more people travel, increasing demand for sector services. The industry is such a vital component of the economy that its performance is often used as a metric when considering its overall health.
- Sector value added (SVA), which measures a sector’s contribution to the overall economy, is forecast to grow at an annualized rate of 1.8% over the next 10 years. Simultaneously, United States GDP is anticipated to climb at an annualized rate of 2.1% during the same 10-year period. Typically, SVA growth that is in line with GDP growth indicates a mature sector. The moderately greater rate of increase in United States GDP relative to SVA results from the more commoditized nature of this sector relative to much of the economy. In particular, fluctuations in the world price of crude oil have contributed to several years of SVA decline.
- Most of the transportation industry’s technological change has focused on improving efficiency, delivery time, and costs. However, some technologies are changing how business is done. Transportation network companies, such as Uber Technologies Inc., have enabled passengers to order a car by using their smartphones. By directly connecting drivers with customers, these technology companies have drastically reduced barriers to entry for car service providers and cut out traditional companies, such as taxi services. However, the function of a car service has not changed, just how it is purchased.
The items listed above represent a small portion and by no means a complete list of the factors that drive value in the transportation industry. We recommend analyzing your company to identify strengths and weaknesses in these common areas. By understanding areas to improve and setting forth a plan, business owners are also improving their financial future.
How can we help your transportation business plan for the future? We work with many transportation companies helping them grow with tax, accounting, and consulting solutions. For more information on benchmarking your business or budgeting and forecasting services, please email us at [email protected].