Why get a valuation of your company?
A business valuation is a process that leads to the accurate, objective determination of the economic value of your student transportation business.
As a school bus contractor, you might seek out a business valuation for a wide range of purposes during the lifecycle of your business, including a planned sale or merger, establishing partner ownership, estate planning, tax planning, or applications for loans or equity to expand your business.
In today’s student transportation industry, we also see a growing number of conscientious operators seeking valuations in response to some of the more difficult industry trends: driver shortages, supply chain issues, fleet maintenance, and increasing fuel costs.
Meanwhile, on the school district side, administrators, superintendents, business managers, and transportation directors all play a role in your business, adding to the complexity of your daily operations.
Ultimately, your fate can be determined by school boards, which may turn over contracts or put them out for bid or RFP before contract expiration. Student transportation providers who lose out at the time of renewal can find themselves in a precarious financial situation. A comprehensive business valuation empowers contractors to plan for unforeseen changes.
In the modern student transportation industry, there are many reasons to schedule a business valuation. In this post, our experts cover some of the top benefits provided by a valuation, including some you may not have considered.
Sale, succession, retirement, and estate planning
If you are selling or merging your business, a valuation provides you with an idea of what a fair, mutually beneficial deal could look like.
In addition, you’ll gain insight into matters that might negatively affect overall value, giving you an opportunity to remedy them prior to going to market. Identifying issues and taking corrective action builds value in your business, regardless of whether you sell or merge.
Today, it is increasingly common for businesses to be sold debt-free and cash-free. Acquisitions are typically based on multiples of EBITDA (Earnings before interest, taxes, depreciation, and amortization) as a benchmark for profitability. It is therefore important in any valuation to determine the EBITDA of your company.
As part of normalizing EBITDA, historic costs are analyzed and non-recurring items that may have been incurred during the last number of years are stripped out. An example is professional fees incurred as part of a restructuring that won’t recur now that the work has been completed.
Succession planning is not the same as retirement planning. Depending on your situation, you may need to restructure, close, or sell your business. A current valuation allows you to create a more strategic, well-informed action plan. The insights from your business valuation can help you increase the value of your company in the years leading up to your exit. As a result, you may be able to increase your sales proceeds, giving you more financial stability.
Through a valuation, you can make improvements that benefit you in the long run. You will also gain insight into your progress toward your long-term goals by knowing the value of your entire portfolio.
Business valuations help you plan ahead
Having a business valuation done for estate planning is vital to distributing your assets to your family members as you wish, based upon objective value. Not only does this allow you to ensure everyone gets a fair share, but it also enables you to strategically balance your hopes for the future of the business with your desire to benefit your heirs.
A valuation is equally essential for retirement planning.
Often, bus operators retire with little savings and a retirement plan contingent on liquidating the business. It can be difficult for an owner if a retirement plan rests on an inaccurate assumption of business value.
Frequent business valuations help business owners plan ahead with an accurate understanding of their business value and what they may need to supplement their proceeds from a sale in retirement. It also enables an owner to focus on adding value by making strategic investments well ahead of a retirement date.
A valuation will help you determine your next move, whether it is to continue operating, sell, or transfer.
Regardless of which of these initiatives you pursue, an accurate valuation will help you create something of greater value so that when you do turn the business over, it will be worth more than it is worth today.
Approaching lenders with confidence
A true market value of your company’s collateral, assets, and cash flow is essential to your ongoing access to capital.
To preserve and maximize your ability to capture funding when you need it, you will need a very thorough appraisal of your assets, including:
- Supplies and inventory
- Equipment and technology
A true market valuation of these assets and your cash flow will help you to approach lenders with confidence to negotiate in advance of securing the funds you need for a variety of reasons including the following:
- The cyclical nature of the school bus contracting business
- Replacement of aged-out or worn-out equipment
- Need for capital in advance of starting a new contract
- Technology investments to improve your business
The emergence of electric vehicles (EVs) will have a lasting impact on the student transportation industry, and it will be essential for contractors to have a strategy to address these changes. Some districts are already planning for a transition to EVs and have mandates upon the expiration of current contracts for future commitments to EV buses, charging stations, wiring, and mechanic training.
Having a recent valuation can help you secure the funding you need to meet contract renewal mandates for EV investments.
A business valuation helps you appraise and understand true business performance
A proper business valuation will be much more comprehensive than a bank’s typical evaluation of your hard assets alone. A proper valuation will inform you of the true state of your business operations, including margins and inherent risks, now and in the future.
A comprehensive valuation goes far beyond financials, so that you can understand your current business performance and target the most vital areas for improvement in order to boost your business’s value.
A valuation will look at the following:
- Business income, costs, and margins
- Benchmarks for comparing future investments to returns
- Benchmarks for comparing to industry peers
- Key performance indicators (KPIs) to focus on in order to maximize business value
This aspect of your business valuation will improve your effectiveness as a business leader. You will have the information you need to lower business costs where possible and improve profitability. You will know what kinds of potential returns justify business investment and which investments can be put off or avoided.
With industry benchmarks, you will have a broader perspective of how your business is performing relative to peers. And with a focus on the right KPIs, you will optimize your time and resources toward the initiatives and activities that matter most in increasing your business’s value.
Estimating current and future cash flows
As part of your valuation, an accurate assessment of current and future cash flows positions your business to optimize future cash flows. It answers the following questions:
- How does risk play into the formation of your optimal capital structure?
- What line of credit does your business need to get through the ups and downs of a fiscal year, given the cyclical nature of the school bus industry?
- What stake should you offer a potential partner, and for what level of investment?
- What stake in the company are you willing to offer an investor?
- What impact to cash flow should guide your need for loans, and what loan amounts should you seek for particular types of investments, from office technologies to new buses?
Business valuations help you identify inherent risks, current and future
A comprehensive business valuation will pinpoint areas of risk, for the benefit of transparency to prospective buyers and investors, and so that you can make strategic decisions to minimize risks.
Risks in the student transportation industry include the following:
- Driver shortages
- Rising insurance rates
- Vehicle requirement changes
- Supply chain challenges
- Capital expenditure needs
- Regulatory changes
- Technological advances
Tracking the right key performance indicators is essential to steering your company out of risks. A valuation will help to reveal, for instance, whether you should be tracking hours per day, per bus; revenue per bus; or fuel per bus.
Developing strategies for the future of your business
As you consider your future in the student transportation industry, there are many initiatives and priorities to consider. A comprehensive business valuation provides you with the tools to make well informed business decisions, and to decide what initiatives to pursue next, including:
- Market goals and your ultimate industry destination
- Organic growth through new contracts and fleet investments
- Downsizing and divestiture of lower-performing assets
- Potential sales, mergers, acquisitions, and partnerships
- Exit timing in advance of industry changes or life changes
Business valuation: next steps
What’s next? Whether you want to optimize your business for growth or prepare your exit strategy via succession planning or sale, the first step is to gather necessary information. The following documents will form the basis of your valuation:
- Profit and loss statements
- Current balance sheets
- Tax returns for the last five years
- A detailed list of fleet vehicles, as well as other assets and inventory
- Details of any liabilities
- Any other valuations you may have received in the past year
With those items readily available, you can proceed with confidence. Expect the entire process to take from two weeks to a month, depending on the size and complexity of your business – and remember, always choose an organization that makes you feel comfortable and confident throughout the process. Expertise, stability, and roots in the student transportation industry are all important considerations as you choose a partner for this important process.
We’ll take a more detailed look at the valuation process, and what to expect with ASTP, in a follow-up post coming soon.
American Student Transportation Partners (ASTP) is a national network of reliable transportation providers. We’re Driving the Future of Student Transportation by providing access to education through safe, reliable student transportation programs. Exceptional bus operators choose ASTP because of our innovative approach to partnership, as well as the resources we provide to help “future-proof” their operations.
To learn more about partnering with ASTP, contact Tod Eskra, President, at [email protected] or call (314) 560-5946.