The Changing M&A Landscape Of The Private Bus Industry

By Victor S. Parra, Contributor

Victor S. Parra

The Wall Street Journal recently announced how the Mergers and Acquisitions market is about to take off in 2025. Private equity groups and other financial institutions “are forecasting record years and are backing their declarations with billions of dollars in investments and fundraising.” The article cites interest rate cuts and a “pro-business tilt” from the Trump administration as reasons for this high level of exuberance coming from the financial community.

Well guess what… The Wall Street Journal was a little late with this announcement as 2024 was a banner year for mergers and acquisitions in the private bus industry. And it will no doubt continue into 2025. Investor interest in our industry is at an all-time high.

Private Equity Focus On The Bus Industry

We’re experiencing a level of customer demand not seen since the early days of de-regulation in the early 1980s. But we all know the reason. Our industry was cut in half by COVID, reducing its 1,500 registered private bus operators. That’s down from about 3,200 pre-COVID. With demand returning and half the number of companies to fill that need, sales are robust, and so are profit margins.

Moreover, pre-COVID debt-to-ratios were averaging 4:1. Today they are running at an unheard-of rate, <2:1. Operators are paying down their debt and producing strong EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortization. Additionally, since the end of COVID, the trajectory for company performance is heading nicely north. This trend, supported by healthy EBITDA, is yielding higher than normal multiples.

This puts bus operators in a better position to control M&A negotiations.

Getting through the pandemic was an exhausting and draining experience for many. The thought of another COVID-like experience is difficult for many to fathom, thus encouraging operators to hang out the “For Sale” sign.

Let’s take a look at how the M&A landscape is evolving.

Management Matters…More Than Ever

Buyers are looking for strong performing companies with healthy balance sheets. That means the quality of your management probably weighs as much, if not more so, than the quality of your equipment.

Buyers want to know the history of the company, how it grew and became successful, how the company transitioned from one growth plateau to the next level up. They want to meet the management team, how long they’ve been with the company, their knowledge of the marketplace and — VERY IMPORTANT — what/where the opportunities for growth, both organically and through acquisitions, are going forward.

Also, we’re finding buyers prefer that owners/presidents to stay on for a period — one to two years — to direct and manage the company’s integration into the buyer’s operation. In addition, most private equity firms prefer that the seller maintain some “skin in the game,” by keeping between 10-20% equity in the newly merged entity, which has proven to be true.

Because there’s a premium for talent, buyers will want to put a high-performing management team under contract to ensure that the company continues growing at the same pace. Afterall, it’s this team of top-notch professionals who enabled the company to get where it is today. In fact, many deals won’t go through without most of the management team remaining in place.

Asset vs. Stock Sale

Another important issue in the buying and selling of bus companies this past year has been the shift away from asset sales and toward stock sales. In fact, all our most recent M&A transactions have been stock sales.

An understanding of the two types of purchases will help you appreciate why bus operators interested in selling prefer a stock sale.

The fundamental difference between stock and asset purchases lies in what is being acquired. In a stock purchase, the buyer acquires the shares of the target company, effectively taking ownership of the entire entity, including its assets and liabilities. This method is often simpler in terms of transaction mechanics, as the company continues to operate as it did before, with minimal disruption to its contracts, licenses, and relationships.

Conversely, an asset purchase involves the buyer selecting specific assets and liabilities to acquire from the target company. This includes all your buses/equipment and, in some cases, the real estate. It also covers intangible assets such as customer lists and government/customer agreements which may have substantial sales value. This method allows the buyer to cherry-pick desirable assets while leaving behind unwanted liabilities, making it a more tailored approach. However, it often requires more complex negotiations and documentation, as each asset must be individually transferred.

The choice between these two methods can also influence the speed and complexity of the transaction. Stock purchases tend to be quicker to execute since they involve fewer changes to the operational structure of the business. Asset purchases, on the other hand, may require more time due to the need for detailed asset identification and transfer processes.

As a seller, you may find your attorney may favor asset sales since what is being purchased is clearly identified. Therefore, he/she cannot be held accountable for any past problems that may surface post purchase. In a stock sale, reps and warranties insurance is usually purchased to protect buyers from any past problems/deeds that were unknown at closing. This saves weeks in time during negotiations and due diligence.

Depreciation Recapture

This is probably the single most important reason for a stock sale. Depreciation recapture is the gain realized by selling depreciable asset, i.e. your buses, reported as ordinary income for tax purposes. It is a tax provision allowing the IRS to collect taxes on any profitable sale of an asset that the seller had used to offset their taxable income. Since depreciation of an asset can be used to deduct ordinary income, any gain from the sale of that asset must be reported and taxed as ordinary income, rather than the more favorable capital gains rate.

Getting To The Finish Line

Lastly, it’s important to keep in mind most buyers — private equity or strategic buyers (other bus companies) do not purchase debt. So, as you’re thinking about selling and computing the value of your business, you need to back out what you owe in equipment, as well as your other debt obligations. For this reason, it’s very important to pay down your debt if you’re seriously thinking of selling your business. Hopefully you’re already in that >2:1 debt-to-equity category.

Whether you’re interested in selling your business or looking to acquire a bus operator, I’d be happy to chat with you. Please feel free to reach out to me at vparra@strategic-focus.com.

Victor S. Parra is a retired President and CEO of the United Motorcoach Association (UMA) and currently is Managing Director of Strategic-Focus Advisors, LLC, a consulting firm that works with CFA MidSouth — a 60+ year old investment bank, providing M&A guidance in the transportation space. Concentration is in the middle market.

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