Unpack the tech value in transportation and distribution M&A

“There's a much greater focus on technology than there was a decade ago, and people are making their businesses succeed with a lot more thought going into the execution versus just how many drivers and trucks can we get in the right places.”

Russell A. Daniel

Grant Thornton Corporate Tax Solutions Partner

“It's more than simply who's got the equipment to move something from here to there,” said Grant Thornton Corporate Tax Solutions Partner Russell Daniel. “There's a much greater focus on technology than there was a decade ago, and people are making their businesses succeed with more thought going into the execution versus just how many drivers and trucks can we get in the right places.”

“We've even seen some of our clients turn that into a strategic opportunity to develop software that they can license or sell to third parties,” Daniel said. “There's a strategic opportunity there, beyond just making your own business run effectively, to monetize that investment itself.”

“Freight brokerage goes hand-in-hand with 3PL (third-party logistics) cloud-based solutions,” McAuley said. “It’s the concept of full visibility of freight, from port to porch. We have a transportation client that’s giving shippers more transparency across the freight lifecycle and the supply chain lifecycle. Those kinds of businesses can support investment theses that aren't just dependent upon revenue-generating equipment or assets.”

“It goes beyond the traditional ‘multiple times your EBITDA’ that we would see as your typical jumping-off place for valuation,” Daniel said. “If someone has created a proprietary software product or other technology that gives them a leg up on the competition, that can have some inherent value beyond just the earnings it's creating now, because we don’t know if they've tapped into that. At the same time, sellers often want to get paid for value that hasn't yet been created, and buyers push back on that. There's a definite tension there.”

“Every piece of technology that we come across claims to revolutionize the industry,” McAuley said. “But how does it tactically manifest into the forecast and support for the company, and what you're comfortable paying from an enterprise value perspective?”

“You have to do more homework outside of your core financial due diligence. It's typically a longer transaction lifecycle, with more nuance and different consideration to enterprise value, because there often isn’t an earnings stream.”

Patrick McAuley

Partner, Transaction Advisory

“If it's the technology that's really driving the acquisition thesis, you have to do more homework outside of your core financial due diligence,” McAuley said. This additional due diligence can include a deep dive into the technology and its potential market which often starts in house but can frequently involve a third -party firm or IT specialist. “It's typically a longer transaction lifecycle, with more nuance and different consideration to enterprise value, because there often isn’t an earnings stream yet.”

To guide your valuation of a transportation company’s technology, start with four factors:

1. Scalability

“From a top-line perspective, a lot of it is around scale,” McAuley said. Consider questions like:

• How can the company go from where it is to where it wants to be, utilizing this technology — and how is it positioned to scale with other technology?
• Are there opportunities to scale related to the go-to-market approach?
• Can we penetrate our identified geographies and markets more quickly and effectively with this technology?

2. Margin

If scalability isn’t the thesis, then consider how the technology can improve the margin:

• Will the technology improve cost reduction (and improve operating margin) or how the company delivers services?
• Is the technology going to make us more efficient on the operating side or on the profitability side?

3. Timing

Make sure to consider the timing for the technology’s development and integration:

• What does this mean from a synergistic perspective?
• Is this something that's a plug-and-play solution and could be rolled out quickly post-close for top-line gain?
• Is this something that is going to take a year or two to be fully integrated and achieving the thesis, and is there value prior to that?

4. Resilience

“What's also attractive about technology is its insulation from what we saw in 2023, where deal volume and value were down pretty significantly. It can be a protection mechanism in periods of low tides,” McAuley said. So, consider:

• How does this protect more of the company’s market share, in any market conditions?
• How does this help the company be less influenced by rate conditions?

The partial impact of tech can be difficult to prove. “There are higher table stakes for all counterparties that are helping to support companies with technology as part of their product suite, or their suite of services, because it's harder to prove,” McAuley said. “The farther you stray from quantitative impact and accountability for what the technology means to the top or bottom line, the easier it is to get lost in a qualitative quagmire.”

It’s important to take a clear-eyed look at the valuation impact of technology. McAuley recalled that “a few deals for a portfolio company fell apart when the thesis was not supported, or lost a lot of momentum, because of the technology due diligence, which is becoming a separate diligence stream with more frequency. When you trace it back to the financial impact, that's often the question that's going to determine whether or not the deal is attractive to that buyer.”

“I think there was a general expectation that the Fed was going to start easing rates. At some point they will, but it's a matter of when.”

Michael T. Capone

Grant Thornton Audit Services Partner

Even with elevated interest rates, rate stability might give some buyers the courage to consider transactions again. Plus, they might have cash that needs to start working.

“There are professionals all over the country whose businesses and livelihoods are tied into the deal ecosystem, and they had a slow year,” Daniel said.

“There's going to be a lot of pressure to move deals along,” Daniel said. “With an election coming, the uncertainty about potential tax law changes is another factor that could push more activity this year. I am optimistic that we're going to see increased deal flow this year.”

As the pressure to make deals returns, the best opportunities in transportation could be companies with tech value that’s waiting to be unpacked.