Buying and Selling in Haulage
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IT seems that once again, as happened after the 1914-18 war, men who are coming out of the Army, especially those' Who were .in R.E.M.E. or R.A.S.C., take a keen interest in the road haulage industry and would like to enter it , This is so much a reminder of what occurred in the years 1919-20-21 as to make one wonder what would be happening now if there were no Road and Rail Traffic Act and if there were the same "free for all ", opportunities to-day as there were in those years. Probably history would repeat itself and the market would soon be flooded with operators offering their services at cut-throat rates and so bringing the industry into disrepute.
' However, Consideration of what might have been will get us nowhere: We have to consider. things as they are and I am bound-to put the case of .such prospective newcomers in such a way that their apprehensions of what • they are likely to he able to do are not too optimistic.
I am receiving four kinds of inquiry, all sufficiently closely related to Jae dealt with together ' and along similar lines. Of these four,-,the.first refers to the purchase of a haulier's business; the second to the acquisition of a partnership in an existing otganization: the third to the sale of a business; and the fourth to starting up anew in the industry.
As regards the fourth of these, the chances of being given that opportunity, are remote„-although I understand that some of the Licensing Authorities are at the very, least turning a sympathetic ear to newcomer applicants for licences. Such occasions are, however, rather' rare. '
It does not need much explanation tc demonstrate the close relation of the four kinds of inquiry At least they have one thing-in common They all turn on the value of a haulage business either present, that is to say existing, or in prospect. Each and everyone of thern gives rise to a eonsiderable number of problems.
£3,060 to invest Dealing briefly with, the outstanding' difficulties of each kind of inquiry and taking them in the order in which they are given above. I come first to that of purchasing a business. 1 had an inquiry of that nature quite recently. A returned B.A.O.R man informed me that he and a friend had together a capital of about £3,000, which they wished to invest in a business, preferably haulage. Neither of them had any experience, but they, had at least that characteristic which is essential in anyone who would become a haulier, namely, they were prepared to work hard. First they asked whether they should be able to buy a satisfactory going concern at all, and if thei', did what were the prospects of being able to expand it. Then they wanted to know whether it would be possible to build up a haulage business from nothing and if so what would be the best way to set about it.
My first reaction was that they appeared to know nothing of the Transport Act, 1947, which, apart from all else, was bound to reduce considerably the prospects of success of anyone entering the haulage industry to-day.
I therefore wrote them accordingly, but received a reply to the effect that they had not by any means overlooked that and had in mind .the prospect of making good in some branch of the industry likely to be left open to them, by furniture removing, express carrying, cattle and livestock haulage or more general operations within the 25-miles radius.
The first thing to note about this particular inquiry is that there are included in it two of the four examples named above, the first relating to the purchase of a business and the fourth to startiag in the industry.
as-4 Before replying to this inquiry I set about investigating for myself the possibilities of obtaining anything for £3,000 which would be worth while and as a matter of fact, having in mind the present prices of second-hand vehicles I did not think there was much chance. However, I got into touch with one or two leading auctioneers who specialize in this class of business and learned of two opportunities , which were, at any rate, near enough to the specification to make it worth while to investigate them.
One was a haulage business, the scope of which is roughly indicated by thefact that the owners _possess licences for 10i-tons unladen. For this undertaking, £2.000 wa0:oeirig. asked, plus the cost of the vehicles owned, which, strange to relate, were being offered at What seemed at first glance to be quite reasonable prices. (Further investigation revealed the fact that there was very, little value in them at all: they were'very nearly scrap and I rather came to the conclusion that this -was the principal reason why the business was being sold.) -•Licenc:s not Transferable The first and most difficult problem which arisesin connection with the purchase of such a business is,the question of the transfer of the licences. It should' be well known by now that, technically speaking, licences are not transferable. To purchase such d business as this, therefore, without making some provision flar the acquisition' of the licences would be folly. The first thing I must "do, consequently, is to deal at some length with this problem of purchasing a haulage business
The relative section of the Road and Rail Traffic Act is that known as XI (3) (b). Section XI relates to objections to applications and the procedure which the Licensing Authority should adopt, but Section (3)(b) relates to an exception, namely, "-an application for a licence to expire not later than an existing licence under which the vehicles to which the application -relates are authorized to be used for the purposes of a business which the applicant has acquired or intends to acquire."
What that means is that a purchaser of a business may apply for a licence in respect of the unexpired portion of the vendor's licence, in which case, apart from an exception to which I shall refer in a moment, the authority will as a rule grant the licence.
That procedure is likely to be satisfactory if there be a considerable portion of the licence still unexpired. It should be remembered that an A licence runs for five years, so that if only a year or so has elapsed since the licence was last renewed, there is a considerable period to run. So far as a B licence is concerned, however, and they will be mostly B licences which will come within the 25-mile limit of operation, the period over which a licence is valid is two years and there is therefore not likely to be any substantial proportion of that period still remaining.
At the end of the period the purchaser of the business will have to apply for renewal and unless he has such knowledge of the standing of the vendor as would incline him to the view that there is a practical certainty of the licences being renewed, he may, in purchasing the business, get something which is of little value, for renewal may be refused.
The first warning I would give, therefore, is that the purchase should be conditional upon the grant of a licence similar to that held by the vendor In view of the foregoing, some authorities recommend that the intending purchaser should immediately apply for new licences and that his agreement to purchase the business
should be subject to the grant of such licences as would he equivalent to those held by the vendor.
The exception which I mentioned earlier relates to the acquisition of businesses which are largely operated on defence permits acquired since the war. It is unlikely that the. Licensing Authority will agree to the transfer of defence permits in the same way, as he would if they were 'lances granted in the orthodox method before the war. In other words; defence permits have not the same standing and Section XI (3) (b),. quoted above, does not apply.
If all the licences held by the vendor of the business he defence permits and if he had no licences at all before the war, then the purchaser of this business becomes in effect a newcomer who must make application accordingly and , will be treat as aS 'such. This is a very important point and should be kept fully in mind.
Apart from the foregoing, the intending purchaser must take steps to enable the value of the business as a whole to be properly 'assessed. •
Assets .and Goodwill
In making that assessment there are two major items to be considered, the actual assets and the goodwill. In view of the fact already pointed out, that licences are not transferable, these cannot be claimed as part of the assets. which comprise the vehicles, buildings and garage equipment. They can be valued only by direct examination by an expert and even then a peculiar problem arises in that, as I shall show by actual example, the value of the assets is considerably affected by the goodwill.
Goodwill in a haulage business—as indeed in most businesses—is measured by the actual profits which have been earned over a period of years. There is no hard ant! fast rule, but the purchase price is usually measured by the actual profits over from one to five years. In the case of compensation for a haulage business taken over tinder the Transport Act, 1947, for example, provision is made that the goodwill will be anything from two to five years' profit. In assessing the annual profit for this purpose. it is customary in the case of ordinary-transactions of this kind In take an average for the three years previous to the date of purchase.
In assessing the profits there. is no better way than to ascertain the costs of operation, following the principles laid down so often in this series of articles and indicated with considerable precision in the booklet "Cost Recording Made Easy."
First, total the cost of operating the vehicles. taking care, in so doing, to make adequate provision for each and every one of the 10 items of operating cost: licences, wages, garage rent; insurance, interest on capital outlay on the vehicle, expenditure on petrol, oil, tyres and maintenance and proper provision for depreciation.
If, as may sometimes be the case, most of the vehicles be quite new, then the assessor must have in mind the fact that up to date it is likely that expenditure on maintenance and tyres, and especially maintenance, may be considerably below that which is 'likely to be experienced in the near future. Assessment of costs; based on actual figures only and without such provision for the future, may give a false idea of the potentialities which the business has for making a profit.
• Check Sinking Funds
In other words it is necessary to take care not to be misled by the fact that expenditure on maintenance appears to be comparatively small: there may be a reason which may not continue to exist. Particular care should be taken to check over what provision has been made in the costs of depreciation, that is to say the setting aside of funds in preparation for the purchase of new vehicles as and when they may be required The next thing to do is to total all the establishment charges, including wages of clerical staff, management expenses, accountancy charges, advertising and legal expenses, travelling expenses, insurance, printing stationery, telephones and telegrams. For a complete list I refer the reader again to the little booklet "Cost Recording Made Easy." In dealing with establishment costs, however, such items of expenditure as hire-purchase interest and income tax accounts should be omitted.
• The total of the above, that is to say of vehicle operating expenses and establishment costs, subtracted from the total revenue each year. gives the net profit. Having taken that for three years, divide it by three and the average profit per annum will result.
The question arises here as to how much of the traffic and therefore how much of the profit is the outcome of war-time conditions. If it appears that a considerable pro• portion is due to that and that under peace-time operation the probabilities are that there would be a diminution in traffic and therefore in profits. then provision must be made accordingly in assessing the goodwill of a business.
It is here perhaps that the intending purchaser may apply that differentiation in the values of goodwill as between taking one year's profits and four or five years' profits. If the business be a good one. and if it seems likely that peace-time conditions are not causing a diminution in the earnings, then it may be worth 'while to offer two, three or even four years. In alternative conditions one year wilt be all that the business is worth.
Assume, for example, that the profits for the three years are shown to be £100, £140 and £180; the total is £420. which means that the average net profit per year is £140. If the assessment of the goodwill be on three years, that means that the goodwill is wo:th .C420, and if on tour years. £560, but if on one year only it is worth no more than £140.
If the actual assets be, say, vehicles at I:1.500, property and buildings at £1,000. and if other assets and unexpired Road Fund licences and vehicle insurance total another £400, then a fair estimate of the purchase price of the business as 's whole, including assets and goodwill, is the sum of the foregoing, £2,900, plus whatever may have been taken as the value of the goodwill.
It may he worth while here to point out to the small operator who is not in the habit of making proper provision for future expenditure that he is likely to be at a considerable disadvantage when, as may happen, he wishes to sell his business. By reason of these omissions, he has an exaggerated idea of the net profit that he is making and an optimistic view of the goodwill of his business.
Superficial Prosperity it is ie this connection that the point raised above, namely the risk that owing to the lack of goodwill the value of the assets may be depreciated, comes up for discussion. A case of this nature arose some time ago, when a friend of mine was assessing the value of a small haulage business for the purposes of sale. The business comprised four vehicles, all actually engaged on work which, although not. subject to contract, was nevertheless of such a regular nature as to be the equivalent of contract work. There was, moreover, every prospect that such business would continue. Viewed in that light the goodwill of the business appeared on the face of it to be of considerabe value.
As a matter of fact my friend was told that on a full year the average profits were in excess of 1240 per annum. He found that all four vehicles were second-hand and that their market value was small. They were, however, in reasonably good condition and therefore, if the business were to be considered as a going concern, their value to the owner was in excess of the market value and, on consideration my friend came to the conclusion that he could take a round figure of £500 as being the worth of the vehicles to the owner.
Unfortunately when he came to go closely into the calculations for goodwill be discovered some serious omissions in the proprietor's calculation for the cost of operation of his vehicles. He found that instead of a prospect of profit amounting to £250 per annum there was an actual loss of approximately £175 per annum!
This contingency arose from the fact that in the provision for operating costs there was, as I would myself have expected, no provision for maintenance or renewal of tyres. Making provision for that meant increasing the allocation for operating costs by E160 per annum for the four vehicles.
Next it was discovered that no provision had been made.' in the establishment charges for management expense; or contingencies.
It was considered that a minimum allowance for that was 150 per annum and even then there was a serious risk as ' regards provision for contingencies, for if the manager drew only £2 per week wages for himself that left only £50 per annum to provide for a substitute vehicle in the case of an accident to any one of the four. S.T.R.