Inorganic Growth As A Means To Higher Exit Multiples Plus

In the transportation & logistics industry, growth is essential for survival. If you are not growing, you are dying. The certainty of an exit at some point, planned or unplanned, is undeniable, and every business owner needs to plan for that in some way.

The amount of money a business owner will walk away with at an exit through a planned sale of the company depends on a number of variables, but one of the most important is the multiple applied to a base measure, EBITDA, for instance. A higher EBITDA can be achieved through organic growth (growing revenues from existing or new sources, cutting costs, etc). A higher EBITDA can also be achieved through inorganic growth (an acquisition of another company, for example).

The real driver of value in inorganic growth (acquiring another company) is the scaling up of the valuation multiple with the increased EBITDA. Typically, in the M&A space, once EBITDA reaches $5M, sophisticated buyers recognize the value in that scale, and as result, are willing to pay a higher multiple. And the incremental multiple drives, more quickly, substantially higher values, than can be achieved with organic growth alone.

This is what private equity firms do on a regular basis and is the key to their huge success in lucrative returns on their investments. They tend to do this on larger scales, and virtually all large companies have in-house corporate development groups that conduct large scale acquisition efforts. But the same logic can be applied to middle and lower middle-market transportation & logistics companies. The risks of growth through acquisitions are not insignificant. Debt and equity capital are usually utilized, as well as seller financing. Acquisitions, properly done, require significant planning, financial modeling and forecasting, and a strategic plan with qualified teams to effectively roll the acquisitions into the parent company and achieve realistic synergies where possible.

The following table illustrates the concept of multiple leverage on valuation. These figures are for illustration purposes only. In this example a company with $3M EBITDA in year 0 can grow organically at 5% per year and achieve a valuation of $13.9M at the end of year 3 on a multiple of 4x EBITDA. This same company could, with taking on added risk through additional debt financing and the complexities of integrating three acquisitions over three years, grow EBITDA to $5M and achieve a valuation of $20M on a multiple of 5x EBITDA. The incremental valuation between the 4x and 5x becomes $5M.

Choosing between organic and inorganic growth depends on factors like growth objectives, market dynamics, and risk tolerance. A balanced approach combining both strategies may often provide the most effective path forward for trucking & logistics companies in today's competitive landscape to grow and better position themselves for a lucrative exit on their own timeline.

At JPR Consulting, and through our affiliation with Ridgefield Partners, we can help you evaluate the risk and return potential of a strategic business development plan to add inorganic growth to your company, help you devise such a plan, and assist in the search and selection of potential target companies to leverage your growth and, eventually, maximum proceeds on an exit.