With capital allocation having a significant impact on a hauler’s valuations, Certified Route Ready trucks can play a role in improving an acquisition strategy, injecting more trucks into the business for the same capital dollars and reducing debt levels to provide the business with flexibility.
By Pete Hendrickson
The value of U.S. hauling operations is measured by EBITDA (earnings before interest, taxes, depreciation and amortization), which is a profitability metric that eliminates the effects of financing and capital expenditures for ease of comparison.
While EBITDA does not directly factor in capital spending, capital allocation is the lifeblood that fuels a company’s future profitability. For a business to maximize its EBITDA and valuation, capital dollars must be invested as efficiently as possible. One lever industry leaders are pulling to maximize the efficiency of their capital allocation is purchasing late model Certified Route Ready collection vehicles in place of new trucks. This article will examine how this strategy is boosting valuations by freeing up capital for acquisitions, stretching fleet capital and reducing debt.
Before diving into specific scenarios of how and when Route Ready trucks can fit into a hauler’s valuation strategy, let us examine how used trucks can deliver a higher internal rate of return than new trucks and, therefore, be a more efficient use of capital in any scenario. The math behind this premise is simple. Used trucks offer day one capital savings that can outpace future maintenance penalties. More efficient reallocation of these capital savings to higher yielding segments of the business can promote EBITDA growth and a higher valuation.
Growth Through Acquisition
Growth through acquisition, while capital intensive, is a widely adopted strategy haulers leverage to increase EBITDA and valuation. Route Ready trucks can play a few roles in supporting a haulers acquisition strategy. First, they can be available immediately allowing a hauler to implement its fleet strategy day one of the acquisition. In addition to the quick leadtime, a hauler can reallocate the capital saved on used trucks towards additional acquisitions or other high return opportunities.
Second, newly acquired hauling operations often require an immediate injection of trucks to replace an aging fleet or align with a company’s standardization goals. Route Ready trucks can more efficiently accomplish these same goals with a lower capital requirement.
Purchasing Used Trucks
When backed by a certification program, buying used trucks in place of new can be an effective strategy to stretch capital, allowing a hauler to purchase more trucks with the same amount of capital. The additional trucks allow a hauler to increase revenue, improve customer service, reduce maintenance costs and provide more drivers with newer equipment. Beyond the immediate EBITDA improvement, this strategy can result in higher employee retention and improved first 90 day uptime as certified late model used trucks are ready to work immediately.
Saving capital on used trucks can help a business reduce its debt, resulting in several positive effects on future valuation. First, maintaining a cushion against debt covenants provides a business with flexibility to capitalize on potentially high yielding capital intensive projects without having to renegotiate banking terms. With opportunities often requiring speed to market, the cushion provided by lower fleet
cap-ex can be the difference between closing and not resulting in a meaningful impact on future EBITDA. In addition to providing a cushion against debt covenants, lower debt levels reduce debt expenses; in turn, improving cash flow and providing opportunities to invest in human capital and other means of growing the business. Finally, when selling a business, lower debt results in a higher equity value and a larger payday upon exiting.
Maximize Your Company’s EBITDA and Valuation
In closing, capital must be allocated as efficiently as possible to maximize a company’s EBITDA and valuation. One area we can look at carefully to improve efficiency of capital is in fleet where certified Route Ready trucks can improve return on fleet capital, align with acquisition strategies and reduce debt levels to promote business flexibility. | WA
Pete Hendrickson joined Big Truck Rental (Tampa, FL) in 2019 as Director of Route Ready Truck Sales and is responsible for the strategy and execution of sales for both the U.S. and Canada. Prior to joining BTR, he spent the last seven years of his career in the beverage supply chain industry in sales and account management for Rehrig Pacific Company. Most recently, he held National Account Manager roles where he provided solutions to allow customers to move products within the supply chain more efficiently and in a cost-effective manner. Pete can be reached at (813) 966-4586, e-mail email@example.com or visit www.bigtruckrental.com or www.routereadytrucks.com.