This is the fifth and final post in a series on a buying a business, telling the story of our recent acquisition of a small transport company. Through this blog series we want to show what it’s really like to buy a small business, including the risks, problems and practical details, including financials. If you’re looking at businesses for sale with the intention of buying your first one, we hope this series will be very helpful. You can go back to the first post in this series here.
The New Year had arrived, I had visited Arnold’s container client (the only client relationship we were effectively going to acquire, since Arnold had dropped the curtainsider work as suggested), and it had all checked out. The payment terms of the industry were annoyingly opaque, but everything else had satisfied the criteria I was looking to meet. The sale of the business was not a concern to them: they were happy to carry on with our company as they had with Arnold’s and they were keen to expand and give us more work.
The final step was due diligence of the company’s accounts and bookkeeping. Given that it was a young company (less than one year old), it had not yet filed accounts with Companies House, so we had only figures provided by the company’s accountant to go on. This is inherently risky of course. The numbers provided could simply have been invented. But matching them against bank statements, and against invoices, and matching these with information I received from the container client when I went to meet with them, gave us some confidence that we were not being misled (or at least that it would have required a highly elaborate fraud if we were being misled).
Besides looking for fraud, the most important reason for checking the books was to ascertain profitability. The company had a cash flow problem – this was Arnold’s reason for selling – but we were not interested in taking on a business with a profitability problem. We were not looking for a “turnaround”. The figures, such as they were, did in fact show that the business was profitable, although its cash position was getting progressively worse as it grew. Profitability fluctuated, but we reasoned that it could conservatively generate at least £1,500 net profit per month, without factoring in the lower cost structure that we would benefit from after the acquisition. We knew that Nomad’s positive cash position would be able to fund the cash flow requirements of this business, and the net earnings of (at least) £1,500 per month would be worth acquiring.
More to the point, the acquisition would give our existing business (which was in a small niche of the transport industry) a foothold into a much larger market, with the potential to grow quickly and become much more profitable. Arnold was keen to stay on and help us with this goal. Being relieved of his debts would be a huge weight off his shoulders, and (besides the contractual requirements we could tie him into) he genuinely wanted to stay and help us grow. Working as a self-employed driver within our business gave him the best of both worlds: no debt, and the ability to continue to grow the business he had started and make a success of it.
Now that we were satisfied that the industry was worth entering (and we had already entered it with our own truck with the new client by this point), and that the work we would be acquiring from Arnold with his existing container client would continue after the acquisition, we were ready to proceed with the acquisition. Arnold had increased his work from one truck to two trucks with the container client since the start of the New Year, so we would continue this, in addition to the truck we were already running with the client we had found ourselves.
To limit our risk we would only be purchasing the “business and assets” of Arnold’s company, rather than the company itself. The tangible assets consisted primarily of one truck (he had hired the other trucks and trailers), plus some dash cams and a few tools, valued altogether at £12-13,000. The question was how much extra to pay for goodwill.
Arnold had earlier said that he wanted to pay off a business loan of £20,000 and a loan to his friend of £13,000 (£33,000 total), and he would be happy. But our analysis of his accounts showed a high trade debtors figure that he hadn’t considered. After adjusting for accounts payable and accounts receivable we reasoned that he could pay off his debts with £24,000. Arnold’s accountant agreed with the analysis and Arnold was OK with this conclusion, so the price was agreed.
At £24,000 + VAT we would be paying £11-12,000 for goodwill. Based on the profitability of the existing business we would pay this back in 8 months, and we would pay back the cost of the truck in a further 8 months. The business would add £350-400k revenue to Nomad and £18k profit (before cost synergies and growth). All of this seemed reasonable, so we were happy to proceed with a purchase price of £24,000 + VAT.
Now we just needed to tie up the remaining details and we could sign the deal...
Last Minute Scramble
It always seems to be a sprint to the finish line when you’re signing a deal like this. Partly it’s because the “last few remaining details” actually end up being quite a long list of time-consuming investigations. Things that are almost certainly going to be OK, but still need to be checked: identifications, proof of address, IDs for all of the drivers, vehicle HPI checks, bank loan statements, share ownership statements. Phone calls to suppliers (meetings in some cases) to check that they would carry on supplying the acquiring company at the same rates as the acquired company. Discussions with our own suppliers (insurers especially) regarding the changes that would be required immediately post-acquisition.
And then the things you forgot to ask for at first but you still really need (“Do you mind handing over your email address after the sale?”). Some of the accounting checks mentioned above were still going on during these last few days too, resulting in dozens of emails back and forth between Arnold’s accountant and I.
Then sudden doubts (these always happen, every time). “Wait, are we crazy? We’re only buying one client, and that client does not tell us how much we will earn until after we’ve done the work?” “Do we have the time for this?” “Everyone says there is no money in haulage – what are we missing?”
The doubts never completely leave. It’s more a question of what things would look like in the worst case scenario, if our assumptions were incorrect, and our fears came true, vs the potential upside. The total unsecured risk was only £12,000 + VAT. We would have to devote some cash to funding the cash flow of the business, but the potential upside was huge. It was worth it.
So we eventually checked off all of these last details, signed the papers and I made the bank transfer while sitting in Arnold’s accountant’s office. The deal was done. Relief. Then urgency again, to get on with the next most important things, that had been delayed until now.
Three Months Later
It was completely smooth sailing after the acquisition – everything went perfectly according to plan…
Just kidding. That never happens.
Haulage is hard work. Our team at Nomad were up to the task, as I knew they would be, but it required a lot of reorganisation of the team’s workload and priorities to handle this new division. For one thing, we hadn’t considered the fact that running trucks on double-shift means that things can go wrong at any time of the day or night – this required a new 24h “on call” capability that we had never needed to offer before. Planning and coordinating the truck movements is not without effort either, so a number of hours each day is spent by our team on this work. Maintaining health & safety standards, ensuring compliance with drivers’ hours regulations, and dealing with suppliers (especially driver agencies) also takes a lot of time. Thankfully the Nomad team are very capable, highly adaptable and ceaselessly energetic – if they weren’t, the acquisition would have very quickly failed, regardless of any financial factors.
Arnold was true to his word and has been a great asset too. He has been a great source of guidance and experience in this new field, as well as an intermediary between us and the drivers he brought on board. He really likes working with our Nomad team, probably because he shares their positivity and enthusiasm. Apparently this is not common in haulage (people in transport offices tend to be gruff and blunt), so drivers get on well with our crew.
Financially the project has been more successful than expected… but for completely unexpected reasons. In the first three months of operations the haulage division has generated just over £12k net profit for the company, which is almost three times as fast as expected, paying for the unsecured portion of the purchase price already.
However, none of this was strictly due to the acquisition itself – the profit came entirely from the other contract that we negotiated “on the side” as I was doing my due diligence at the start of January. It turned out that the reason this client was able to guarantee us a fixed rate per shift and fixed number of miles (which the other container client could not) was because the work they wanted us to do wasn’t container work – it was refrigerated transport for one of their clients, with whom they had negotiated a better rate than the typical container rate. In the first three months of the year we had made just over £15k profit on this job, compared to just over £3k loss on the container work we were doing for Arnold’s client.
The key risk we saw with container transport from the start was the fact that the haulier is not told the rate until after the work is completed. We should have added to this the related risk that the client is free to change the rate at any time. Our profitability estimates had been based on the assumption that revenue per shift and per vehicle would continue to be approximately static going forward – we did not have a fixed “rate card” but we assumed that on average the rates would be the same. In reality, the client reduced the rate it was paying, on average, over the following few months and we were powerless to do anything about it.
Comparing this client to others in the container haulage industry, their new rates were not unfair – they had simply come down to a level within the same region as the others across the industry, whereas previously they had been paying Arnold slightly more. Small hauliers find it very difficult to be profitable at the industry standard rates of £1.40 per mile and below, and we too found it difficult when this client paid us at this level instead of the higher rate they had been paying Arnold in the few months leading up to Christmas.
Arnold himself was very disappointed with this, and has been very active in helping the company to find alternative sources of work. This was the only client of the business we acquired, and it turned out to be loss-making after the acquisition.
So was the acquisition a success? I would still say definitely yes.
We are now seven months in and the haulage division is still profitable, with a new client in addition to the original profitable one. Everything is still constantly changing, but our team are getting better and better at managing all of the new and different kinds of risks and opportunities that arise (for example: diesel theft is a new issue they’ve had to find ways to combat). Most of the profit still comes from the first client, but without the losses of the container work from the acquired client.
We would never have found, or even looked for, our most profitable client if we hadn’t been investigating this industry as part of the due diligence around this acquisition. Overall it’s been a lot of work but we’ve learned a huge amount. Some of what we’ve learned will make the Nomad team better at managing and growing the haulage business going forward. The experience has allowed us to better appreciate Nomad’s existing overseas removals business and the profitable niche it is in. It has given Nomad some more scale and increased its turnover and profitability. And finally, the experience has allowed us to identify a new opportunity in a related industry which will are also intending to pursue as a stand-alone business in the coming months.
This is the nature of acquisitions – especially at the small end of the market. Businesses of this size are so exposed to change that very often the acquired company can become quite different after the acquisition than it was before. But along with risk, acquisitions also expose you to opportunity. As long as the down side is managed, the upside often has the potential to more than compensate for it.