Has anyone considered tow truck companies?

October 09, 2020

by a searcher from New York University - Leonard N. Stern School of Business in Orlando, FL, USA

I'm looking into this space and a couple things I really like are (1) highly fragmented (2) lots of assets to lend against w/ the trucks (3) more or less recession proof, though with less cars in general on the road during COVID revenues are probably down overall in the industry

Things I don't like are (1) labor issues in this industry (2) working with AAA which drives pricing down (3) insurance and safety concerns.

Has anyone else considered this space? It's too small for traditional search funds, but for solo entrepreneurs and self-funded I have seen a couple opportunities with SDE around $1m and asking around 3-3.5x.

Reply by a searcher
from University of Pennsylvania in Miami, FL, USA

I was close to buying a great Tow firm with $2.5M EBITDA. A family office won the deal. Be careful on the asset side as there is usually not that much asset coverage (the above deal had $2.5M in trucks) and you will need to have a well thought out capex/lease schedule. There is a lot to like with these businesses and some potential negatives. There was a roll-up several years back by an east coast PE fund. Went BK - likely because it was overleveraged. Milestone Partners.

Reply by a searcher
from Stanford University in Salt Lake City, UT, USA

I looked into this industry briefly. I agree with your analysis. But, I'd suggest deducting projected CAPEX from SDE. Depending on the age/composition of the fleet and your growth plans, CAPEX could be very high and thus cash flow could be significantly lower than SDE. The standard 3x SDE valuation just doesnt work as well for capital intensive businesses where SDE is a poor proxy for cash flow and net income.

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