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3 Big Tips When Buying Or Merging Bus Companies

Spencer Tenney
Posted on September 17, 2010
Experienced and educated business buyers know not to assume anything or rush to any judgment about a particular business for sale.
Experienced and educated business buyers know not to assume anything or rush to any judgment about a particular business for sale.

Buying bus companies, or the assets of those companies (customer lists, revenues, vehicles, goodwill, etc.), can be an affordable and lucrative growth strategy for all transportation business owners. But many owners have limited experience and distrust the acquisition process. Many also have little confidence in their own ability to incorporate acquisitions into a business development strategy.

This article highlights three tips designed to expand the education and confidence of business owners and to help influence the success of their acquisition/merging efforts.

1. Don't Assume that Something is Wrong - As a Matter of Fact, Don't Assume Anything
It is common for prospective buyers to make bold assumptions about acquisitions before understanding the facts surrounding them. One of the most common assumptions is, "If the business is for sale, then something must be wrong with it."

Business owners sell their companies for many reasons: they're tired, they want to take advantage of all-time low capital gains tax before 2011, they would retire rather than reinvest in equipment and prolong their career, they experience health issues, they want a new lifestyle with fewer responsibilities, partner disputes, family issues, etc.

Experienced and educated business buyers know not to assume anything or rush to any judgment about a particular business for sale. They understand that every business has imperfections (cash flow, fleet usage, technology) - many of which they can convert into opportunities in the context of an acquisition.

Example: CTA recently sold a transportation business in Houston. The seller's business was breaking even each month. The financial performance was not exciting on a stand-alone basis. But the buyer was a local transportation business owner and recognized that once he absorbed the revenues, vehicles, and employees into his operation, the numbers would all change. Through the acquisition, the buyer created several hundred thousand dollars in gross profit and cash flow immediately.

Educated buyers also resist assuming that a business is not interested in selling or merging because of its size, history, or even from what they have heard directly out of a business owner's mouth. Because of the private nature of the bus industry, business owners are understandably cautious about "showing their hand" and especially cautious when it comes to sharing financials with competitors.

The reality is that many transportation businesses could be and should be considering all acquisition and merger possibilities with regional/national competitors - as demonstrated through the recent merger between United and Continental Airlines. A professional intermediary can help business owners initiate and engage into intensely private acquisition/merger discussions while protecting each company's confidentiality - something difficult and risky for business owners to do on their own.

Another assumption to resist is that only large companies engage in mergers and acquisitions. Small companies with limited financial resources regularly protect retirement funds and transform their quality of life through mergers and acquisitions. Do not limit your options through your own understanding. Many deals of all sizes can be funded with little upfront cash. 

2. Focus on the "Complete" Financial Benefits of the Acquisition
For some business owners, the problem is not assuming - it's walking. Buyers often walk away from acquisition opportunities prematurely because they fail to understand the complete financial impact available through the acquisition. Focus on the following three areas to gain a more complete understanding of the short- and long-term financial benefits of acquiring a bus company.

Focus on monthly cash flow created once the company is combined with your existing operation. Resist basing a decision to acquire a company entirely on its stand alone performance. The appeal of the deal is often found in cutting duplicate overhead and expenses between the two companies. Some opportunities to create "new" cash flow are not obvious yet dramatically influence the financial benefits of the acquisition: fuel reduction, technology enhancements, etc.

How long will it take you to pay for the deal? Being able to pay for an acquisition in a desired period of time is a financial benefit worth understanding. If you cannot quantify how many months it will take you to pay for an acquisition, then you may not clearly understand what the acquisition has to offer you. You may need a second opinion from a professional. Once you understand this benefit, it may mitigate many of the risks that first concerned you and clarify the ongoing, long term value of the deal.

Increasing the value of your existing transportation business. Buyers can often direct their focus on the immediate financial benefits of acquisitions and overlook the long term benefits. Understanding how an acquisition can increase the enterprise value of your existing bus company often transforms how a buyer evaluates a potential acquisition - affording him more flexibility/deal options and greater justification to find ways to bridge the gaps between he and the seller.

Charles Tenney & Associates recently facilitated a bus transaction in Nebraska. At first glance, the buyer was cold to the idea of acquiring the small competitor based on his initial assessment of the acquisition benefits. With a little encouragement, the buyer took a closer look and identified additional cash flow opportunities and synergies he had first missed. The deal was closed within 30 days. The seller is working for the buyer, debt free, and happier than ever. Fortunately, for both parties, the buyer was able to evaluate the "complete" financial benefits before making a final decision on the acquisition.

3. Be Fair-Minded In Your Approach
When a buyer begins to understand the complete benefits of an acquisition, he can approach the seller with a deal. The manner in which a buyer approaches a seller greatly influences the potential success of an acquisition or merger. Sometimes what appears to be a great deal on paper or in concept does not materialize on the buyer's bottom line. In many cases, this occurs because the deal is deficient in fair-mindedness. Fair-mindedness occurs when a deal recognizes the needs and wants of the buyer and of the seller.

The current economic conditions can embolden some buyers to take a "my way or the highway approach" when acquiring companies - the opposite of fair-mindedness. There is nothing wrong with buyers trying to get the best deal possible. However, too many buyers fail to, or refuse to, acknowledge the basic needs/concerns of sellers. And in doing so, buyers miss opportunities to acquire very good companies or fail to maximize the full potential of the companies they do acquire.

Why does it pay to be fair-minded in your approach to buying bus companies? First, the seller will likely play a key role in the transition stage of the acquisition - stabilizing client relationships and ensuring continued commitment of service, stabilizing/improving employee morale, etc. Also, the seller will likely maintain personal relationships with many customers, vendors, and employees long after the sale is complete.

The seller can have a great influence on post acquisition success and failure. So if you don't have to, why go out of your way to demoralize the seller in the negotiating process? Focus your energies and creativity on how to motivate the seller to genuinely promote your continued success in the business.

Second, many buyers have a limited understanding of what is fair and what is not fair. They also don't fully understand the many ways they can acquire a company and still make money. Through the help of an industry specialist, buyers are often able to accommodate some of the requests of the seller while structuring a deal that exceeds the initial expectations of both parties.

Remember: In many cases, what is required to concede some deal points to the seller often pales in comparison to the long term value the gesture creates for the buyer.

Acquisitions can be an affordable growth strategy for "all" bus companies. As business owners become more educated in the process, opportunities for buyers and sellers can expand.

Avoiding assumptions, focusing on the "complete" financial effects, and being fair-minded in your approach are three tips that can greatly influence the success of your acquisition and merging efforts.

Related Topics: tips for success

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