Exit motivation: why do you want out?

There can be many motivational reasons for the desire to exit a business. Here are just a few:

  • Age
  • Health considerations
  • Financial reward
  • Transportation ownership fatigue
  • Lifestyle improvement

Note: Reason for exit can be an important consideration for strategic buyers.

Timing: understand how deals are structured

Most transportation acquisition deal structures contain an earnout provision for a seller to obtain the full deal valuation. There are hundreds of deal structure variations within two primary categories:

1) 100% purchase

  • Buyer applies a multiple to the trailing 12-month (TTM or LTM) period normalized earnings (expenses credited for anomalies that won’t continue forward).
  • Buyer typically pays a percentage in upfront cash and the remaining amount over a designated earnout period with an earnings baseline requirement.
  • Earnout timelines typically stretch from 1 to 3 years, and sellers are typically required to remain in the business during earnout.
  • Most sellers want to remain in the business during earnout to control their destiny as it pertains to realizing the deal full valuation.

2) Equity retainment

  • Seller retains equity for what is referred to as having the ability to “take a second bite of the apple.”
  • Both buyer and seller share in the rewards of future growth and profitability over a timeframe that is typically much greater than earnout.

3) Due diligence (plan for a long stretch)

  • Along with the timeline it takes to compile initial data, introduce multiple buyers (NEVER consider one buyer), and finalize LOI/IOI details, a seller must navigate a due diligence period that can extend beyond 6 months.
  • It is very common for sellers to experience “seller fatigue” during due diligence.

Financial considerations: don’t wait for the “perfect” moment

Sellers often struggle with the correct time to sell. There are many variables that can affect a transportation business and many are not within control of the seller—market capacity, political direction, the U.S. overall economy, and customer instability are a few factors.

Next Mile M&A has worked with many sellers that opted out of selling in hopes of relatively few upside dollars, only to end up selling for less. Next Mile has advised sellers to consider an acquisition trigger point that will provide a financial legacy for their immediate family, and potentially the next generation. If a seller can garner enough to financially set a family for at least the seller’s expected lifespan, the seller should seriously consider if it is worth gambling in hopes for additional financial consideration.

Financial readiness: accuracy is critical

Financial accuracy

One of the most significant mistakes a business can make is to go to market only to have a buyer find financial errors. This automatically creates distrust with the buyer and can destroy an exit strategy for an extended period.

Next Mile’s system has documented finding more than $1.75m of EBITDA calculation errors. Each business had an accounting firm it relied on for accurate financial statements.

Types of data buyers want to see (and why deals get re-traded)

The problem with most data generated from financial management systems and TMS is that many of the details buyers want are not readily available—or it takes substantial time to gather the data in the desired format. This can lengthen the process or cause a deal to be re-traded during due diligence. Re-trading is when an original valuation is lowered after financial irregularities or additional risk factors are discovered that were not previously known.

Next Mile categorizes primary data types into two main categories:

Valuation drivers (more impact on the multiple)

  • Revenue trends across the last three full fiscal years, current year, and TTM period
  • Gross profit trends across the last three full fiscal years, current year, and TTM period
  • Gross profit by mode (market comparisons on profitability by mode)
  • EBITDA trends across the last three full fiscal years, current year, and TTM period
  • Normalized expense calculations with detailed descriptions (three fiscal years, current year, and each month within TTM)
    • These add-backs can be critical and come under heavy scrutiny, especially if a seller is not familiar with which line items and the proper amounts to claim.
  • Line item and normalized EBITDA % of revenue trends
  • Seller culture, personalities, skillsets, and strategic fit within a buyer

Risk factors (more impact on deal structure—% cash at close & earnout duration)

  • Revenue concentration
  • Gross profit concentration
  • Mode concentration
  • Commodity concentration
  • Industry concentration
  • Lane concentration
  • DSO and bad debt history
  • Mitigating factors (example: concentration somewhat mitigated with extremely strong customer tenure)

Data consolidation: show the full picture early

When data is consolidated and all positive and negative aspects of a seller are openly displayed early, the acquisition timeline is cut short, and the seller will be more likely to benefit with more positive valuations and deal structure offers.

Next Mile’s system generates over 430 graphs and charts, including reports that can take extensive TMS reporting to replicate.

TMS naming conventions can mislead buyers

Naming convention issues in TMS can be problematic and misleading for buyers. Example: entries in a TMS may include the location in the customer name, which can mislead a buyer who counts customers early to determine revenue concentration. Later, when the data is cleaned up, it can cause valuation and structure to be re-traded during due diligence.

Other examples:

  • Inability for a TMS to generate accurate top ten mode data (many descriptions of a dry van alone)
  • Commodity data is a risk factor that few TMS can generate

Business trends and projections: keep it factual

A seller should have accurate projections supported by factual data prior to going to market. If current trend/extrapolated data is down and future projections are unreasonably high, it will receive scrutiny and may create a negative trust factor. The data needs to be clear and concise with factual support.

Legal and safety

Legal and safety issues may affect a buyer’s desire to make an offer or severely impact deal structure (unusually high escrows or more restrictive earnout stipulations). Severity and timelines play an important role in timing.

What to do next (owner checklist)

  • Write down your exit motivation (age, health, fatigue, lifestyle, financial reward).
  • Decide what you’re open to: 100% purchase vs. equity retainment.
  • Assume diligence can run 6+ months and plan bandwidth to avoid “seller fatigue.”
  • Validate financial accuracy before going to market—buyers finding errors first creates distrust.
  • Get your buyer-facing data organized around:
    • Valuation drivers (trends, gross profit by mode, EBITDA, normalized add-backs)
    • Risk factors (concentrations, DSO/bad debt, mitigating factors)
  • Clean up TMS naming conventions (customers/locations, mode descriptions, commodity tags).
  • Keep projections tied to factual data—avoid “pie in the sky” numbers.
  • Don’t run a one-buyer process: NEVER consider one buyer.

Questions to ask your advisor

  1. Which structure fits my situation best: 100% purchase or equity retainment—and why?
  2. What earnout terms are typical for a business like mine (timeline, baseline, and my required involvement)?
  3. How will you run a process that introduces multiple buyers?
  4. How are we validating financial accuracy before going to market so we don’t lose trust in diligence?
  5. What are the likely valuation drivers for my business (and what do we need to show cleanly upfront)?
  6. What are the top risk factors buyers will see (concentration, DSO/bad debt, mode/commodity exposure), and what mitigating factors matter?
  7. How will we standardize the TMS so customer/mode/commodity data doesn’t change mid-process?
  8. How will we keep the process from dragging and avoid “seller fatigue”?