Navigating Your Transportation Business Through COVID-19
Our transportation team has been getting many questions about how to navigate a business through this pandemic. We will discuss a handful of questions and answers here and update this post frequently as we continue to learn more about the impact this will have in the coming months.
Q: The summer months are the leanest time for my school bus company. I know my cash needs for this period, but due to the PPP loans, I have more debt and more cash than usual. I have spent the money necessary to get the PPP loan forgiven. What should I be doing with the excess cash?
A: There is no “one size fits all” solution. One client example:
- Pay down particular short-term debt (not PPP loan) with a portion of the perceived excess cash.
- Pay down a piece of long-term debt in advance of the amortization amount required with a part of the perceived excess cash and reserve an amount more substantial than the average summer reserve for the fall business uncertainty.
- Reevaluate in a month or two.
Q: I am 68 years old and have been in the transportation industry all my life. Is it a good time to sell my business, or has the pandemic caused all the buyers to vanish?
A: As a result of the pandemic, most businesses have been impacted negatively. The number of deals over the past several months have diminished. However, there are still strategic buyers looking to acquire a business. The best approach is to work on preparing the business for sale.
Take a look at how your company operates.
• Do you have parts inventory that is poorly organized?
• Do you have old parts that won’t work on your existing fleet?
• Do they take up shelf or floor space?
• Would a buyer see the inventory as clutter or as a valuable asset if it was better tracked?
• Is the fleet in good repair, or has there been deferred maintenance?
• What about your office, books, and records? Do they need organization?
• Are your records up to date for last month-end closing?
If an owner is ready to sell, efforts in these areas bring significant dividends. Many times, discussing with your accountant or banker that you want to quietly put the word out that you are considering a change, can bring interested parties to the table without disruption to the employee group. This can be done privately.
Q: I am working on a deal to purchase a business, including vehicles, office equipment, shop equipment, and goodwill. There are significant personal property and vehicles, and if I buy assets, I have to pay the motor vehicle excise tax and sales tax on the deal. Wouldn’t it be better to buy the entity stock and skip paying sales tax?
A: It is true if you purchase the entity, you skip the motor vehicle excise tax. That number on a $2,000,000 fleet is approximately $130,000. However, we could assume the fleet has been depreciated to $200,000 remaining tax basis. Buying the entity vs. the assets, then the 1,800,000 in depreciation is forgone. At an income tax rate of 31 percent as an example, the tax benefit of buying the assets and not the company common stock is $1,800,000 X .31 = $558,000.
Additionally, the purchase of goodwill would be amortizable over 15 years under and asset purchase approach. If a person purchases the company stock, there can be a significant amount of unknown liabilities that do not show up for years.
Q: Will there be an impact from COVID-19 on my retirement plans?
A: Several provisions in the CARES Act directly affect retirement plans with the intention of benefiting plan participants. For example, the Act increases the maximum loan amount that can be taken from a participant’s retirement plan account. However, the adverse effect of COVID-19 on the overall economy will likely also negatively affect the plan sponsor. This could lead to a reduction in or elimination of employer matching contributions. Also, a business that has been forced to lay off a portion of its workforce could be subject to a partial plan termination.
Additional Transportation Client Resources
The Smith Schafer transportation team, comprised of numerous professionals, is committed to serving over 110 Minnesota transportation entities. We have the experience and understanding of the transportation industry to make a lasting positive difference in your future success.
