Why are some logistics companies worth more than others?

Valuation is a funny thing. Some logistics businesses are worth more than others. But why is that the case, especially when two companies appear to be offering the same services and solutions to their customers?

Generally, companies acquire other businesses not on the basis of the assets that the target company owns, but because of the profits and cash flows that these assets generate. Valuations of logistics companies are typically based on earnings before interest, tax and depreciation (EBITDA). So clearly the higher your EBITDA, the better your company valuation is likely to be.

Although valuation is not an exact science, certain principles do apply when it comes to determining the value that any party will pay for a logistics business. For example, potential buyers will consider the contractual nature of customer relationships and quality of earnings. In general, a company’s valuation will be enhanced when it has longer-term contracts and can demonstrate that relationships have been maintained over a number of years. This is, of course, based on the assumption that such contracts are profitable! Long-term, profitable contracts that generate recurring revenue provide visibility and security over future earnings. That reassures acquirers, who tend to ascribe higher valuations to such companies as a result. But they will also look to see a strong pipeline of new business opportunities, as well as historically high opportunity conversion rates.

Similarly, the quality of a company’s customer base also influences its valuation. This isn’t just about high quality names and pedigree, but also a matter of having a balanced customer base with no major customer concentration. What does this mean in practice? As a rule of thumb, your top 10 customers should not account for more than 30-40% of total sales. Too much customer concentration increases the risk of major damage to a company, so acquirers will be wary.

Higher valuations also tend to be given to logistics companies with diversified and value-added service offerings: the more you touch an item in the supply chain, the more money you earn off it. On the other hand, companies that provide commodity-type services, where barriers to entry for new competitors are low, are generally valued less highly.

Companies are more attractive to buyers and so attract a higher valuation when they have a track record of growing and improving financial performance. Even better if this is coupled with evidence of accurate budgeting and a history of achieving budget performance. It’s also important to ensure that the current year’s trading is in line with budget. Such factors tend to suggest that the company is well-managed. Acquirers will appreciate seeing a strong and stable management team in place, supported by a second tier team, and evidence of succession planning.

Effective use of technology in a business also supports a positive valuation. A technology platform that reduces manual involvement, or provides data for improvements in efficiency, is highly valuable and sought after.

And finally...don’t forget that the valuation you are offered is not necessarily the same as the sum you will walk away with. Adjustments to the valuation of a company are made for debt and free cash. Higher levels of free cash and lower levels of bank debt and finance lease arrangements enhance what you take away.

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