Money

Dealing In The Realities Of Mergers & Acquisitions

Posted on June 5, 2015 by - Also by this author

This is our annual issue full of numbers and statistics. While precise, numbers don’t always tell the full story. For that, it helps to talk to people on the ground who can see trends play out firsthand.

One area difficult to quantify in a survey is mergers and acquisitions (M&As). In fact, there is no real statistical clearinghouse for all such deals in an industry dominated by Main Street businesses with fewer than $500,000 in annual revenues.

To get a sense of M&A trends and what they mean, I turned to veteran brokers Charles and Spencer Tenney, the father-son team that runs the Arlington, Texas-based Tenney Group. The brokerage and consultancy has been handling all types of ground transportation company deals in all economic circumstances since 1973.

In the 1970s and 1980s, Charles Tenney operated a large fleet limousine service in Dallas, along with courier and airport shuttle services. He also served as President of the National Limousine Association in 1989. Charles and his son, Spencer, who joined the company as Managing Partner in 2002, have become synonymous with limousine company sales.

A standout stat in the Fact Book this year is the number of limousine operator/owners at 8,305, compared to 8,339 last year, according to List Strategies, Inc. While that number remained flat, revenue and business activity has increased year over year. M&As are one of the causes, which I can attest to anecdotally from seeing more of them in our industry news flow.

Overall, industry M&As have increased annually by single-digit percentages since 2010, Charles told me in a recent interview. But as he quickly pointed out: “The reason it’s increasing is not unique to the limo industry; it’s the phenomenon of Baby Boomers retiring. There are more businesses being sold now than at any point in history because of Baby Boomers.” That trend will accelerate over the next 15 years.

The Tenneys specialize in medium- to large-fleet company sales, since such companies retain more value easier to quantify than for smaller ones. Their deals range from $1 million to $100 million in annual revenues.

While M&A activity has increased among small-fleet companies, Charles said larger companies attract more buyers for two key reasons: 1) Small companies often have insufficient recordkeeping to support an agreeable sale price, and 2) Larger companies are more capable of offering a clearer return on investment, expanding, and securing financing for a transaction. From a trend standpoint, it is difficult to monitor present and historical statistics around small business transfers (sales, acquisitions, mergers, liquidations, closings) in any meaningful way.

Exclusive of economic trends, M&As in the limousine industry also happen because of life events. About one fifth of all businesses will transfer ownership or close doors. As Charles explained, divorces, split partnerships, retirements and falling finances are driving forces behind M&As. “The number one reason people sell businesses is just burnout. That means different things to different people.” Spencer added, “It reflects the quality of life. The things that drive people to make decisions are a combination of factors, including emotional ones.”

The growth of transportation network companies (TNCs) appear to spur M&As. “TNCs are affecting business value in the industry,” Spencer said. “The companies most affected have business models built to compete on price. The values of these companies are decreasing daily because they offer high risk and uncertain potential ROI. We see the large companies, even with premium pricing and some degree of insulation from TNCs, adjusting strategies and taking measures to reduce their overall financial risks. Many owners, primarily Baby Boomers, are choosing to employ exit strategies two to three years earlier than they might have.”

Working to improve your business quality alone will not offset the diminishing effect TNCs are having on value in this industry, the Tenneys said. Competition from TNCs and other sources will force operators to be creative and respond with dynamic value offerings that protect pricing and profits. The companies that do this will build long term value and grow market share.

M&A transactions can help operators manage risk by diversifying their operations into such areas as charter motorcoach service, party buses, recreational vehicles, and medical transportation to hedge their bets across the transportation industry, the Tenneys explained.

“We closed a deal in Los Angeles where the operator bought a business with a large segment of airline crew services,” Charles said. “It’s all scheduled chauffeured transportation for crews which is insulated from Uber. That is a different service offering that allows operators to grow or replace revenue streams.”

Spencer added, “We have a client in the medical transportation space uncomfortable with their amount of exposure. They retained us to help them grow in a different industry segment, so no one single incident can wipe them out. They’re looking at bus, shuttle and sedan services. It’s a principle that applies in all directions.”

From a competitive standpoint, fewer entrepreneurs will start businesses in the industry due to perceived high risks and reduced upside resulting from TNCs, the Tenneys predict.

“Those operators exiting the industry by choice or by force will likely be ones with low pricing business models who refuse to change how they do business and make money. Over time, the result of fewer companies will make the competition easier to define and combat. This will make the remaining companies more attuned to the needs of the market, more capable of bringing unique value to customers, and more positioned to grow and protect business value.”

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