By Kasey Burleson, McLeod Software, Chief Financial Officer
In my experience, company value is of vital importance, even if you never intend to sell, because a company that is growing its value is a company that is well-run and sustainable. Company value increases when companies prove their ability to achieve above average profit margins consistently. We continually hear about networks, lanes, trips, optimization, and velocity. Going down a level, we think about rates, empty miles, length of haul, etc. We also understand how customer service, drivers, equipment, and technology all drive our business and its equations. So how can we synthesize all of this into two concepts that come back to value creation?
Value = Certainty, Certainty, Certainty
I like to say that creating business value is all about certainty, certainty, certainty; and certainty is the equivalent to location, location, location in real estate. If you look around, you’ll see evidence of the human craving for certainty everywhere—in our personal lives and in the way we behave economically. Buyers pay more and accept lower returns for certainty, and likewise, they pay less and require higher returns for uncertainty or risk. In business, certainty means that risk/volatility is reduced, and that translates into value.
Here’s one way this plays out. Imagine two companies, ABC Carrier and XYZ Trucking. Both companies have annual revenue of $100 million and annual earnings of $8 million, but ABC is valued at $64 million, while XYZ is valued at only $48 million. Why? ABC is getting a higher multiple due to its certainty (less risk – buyer will pay more).
Compare quarterly earnings. It turns out that ABC’s earnings vary only slightly from quarter to quarter, while XYZ’s quarterly earnings are much more volatile. For both companies, the end result is annual earnings of $8 million, but XYZ isn’t consistent/predictable from quarter to quarter (network, lanes, trips, velocity, equipment, service, pricing, etc. – think Southwest Airlines).
The fundamental formulas used to calculate value include variables that reflect consistency and volatility. In mature industries, companies that deliver consistent profits are more highly valued.
Another way value increases significantly is when margins are not only consistent, but also above average. Increasing margins by 1% or 2% and maintaining that level can create huge leaps in company value. Buyers want the company that can produce and sustain above average margins.
The Role of Your Transportation and Logistics Platform
One of the most powerful tools for creating certainty is your primary operations software. The right software platform delivers the right information to managers and users, includes the tools to execute the company’s objectives consistently (customer service, utilization, etc.), and provides the opportunity for a company to grow. Software allows for controls and repeatable processes. It also ensures that the business depends less on any one individual’s ability to manage everything daily. Users are managing and handling exceptions versus “pushing the pencil.” Think of software as the tool that gives your company the opportunity to grow and continue to deliver service and results in a consistent manner.
Through McLeod’s Planning, Feasibility, Telematics Integrations, Rapid Alert Notifications, FlowLogix, Private Network Notifications, CRM, Vital Signs, Profitability Analysis, Imaging, and more, we are focused on building the platform that will help our customers grow, produce above average margins, deliver great customer service, and ensure consistency.
Why Invest in Software?
It Pays Off via Customer Service, Margins, and Value to the Owners
A common way to think about the ROI for investing in software is to consider the savings in labor costs that come from automating various tasks. This is an entirely valid and important component of the ROI, but there are many aspects to consider. If the use of software allows a company to turn volatile earnings into consistent earnings, while also pushing up the margin, the value of the business may jump by 50%, 100%, or more. If software can help you grow your business, serve your customers better, and maintain or increase your rates, it is hard to even quantify that. Returns such as these are not hypothetical. McLeod customers are doing it. We develop new products and enhance our core products every day. McLeod is continuing to build with a single platform “from the ground up” for focused or diversified transportation and logistics companies. It is McLeod’s pleasure to serve you, so you can serve your customers better and create a more valuable business.