Do you know what your trucking company is worth? It's a critical question to address for numerous reasons, from potential acquisition action to succession planning.

Here's why you should care about an accurate valuation of your business, along with three specific methods for measuring it.

Why Value Matters

1. Mergers and Acquisitions

"A buyer can come knocking at any time," said Spencer Tenney, managing partner at Tenney Group, an Arlington, Texas firm that helps transportation business owners build and protect business value.

"You need to have a prepared growth story that captures the imagination of a buyer" if you are interested in entertaining an acquisition offer, Tenney said. Getting a reliable valuation is step one in creating a thoughtful plan for how a buyer can grow the business in the future. "This is an important element of reducing the perceived risk of paying a fair market price for your business today," he said.

2. Succession Planning

"One size does not fit all for a business owner, so understanding your value, and how it may be impacted by the succession planning path that you prefer, will help you make good decisions," said Andy Manchir, a director in Indianapolis CPA firm Katz, Sapper & Miller's valuation and ESOP services groups.

This holds true whether you hope to pass your business down to the next generation of your family or through formation of an employee stock ownership plan (ESOP).

3. Growth and Development

"Most trucking companies are privately owned and represent the largest asset for the owner and his or her family," said David Roush, president of KSM Transport Advisors LLC, an Oklahoma City trucking consultancy that is part of the Katz, Sapper & Miller network.

"The owner needs to treat the trucking company as an asset and focus on working on the company, not just in the company," Roush said. "Continuously evaluating the company's value forces the owner to focus on the initiatives that will increase value, such as: EBITDA, CapEx, revenue concentration, diversifying its customer base and optimizing its freight network."

How to Measure Worth

1. Asset Valuation Method

The asset valuation method determines your company's worth by calculating the fair market value of assets minus liabilities. Begin by asking yourself, "What would it cost to create a company like mine — same services, geographies, fleet, payroll — from the ground up?"

2. Income Valuation Method

The income valuation method estimates future cash flow based on historical cash flow coupled with an honest forecast of the top and bottom lines. Assessing the makeup of your customer contracts can also help you determine valuation by income, particularly if you're working with a potential buyer.

"Make sure your No. 1 client is really your No. 1 client. If you are providing heavy discounts, it might not be revenue that is attractive in a transaction environment. Make sure you have a direct relationship with the majority of your customer base. Buyers who look at revenue that is sourced through third-party brokers tend to discount it significantly," Tenney said.

3. Market Method

The market method compares your business to publicly traded companies, whose values you can determine by checking their stock prices. This method also factors in acquisition terms of comparably sized companies. In addition, you'll need to monitor everything from the economy to gas prices, the ongoing driver shortage to government policy. For instance, the Trump Administration's regulatory actions currently bode well for the trucking industry as values surge, while his proposed trade policies could stymie trucking growth.

Making It Happen

If you have an in-house accounting team, they can run valuation calculations for you. If not, consult with a third party — some firms even specialize in this service for trucking companies. How often you'll want to crunch the numbers depends on your objectives. For instance, if you're actively courting buyers, you'll want to keep your valuation figures very current. Otherwise, completing this critical exercise every year to every few years should be sufficient.

This article is provided for informational purposes only and is not intended to constitute an offer or solicitation to sell the products or services of the providers identified. City National Bank makes no recommendation of the products or services offered by the providers mentioned in this article. The opinions expressed are those of the persons quoted and not necessarily the opinions of City National Bank.