How do you finance the purchase of a trucking company?

A fleet with a business attached

Most acquisitions of service companies are mostly goodwill. A trucking company is different: much of what the buyer pays for is tractors, trailers and sometimes terminals, and lenders can lend against them. The buyers at this size are strategic carriers adding lanes or customers, private equity platforms, independent sponsors and management teams. A carrier this size has usually outgrown SBA financing, whose 7(a) loans go up to $5 million.

The catch is that trucks lose value with every mile, and a fleet that is not replaced gets expensive to run and hard to insure. Lenders look at a carrier two ways at once: as collateral, valued at what the equipment would bring in an orderly sale, and as a cash flow, measured after the money it takes to keep the fleet roadworthy. The second view usually decides how much can be borrowed.

In trucking, depreciation is not a paper expense. A lender treats the cost of replacing trucks as a claim on cash that comes before the loan payment.

Earnings after the fleet is paid for

Lenders size acquisition debt on EBITDA adjusted for the owner. In trucking they then subtract maintenance capital spending, the amount needed every year to replace worn trucks and trailers and keep the fleet's age steady. A simple illustration: a carrier with adjusted EBITDA of 1,000 that must spend 300 a year replacing equipment has 700 available for debt service, not 1,000. If the seller let the fleet age to flatter earnings, the buyer inherits a backlog of replacement spending, and the lender will see it in the equipment list. Covenants usually test this through a fixed charge coverage ratio that counts capital spending; see DSCR vs FCCR.

Other items lenders read closely in a carrier's P&L:

• Fuel. Whether surcharges pass rising diesel costs to customers, or the carrier absorbs them.
• Drivers. Company drivers or owner-operators, pay per mile or per hour, turnover, and whether wages keep pace with the market.
• Insurance. Premiums against revenue over several years, and any large claims.
• Maintenance. Rising repair costs on an aging fleet, and whether the carrier runs its own shop.
• Leases. Tractors on operating leases are a fixed charge the lender counts, even though they do not appear as debt.

The rules on add-backs are in EBITDA add-backs, and the capital-spending question in maintenance vs growth capex.

Authority, safety and insurance

A carrier operates under a USDOT number and, for for-hire interstate work, operating authority from federal regulators. How the deal is structured decides what the buyer keeps. In a stock purchase the company, with its number, authority and safety history, carries on under new ownership. In an asset purchase the buyer's company generally needs its own registration and authority, and starts without the seller's history. That trade-off, a clean start against a proven record, is one of the most important structural choices in a trucking deal; see asset purchase vs stock purchase.

The safety record matters to a lender because it drives insurance, and insurance is one of a carrier's largest costs. Insurers price commercial auto coverage on claims history, inspection results and the drivers on the policy. Lenders ask for loss runs, the carrier's safety data and open claims, and want confirmation that the fleet will be insurable under the new owner at the cost the model already reflects. Large open claims in a stock purchase are usually covered by indemnities or an escrow.

Customers, brokers and concentration

A carrier might haul for a few manufacturers and distributors under contract or dedicated arrangements, move loads from freight brokers, or both. Lenders read these very differently. Contract and dedicated customers with multi-year relationships put a floor under revenue. Brokered freight fills trucks but is priced on the spot market and falls quickly when capacity loosens. A carrier with mostly contract customers usually supports more debt than one of the same size living on the spot market, and a lender will look at how the carrier's revenue per truck moved through the last freight downturn.

Concentration is common because a single shipper can fill much of a fleet. Lenders want revenue by customer for several years, the contracts or rate agreements, and whether any contract lets the customer walk on a change of ownership. A concentrated carrier can still be financed, with more equity, a seller note or an earnout, and a smaller senior loan. See customer concentration and change-of-control consents. Carriers hauling specialized loads are covered in financing a specialized trucking company.

Key people matter as much as key customers. Lenders want to know that the dispatch and operations leaders, the safety director and the salespeople who hold the shipper relationships are staying, and they read retention agreements and rollover equity that way.

Factoring, equipment notes and the capital structure

Many carriers factor their invoices, and most arrive with equipment notes on individual trucks. A new senior lender wants its own first lien on the receivables and the fleet, so the factor is paid off at closing and the equipment notes are either paid off or kept inside agreed limits; see paying off the seller's debt at closing. An asset-based revolver then funds the gap between hauling freight and being paid for it. Asset-based lenders typically advance 80% to 90% of eligible receivables, receivables more than 90 days past invoice are typically ineligible, and borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables. How a borrowing base works covers how the revolver is sized.

How equipment debt sits beside a senior loan is covered in equipment loans with senior debt, and how an asset-based lender values trucks in machinery and equipment in an ABL. If the carrier owns its terminals, see sale-leasebacks of business real estate.

What a trucking lender will ask to see

An asset-based facility starts from an AR aging by customer with days outstanding, an AP aging, the balance sheet, the P&L, a year-to-date P&L, and the debt schedule with every equipment note and lien, often with bank statements and two to three years of tax returns. The acquisition adds the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. For a carrier, add:

• An equipment list: unit, year, make, mileage or hours, condition and any lien, with a recent appraisal.
• Maintenance records, and the plan and budget for replacing units.
• Insurance policies and loss runs, and the carrier's safety data and inspection history.
• Revenue by customer and broker for each year, with contracts or rate agreements.
• A driver roster with tenure and pay, and any owner-operator agreements.
• The factoring agreement and equipment payoffs to be settled at closing.

Senior bankers run every Midas Partners engagement. Once the documents are in, Midas Partners builds the financing model, lender presentation, blind teaser and underwriting memo in a day, with replacement spending built into the model so coverage is shown the way a lender will measure it; by hand the same package takes at least a week. Software does the analyst work and a senior banker checks every page. Of the 1,800+ lenders in the book, 235 write asset-based loans and lines and 1,148 write term and private credit. See the package.