The long haul to success: managing risk in the haulage sector
In TMA’s first webinar of October, TMA and DWF hosted a webinar on 6th October with advice for those involved in the investment, funding, purchase and administration of road transport companies.
Mike Parsons, board member of TMA Manchester and director of Duff & Phelps’ Advisory Team, opened the webinar and introduced Joanne Witheford, DWF’s deputy head of road transport and logistics.
Joanne’s expertise lies in supporting businesses to ensure that they are not left exposed by poor transport regulatory compliance and is regularly instructed to undertake due diligence in corporate transactions and administrations involving haulage companies. She acts for three of the UK’s largest transport and logistics organisations and is recognised for her strength in this field.
When opening the webinar, Mike began by stating that the road haulage sector is worth around £124bn to the UK economy each year and employs 2.5 million people in the UK. Covid-19 has had a devastating effect on the sector and when the lockdown began, 55% of transportation and haulage firms furloughed staff and at its worst, 50% of the country’s HGV fleet lay inactive. 95% of hauliers who applied for CBILs loans had them rejected, leaving many with serious cash flow issues. Add to this the looming disruption of Brexit and it’s expected that the level of transactional activity will increase, either through solvent consolidation or insolvency processes.
And with a rise in transactions expected, it’s important for buyers, lenders and advisors to be aware of the potential issues that can arise.
Of the potential issues, Joanne said that those surrounding the operator licence are perhaps the most important to consider. Operators’ compliance commitments are extensive and strictly enforced. All businesses that operate heavy goods vehicles (HGVs) and Public Service Vehicles (PSVs) are required to hold an operator licence. The licence brings with it significant obligations to ensure that the transport business is operating its fleet of vehicles compliantly. In the event that those compliance standards are not met, the regulating Office of the Traffic Commissioner has the power to revoke an operator’s licence.
Without a licence, an operator cannot have its vehicles on the road. It is therefore crucial for investors, funders, and buyers to ensure that any operator they are considering is not close to having any serious regulatory action taken against it by the Traffic Commissioner which could result in a revoked or suspended licence.
To discover if an operator is at risk of losing its licence, Joanne said there are three initial places to look:
Ask the company whether it has been called to a public inquiry by the Traffic Commissioner. If it has, that means that there are potential issues that might need to be explored.
Check the public register of Traffic Commissioner decisions to see whether the company has a history of attending public inquiries or any history of regulatory action being taken against it in the past few years.
Ask to see their Operator Compliance Risk Score report. This report is based on the Driver and Vehicle Standards Agency’s database that records every dealing it has had with an operator and whether it was positive or negative. The report is a good indicator of compliance and also whether the operator is likely to be called to public inquiry. While the OCRS is not publicly available, the operator will have access to it and should have it available to show to you. If they are not signed up to OCRS that, in itself, is a red flag. A responsible operator should be interested in their score.
However, Joanne also said that if an operator turns out to have a poor OCRS score or has been called to public inquiry, this doesn’t necessarily mean they are at risk of losing their licence or that they are not a company to invest in, fund or purchase. However, it is advisable to delve deeper to ensure there’s not a big problem brewing.
Another potential problem area is that of an operator’s obligation to, at all times, be able to demonstrate “financial standing” where they are required to have excess funds that are “readily available” to it. In order to demonstrate financial standing, operators must have a minimum of £8,000 for the first vehicle on their licence, and £4,450 for every additional authorised vehicle. For an operator with many vehicles on the road, this can add up and operators will often seek external funding for the purpose of demonstrating financial standing.
If an operator can’t demonstrate financial standing, the Traffic Commissioner is required to revoke their licence. Therefore, if purchasing an operator, it’s important to understand their financial situation and your financial obligations going forward. And if dealing with an operator in distress, Joanne said it’s possible that the operator might have neglected to inform the Traffic Commissioner that it is no longer of “financial standing” and so insolvency professionals need to be prepared to explain to the Traffic Commissioner why the situation was not declared and how the operator will achieve financial standing in the long term.
There are a number of ways an operator can demonstrate financial standing to the Traffic Commissioner, including
- Bank Statement
- Invoice finance agreement
- Overdraft facilities (with the required amount available
- Average balances over a 3-month period must be shown.
Mergers, acquisitions and administration
Joanne then moved on to explain how different types of sale affect the operator licence. In the event of an asset sale, the operator licence will not be transferred as it is owned by the company. So, if the purchaser is not an existing operator, they must apply for a licence. If the purchaser is already an existing operator and has capacity on their existing licence to accommodate the purchased vehicles, then they do not need to apply for an increase but, otherwise, they will need to make an application to increase the capacity on their existing licence.
In the event of a share sale there is no change in entity, just in ownership, so there is no need to apply for a new licence. However, if there is a change at board level the Traffic Commissioner must be notified withing 28 days.
In the event of a company going into administration, the operator licence ceases to be valid. This has the potential to put an end to the rescue of a company but there is the option for a licence to be granted to an Insolvency Practitioner to save a company. IPs can apply for a licence under Regulation 31 of the Goods Vehicles (Licensing of Operators) Regulations 1995. Under this regulation, the IP commits to the company fulfilling its requirements to ensure compliance but in Joanne’s experience, IPs can be reluctant to do this as it is a big undertaking.
This is where the new moratorium provisions are particularly helpful for the sale of transport businesses due to the moratorium period providing time for a buyer to be found before the company enters administration and the licence is revoked.
Knowing how you will manage compliance going forward is also key to consider when buying a business. Particularly when buying an operator that has been struggling financially, Joanne said it’s important to engage with the Traffic Commissioner as early as possible. Not only can there be repercussions for not informing the Traffic Commissioner of financial difficulties, but you need them to be on board with the proposals for the sale of the business.
Joanne also recommended investing time into building a compliance business plan. Particularly when dealing with a business that has struggled financially or had a poor compliance history, Joanne recommended putting together a proposal that will reassure the Traffic Commissioner about how the new business will operate. The plan should consider how the company will avoid financial difficulty going forward, what the new corporate structure will be, whether those people that caused issues in past will continue to be involved and why, and how you will maintain ongoing compliance. By sharing such a plan with the Traffic Commissioner, they are more likely to be a help, rather than a hindrance to the sale of the business.
To summarise her advice, early on in the transaction process, Joanne recommends considering the operator licence, compliance history, and financial standing of the company. Then, inform the Traffic Commissioner of the business plan for managing ongoing compliance and get them on board with your plans. Reassuringly, Joanne said that while all this can sound complicated, in her experience, transactions in this sector tend to run smoothly when the operator licence has been given focus throughout the transaction process.
Thank you to Joanne for sharing her expertise and to everyone who joined the webinar. If you wish to contact Joanne please click here.