Equity firms competing to buy private bus companies

By Victor S. Parra

I suspect some of you reading this headline assume it’s the title of a sci-fi movie. Well, to the surprise of many (including me), it’s what’s happening right now.

And the stars of the movie are dozens, even hundreds, of private-equity firms looking to purchase private bus companies.

Let me step back for a moment and give you some of my historical perspective.

During my 19 years as president and CEO of the United Motorcoach Association, periodically I would receive calls from bus operators asking me confidentially if I knew of a company that might be interested in buying their business.

Usually, I didn’t have a recommendation but would keep this information confidential until, by coincidence, a company in their market would surface looking to expand their business. As you can imagine, this rarely happened.

Recently, I was invited to serve as an advisor to an investment-banking company engaged in mergers and acquisitions. In the past few years, the company has handled several transactions in the private bus industry.

I have since learned how private-equity firms view the motorcoach industry.

I also learned that there is about $1.2 trillion in private-equity money sitting on the sidelines looking for businesses to invest in (trillion is not a typo).

You should know private-equity firms mostly buy mature companies that are already established, unlike venture-capital firms looking to invest in startups with unpredictable chances of failure or success.

So, the next question is, why are private-equity firms interested in the private bus industry?

There are several important reasons for this interest. Middle-market private-equity firms see the motorcoach industry as a smart investment because:

  • Private bus companies own tangible assets.
  • The businesses have real value, particularly compared with other investment options such as technology firms.
  • Buses (tangible assets) have high liquidation and capitalization values.
  • Business performance is steady, with no major swings either way, up or down.
  • Private equity firms appreciate the fact that bus operators are smart, savvy and hard-working, qualities that seem absent in other industries looking to make the proverbial “fast buck.” (This one I already knew!)

Private-equity firms offer different types of purchase options. Probably the most common option is the “platform buy,” in which private-equity firms purchase 80 to 90 percent of the bus company.

They keep current management in place through a two- to three-year contract, depending on what the ownership is comfortable with. The bus company owners may retain 10 to 20 percent equity in their company, get paid a salary possibly higher than what they’re currently paying themselves and have a large amount of capital from the sale.

The owner(s) may choose to invest in the current business (since they still have an equity interest) to build new services, buy more equipment and/or invest in capturing new markets. Or they may opt to just save and invest in various financial instruments, stocks or bonds.

And because of the strong interest from the private-equity sector, there may even be multiple firms bidding for the business.

There are other options, as well. Let’s say an operator has a partner or family member who owns 50 percent of the company and is not willing to sell. The operator can still parcel out the 50 percent equity interest to a private-equity firm and use the capital from the sale to start a new venture or invest in other businesses.

Or, let’s say a small bus company with fewer than 20 buses is looking for an exit plan because the owner’s children are not interested in continuing to work in the business. There’s an option for that scenario, as well.

It’s called a “tuck in,” where private-equity investors may merge the business into another bus company in the area. This way the owner gets to take the equity from the business and walk away without any debt.

Selling either all or part of a business is no easy decision. In many cases, ownership goes back several generations, making the decision very personal and difficult.

But any operators contemplating selling should, at a minimum, know what their businesses are worth in the open market through an “opinion of value.” This will help them decide if the time is right, or if they need more time to improve their financial performance to increase the value of their company.

Victor S. Parra, former president and CEO of the United Motorcoach Association, runs his own consulting firm, Strategic-Focus Advisors, and is an advisor to Corporate Finance Associates. He can be reached at vparra@strategic-focus.com or 703-501-6947.

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