The pandemic created unprecedented challenges for the transportation and logistics industry. Supply chains were disrupted, rail, road and air cargo providers struggled to move essential goods, labor shortages became acute, and factories and warehouses closed or faced operational challenges.
While some challenges, such as the labor shortage persist in 2021, opportunities abound for those in the T&L industry because of surging consumer demand bolstered by pent-up spending. Many companies in the industry are considering growth opportunities in the form of mergers and acquisitions. Others consider it the perfect time to transition their business to the next generation or new ownership, said Taylor Howerton, logistics and supply chain industry consultant at Truist.
“Transportation and logistics owners are thinking about how they are going to be able to meet the opportunity that’s out there right now or what does the transition look like given how profitable these companies are and how bright the near-term environment looks,” Howerton said. “Many are taking a look at current valuations and weighing that against an operating environment that has tremendous opportunities as well as risks.”
Howerton and fellow Truist experts Michael Garcia and Erich Holmes shared their insights about recent transportation and logistics industry trends. Garcia is an investment banker with Truist Securities focused on the sector, and Holmes is a business transition strategist with Truist Wealth’s Business Transition Advisory Group.
Truist, a top 10 U.S. commercial bank by assets, was formed from the 2019 merger of BB&T Corp. and SunTrust Banks, Inc. Its McGriff Insurance Services, Inc., a subsidiary of Truist Insurance, is one of the largest transportation insurance brokers in the U.S.
How are T&L companies addressing areas of uncertainty that remain following the global health crisis?
Howerton: A just-in-time inventory management philosophy emerged over the last several decades that requires producers to forecast demand accurately. International trade disputes and the pandemic challenged that model, which led to extreme shortages of many goods during the crisis. Supply chain managers are now evolving more to a “just-in-case” model where larger inventories are kept on hand as safety stock. The result is a need for more warehousing and increased shipping capacity. As producers look for more resiliency and redundancy in their supply chains, T&L companies will benefit from increased outsourcing as they can leverage their technology and ability to scale warehousing and transportation investments across their entire customer base.
What are some of the top opportunities for T&L companies?
Garcia: Warehouse automation and robotics already were being accelerated, but the labor shortage has put a spotlight on this area. We also hear a lot about automation on the trucking front because of persistent driver shortages. There will be opportunities to automate the middle mile of long-haul routes, which is the toughest part of the run. Self-driving trucks could really improve the overall quality of life in the truck driver industry.
From a wealth planning perspective, what are the three buckets you focus on for a business transition?
Holmes: The three buckets we believe business owners should focus on are as follows: You want to (1) maximize the enterprise value, (2) maximize family wealth from the transaction – which includes minimizing income taxes – and (3) you want to help the owners figure out what they are going to do next. However, driving the focus on the third bucket, what’s next for owners, can be challenging. Often times it’s hard for owners to think about stepping away from what they think of as their baby. Additionally, given the amount of time and effort spent on building the business and the ongoing running of the business, they may not have ever carefully consider plans to do anything else. You want to help them spend adequate time to think clearly about the next chapter so that they can articulate it to their transition team and be excited about the journey to what’s next.
Reports show that lawsuit verdicts above $10 million are causing insurance rates for trucking companies to soar. What steps can T&L companies take to reduce their insurance burden?
Howerton: Insurers like McGriff are able to bring strategic advice around risk management to the table. Ultimately you want the cost of insurance to be as cost effective as possible, however, implementing a prudent risk management culture drives behaviors that extend well beyond reducing insurance costs to facilitating a safer, efficient, and potentially more valuable organization. Truist and McGriff’s industry focused risk management team can work with companies to tailor a strategy that can help accomplish these objectives.
How are proposed higher capital gains taxes for people with incomes of more than $1 million affecting T&L transition plans?
Garcia: Owners are weighing growth prospects and potentially higher business valuations against what likely are to be lower proceeds of a sale because of tax law changes. Also, interest rates are low, and there is significant private equity capital out there looking for acquisitions. The mergers and acquisitions market is very robust right now, so that all adds up to an acceleration of plans to sell for many owners.
What are the five steps an owner should take to execute on a transition plan?
Holmes: Begin with the objective in mind, the why. If we know why an owner wants to transition and what he or she wants to achieve, our planning can be aligned with those goals.
Second, start planning two to three years in advance so you have the time to really think about what you want to accomplish and execute on it in a thoughtful way.
Third, build a transition team with industry knowledge. Existing team members from management may be a part of that, but you want to bring in external advisors like a CPA, attorney, M&A experts, bankers and wealth advisors.
Next, make sure the business and personal planning are in alignment. Decisions you make on the business side will impact you personally. For example, if your advisors on the personal and the business side are connected, they can help you understand why it may not be the best option to take the largest deal on the table, because it might be structured in a way that results in net proceeds that are less than the second-highest offer.
Finally, plan in the green zone but prepare for the red zone. You never know what’s going to happen. Fifty percent of transitions happen for reasons out of our control – death, divorce, disability, distress or burnout. Prepare before that life event happens. Then, you’ll be in the red zone with a playbook ready to execute.