The valuation of a freight forwarder

What is a forwarding company worth?

In this article we want to give you some insights in the valuations of forwarding companies. This is the content of the article:
  • Developments in the global forwarding industry
  • Value and price expectations of business owners in the forwarding market
  • How to value a company in general
  • What determines the price of a forwarding company
  • Detailed description of items that have an effect on price
  • Valuation multiples we see in the forwarding market

We are very much interested in your opinion and the experiences you encounter in the area of business sales of forwarding companies. What do you see? What is crucial in your opinion regarding the value of a forwarding company? Please reply below the article.

Developments in the global forwarding industry: consolidation

The forwarding industry is continuously growing as the global population and trade increases. Given the future growth of the world population it is obvious that international trade will continue to develop further. At the same time we see technology play a much bigger role. This provides the opportunity to increase productivity via IT solutions and the usage of the internet. Changes in the industry and opportunities for new players to develop are the result.

Another important trend we see in the forwarding industry is consolidation. It is difficult for forwarding companies to grow autonomously. Hence, acquisitions are an important instrument to ensure growth is realized. We see the main players become larger via acquisitions. Sometimes these companies grow up to a size that business owners don’t want to sell to them anymore. They feel their business, that is build up with a lot of sweat, will be swallowed up completely. Business owners fear it will be integrated immediately and nothing will be left over from what was build by the owner with hard work.

The value and price expectations of forwarding business owners

A topic dear to most forwarding business owner’s hearts is how much is the business worth? In practice it is often a disappointment for business owners once they get confronted with the reality of prices buyers pay in the market place. In the end it is important to understand that each forwarding business is part of the global forwarding industry. Hence, the drivers that influence value in different regions of the world are playing a role everywhere.

Business owners often get professional advice from accounting firms who may use all types of formulae. They are indicators. The only way you will know what you are worth is when you have offers on the table. These offers are very often lower than what business owners have in mind. However, on the other hand it is real cash that you can have in your pocket directly.

In practice the main deal breaker we see in forwarding M&A transactions are the price expectations of business owners. These valuation expectations are simply to high. Buyers want to make a return on their investment and earn back the investment in four to five years preferably earlier. Do you agree to the fact that forwarding owners expect too much for the sale of their business?

How to value a company in general?

The valuation of a company is described very often. There is the technical part as well as the ‘art’ of a business valuation. There can be a difference between valuation and selling price. The difference between value and price might be explained as follows: a buyer is willing to pay a price which is based upon the value the company has for this buyer. A company can have a different value for each buyer, so the price they are willing to pay can differ. Another way to put this: ‘price is what you pay, value is what you get’.

In our practice, of European business sales, the valuation of companies is something we come across regularly. If you want to read more about the technical pieces in a general business valuation please go to the business valuation section on our website.

What determines the price of a forwarding company at the moment you sell?

Buyers want value and return on investment. Forwarding buyers want limited risks. Buyers want the business they buy to continue as it did in the past and preferably much better. A buyer is willing to pay a higher price if the opportunity is of serious interest to him or her.

Main drivers that determine the price of a forwarding company:

  1. Size (smaller companies have a much lower valuation multiple)
  2. Profitability and margins
  3. Synergies
  4. Interest of a buyer
  5. Customer base and concentration

These main drivers of value for forwarding companies are described more in detail below.

1. Size

Big is beautiful and size matters. Smaller companies mostly have much lower multiples and valuations as the risk for a buyer is larger. Very often the client relations depend on the owner and a certain percentage of clients leaves after a business sale.

2. Profitability and margins

Profitability is a main driver for business value. Forwarding companies have limited assets and the value is mainly determined by the profit of a company. Obviously the people are important and the main assets of a forwarding company. The valuation of a forwarding company is normally determined by an EBITDA or profit multiple. Margins are of high importance as well. Companies with high margins obviously realize better and higher prices during a business sale.

3. Synergies

A buyer that can realize synergies is willing to pay a higher price for a company. Hence, it is important to find the right buyer that can bring additional business into an acquisition. Buyers can also realize costs synergies in items like management or office expenses. If a buyer has good IT and accounting systems it might be able to realize further costs savings on the accounting staff and procedures.

4. The interest of a buyer

The price of a company depends very much on the seriousness of a buyer. One has to find the right buyer that appreciates the value of your company. In practice we see that each buyer assigns a different value to a company and therefore different buyers are willing to pay a different price for the same forwarding company.

5. Customer base and concentration

A balanced spread between customers is important. Customer concentration is something that buyers don’t want. If a business loses a large customer this will hurt the company a lot. No buyer wants to run the risk and depend on a few large clients. Hence, valuations for forwarding companies with a high dependency on single or a few customers are lower than forwarding companies with a good customer spread.

Valuations: EBITDA multiples of forwarding companies

We see different multiples across the forwarding industry. Most valuations we see are in the range of EBITDA multiples from 3 to 7. The majority of business sales in the lower end (up to 10M Euro in revenue and 1,5M in gross profit) sells for valuations between 3 to 5 times EBITDA. In case of larger forwarding companies we see higher EBITDA multiples happening. 5 or 6 times EBITDA is a price some forwarding buyers are willing to pay. Occasionally we see a higher valuation. Valuations with EBITDA multiples of 7 or above are almost non existing in the market of forwarding companies below 20M Euro valuation.

Some questions:

What is a realistic valuation for a forwarding company in your opinion? How should a forwarding company be valued? Do you think business owners are rewarded enough for their hard work?


Emanuele Binaghi | Monday 14 July 2014 | website:
I think that a realistic valuation for a forwarding company changes from situation to situation; it should be taken in account, over the fundamentals, also a number of factors such the percentage of controlled business, the opportunity for the buyer to enter in a new country or in a new vertical market. I think that a Forwarding Company should be valued starting with the classic EBITDA multiples considering also, as criteria to increase or decrease the value, all the "soft drivers" that are strongly dependants from the buyer's interest in acquiring the business. Even for the business owners is very hard to say if they are rewarded enough or not, again it depends on a number of factors which are related to the business owners situation and the interest the buyer has in closing the deal

Adam Chazanow | Thursday 31 July 2014 | website:
This article provides a very good overview of the main valuation criteria. It is perhaps obvious, but still worth pointing out that buyer's interest is by far the most important factor determining pricing - especially in an almost zero-asset, very low barrier to entry business such as freight forwarding. Buyer's interest is determined by the 'fit' of the target company to the buyer's strategy and business priorities, and how many alternative investment opportunities exist at the time. As an example, a forwarder with strong local connections, based in an early-stage market with limited competition such as several sub-Saharan African countries may command a higher premium than in a developed market such as Central Europe, where there will usually be more alternatives to choose from. A key point for the buyer is how to 'lock in' the target's key staff (which usually include the owner) for a guaranteed transition period. Forwarding is a transactional business, relying heavily on personal relationships. The value of the business can easily be destroyed if key personnel leave after the deal and take their customers with them. This can also affect large transactions, such as the sale of the giant American forwarder EGL to Apollo Management in 2007. Jim Crane, EGL's CEO at the time of the sale, was upset he did not succeed with a management buy-out, and quickly left to form his own forwarding company, Crane Worldwide, taking many of his former customers away from EGL. Thorough business due diligence prior to the acquisition, and a well-worded Share Purchase Agreement are, as usual, essential in any M&A deal. This is an area where we often support our Clients.

Daniel Herron | Monday 4 August 2014 | website:
This article provides an outstanding overview of the M&A process in the lower end of the middle market, companies we identify as having revenues less than $100M. Buyers seek to acquire freight forwarding businesses with high-quality of earnings and good financial records; generally, we do not find Sellers with audited financial statements, and this is a point we often suggest Sellers address before considering a sale - are the financial records in good order, and if not, we recommend Sellers be better prepared in advance of a sale. We also note Buyers pay close attention to the customer base and often find a concentration (any single customer representing more than 10% of revenue/earnings) may be a significant concern, but it is the norm for companies of this size to have a large percentage of the business with the top 5 clients representing as much as 80% of the Sellers revenues/earnings, and losing any customers during the post-transition period is challenging for all concerned. The Buyers experience of integrating freight forwarding companies should be considered by the Seller in advance of the sale, and the topic of customer visits prior to consummating a transaction is often contentious but necessary to close the deal. Finally, I can't stress this too much, Buyers are seeking to acquire talented people to join their organization and many Sellers and their respective management teams thrive post-transaction, and eventually find a path towards retirement or new opportunities, and Sellers can take comfort knowing the business built over long periods of time has successfully transitioned to the next stage. All companies evolve over time, some by family/management succession, and others during M&A transactions. We believe a well prepared Buyer, coupled with a well prepared Seller, can find common ground on purchase price, terms and conditions, and move forward to accomplish mutual objectives in an M&A transaction. Being well prepared to execute on the business deal is absolutely necessary for both the Buyer and the Seller to consummate winning M&A transactions. Wishing all of you reading this article well, continued success!

Dick H. Binkhorst | Wednesday 6 August 2014 | website:
If we're talking about a real Freight Forwarder there's no such thing as fixed assets. Freight forwarding is a non-asset based activity; you need a phone and a PC, all other assets are in 3rd parties. The freight forwarding company value is in goodwill and human capital only. Hence the value notably in smaller companies is highly related to the dependence on the current management and ownership (what happens if they are leaving?) and the quality of the goodwill. The goodwill and continuity in a small, or even mid-sized, freight forwarder are fragile and although the earnings and the return on the (original) investment may be high, the earn back period should be not more than say 3 years. This of course is not the case with the large freight forwarders where the know-how and goodwill / business relations are spread over thousands of employees and managers, generally led by high quality internationally oriented management.

virgil ratliff | Monday 23 January 2017 | website:
This is a very nice blog. The readers will get glimpse of the real work and real world inside a freight forwarding company. Thanks for posting this blog.

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