Chapter 8
Going public and shutting down

Ever thought about your company trading on the New York Stock Exchange, Nasdaq or any other stock market? Although it’s very rare for small and medium-sized trucking companies, public ownership bears at least passing consideration.

Going public lies at one extreme of an owner’s dreams about his business. At the other end of the spectrum is what many would consider a nightmare – giving up on the business altogether. But an orderly liquidation sometimes is the best possible exit strategy. We address both options in this chapter.

A step toward public ownership
Before we delve into the classic case of selling your stock on a public exchange, you should be aware of an option that can serve as a step toward public ownership. In a private placement, a representative for your company finds a group of investors willing to take a minority stake in your business. A private placement is like taking on a partner, and you can use it as a way to generate capital.

The downside of a private placement is that the investment group will be expecting a higher rate of return than a bank would for loaning you money. For routine needs, such as working capital, your banker will be your more cost-effective option.

So why would choose this option over bank financing? The principal advantage is that a private placement may offer the opportunity for a significant capital infusion in situations where a bank may consider the loan too risky. For example, suppose you are running 300 power units today and have the opportunity to grow to 500 trucks. For such an aggressive strategy, you might find investors willing to step in if your business plan looks reasonable.

In general, private placement firms are looking for opportunities that will provide a return in five to seven years. It’s not unusual for these groups to seek public ownership as their exit strategy. That can become your exit strategy as well.

Going public
Using the public markets is a complex succession strategy. Typically, a public offering is used to generate an infusion of capital and to provide a new form of currency. It positions you for growth through acquisition because you now can easily offer stock rather than cash. Rarely is the public market used as a pure exit strategy because it doesn’t address management transition. In fact, the market will insist that you have a strong management team in place.

Use of the public markets in a succession plan requires a two-stage approach. You must bring in, train and virtually turn over the company to your management successor first, whether he is family or an outsider. You might even use the “going public” plan to lure a seasoned manager who wants to be aggressive.

You also will need a board of directors that can handle the pressure and stress of a public company. Public ownership instantly transforms your business dealings from “nobody’s business” to “under the microscope.” You need board members who understand how to reconcile the company’s long-term strategic needs with pressure from shareholders for near-term earnings. The bottom line is that your management succession plan will need more depth if it is part of a plan to go public.

When companies go public, they typically sell 20 percent to 50 percent of the company on the open market, leaving the family as majority owners. At this point, you would retain board positions as you still have a major financial stake and future in the company. Going forward, your family may desire to slowly sell the remaining portion of stock that you hold.

Beware of the red tape. Get ready for lawyers, CPAs and stock market analysts to be your best friends. You will need to have three to five years of clean, audited financial statements. That means that if your financial statements haven’t been audited, going public is at least three years away. It’s possible to conduct audits on years past, but it’s prohibitively expensive.

Finally, if you plan to take the business public, understand how much time will be needed to respond to analysts who will want to know how the company is doing, what your strategic plan is and what earnings you project. And during the initial public offering, your management will need to explain the business and how it fits into the overall transportation industry. And there are ongoing reporting requirements galore.

You can see that going public is daunting, and staying public is hardly any easier. In fact, there have been cases of trucking companies going public and then later deciding to return to private ownership. Before you take any steps in this direction, talk not only to your key financial and legal advisers but also trucking companies that have made the leap to public ownership – and perhaps back again.

Closing the business
There are many reasons why closing the business might be the appropriate succession plan, and don’t assume that it represents failure. Sometimes you will achieve maximum family harmony and financial return by simply calling it quits.

Management crisis. Especially in smaller companies, an owner who hasn’t taken any steps toward forming a succession plan may be the only person who knows the business and has the experience to make decisions. If this person dies or becomes incapacitated, the family’s only realistic option may be to close down.

Chances are, if you have done nothing to prepare for management succession, you haven’t done much to prepare financially for your departure either. Although Congress is phasing out the estate tax – and then reinstituting it in 2011 – a very large estate in equipment and real estate could still trigger a big tax bill that your family may have no cash to pay. We will address strategies for dealing with this issue in later chapters of this book.

The point is, you don’t want this to happen. Start working on a succession plan today.

Family squabbles. When the family cannot decide what to do with the company, closing is always an option. You may feel it does not maximize your financial return, but it may maximize your family harmony. If you know your children cannot live with each other at work, and you have ruled out all other options, you end up with closing.

It is not as uncommon as you might think to close down instead of selling to a third party. Sometimes family members can’t stand the thought of their company being run by someone other than the current leader. And while the return may be less than a sale to a third party, you can achieve that return much faster and with less stress in a liquidation. One consideration, of course, is the livelihood of your employees. In periods of tight capacity, however, this may be less of a concern than at other times.

Poor past performance. If your trucking company was hit hard during the most recent downturn and is still struggling to return to financial health, your company may be “damaged goods,” and your best shot at maximizing your return might be a near-term liquidation to recover as much value in your equipment as possible. Remember, selling your company requires investment not only in legal and financial consulting but in repairs and upgrades to make the business more attractive. At some point, a deteriorated balance sheet and marginal cash flow may make sale of the ongoing business an uneconomic choice.

Liability worries. It’s unpleasant to consider and difficult to discuss, but you can’t ignore the possibility that, depending on your company’s size and insurance coverage, a catastrophic accident or two could break you. It’s possible that closing down would be your best course of action to minimize your personal liability. But this clearly is an area in which you need experienced legal advice before taking any steps that could make your predicament worse.

Weighing options
This ends our discussion of your principal options for transitioning management and ownership of the business. At this point, you should return to Chapter 3 and consider those options in relation to one another. Once you have identified the best overall path for you, your family and your company, you are ready to move toward implementation.