3 Collision Industry Predictions for 2016

I’ve had a number of conversations recently with business owners around the question of “Is now a good time to sell my business?” That is a very personal question. There is no generic answer. But I’ve found myself discussing the same risk factors time and time again that I think owners should take into account when making that decision. There are 3 main areas I see that will continue to impact the industry: technology, consolidation, and monetary policy, i.e. the Fed.  Here are 3 collision industry predictions for 2016.

Technology

The way cars are designed will continue to change. Which means the way cars are fixed will continue to change as well. In the early 2000s when I was in the operations side of the industry there was much less in the way of complexity. Understanding the unique repair requirements of high strength steel was generally the most complex repair decision that had to be made.

But fast forward 15 years and the industry is abuzz with discussions over advanced repair materials, from aluminum to carbon fiber. Vehicle manufacturing now more closely resembles aerospace manufacturing. And for good reason – OEMs are taking lessons learned in aerospace to reduce weight to increase fuel economy and applying them to automotive manufacturing.

As vehicles evolve in complexity, the tooling and training required to repair vehicles will increase. OEMs will continue to take a more active role in creating repair methodology and enforcing standards. This will result in increased investments that repair businesses have to make in tools and equipment, training and certifications, and facility upgrades. It will be more costly to operate a professional facility going forward.

Consolidation

Consolidation will continue in 2016. But consolidation continues to evolve (previously discussed here). Greenfields and brownfields will increase (a greenfield is building new a new facility from scratch, a brownfield is converting an existing building). Greenfields and brownfields are alternatives to purchasing a business. So they tend to depress business buy /sell prices.

While purchases of one or two location businesses are still important to the growth strategy of the large consolidators, they are less so now than they were previously. In addition to brownfields and greenfields impacting prices, the cost to the buyer to integrate smaller businesses can be nearly as much as integrating larger businesses. And the risk tends to be higher to the buyer as well due to less developed business systems, more key employee risk, and customer concentration risk. So it tends to be more economical and less risky for buyer to purchase a larger business.

While it appears that prices may be reaching a plateau, the businesses that are able to get the highest multiples to cash flow are still those that retain experienced representation. In general, the greater your size the greater the multiple on free cash flow. Regional MSOs are in high demand but when attempting to go it alone in a business sale face challenges maximizing and retaining value and managing a smooth transaction. For businesses that are more local in nature it is increasingly challenging that these companies will be able to negotiate (and retain) premium prices in a business sale, especially without experienced representation.

My big prediction for this year is that one of the big consolidators will acquire another big consolidator. I’ll hedge my bet a bit by saying if it does not happen this year it will happen before the end of 2017. Subscribers – email me if you agree or disagree and why.

Monetary Policy

The wild card in all of this is what happens at the Fed over the next 12 months. At present inflation pressures are subdued. Which means that the Fed will likely take a low and slow approach for the foreseeable future. But that could change rapidly. Money is still incredibly cheap and plentiful. However a major shock to financial or commodity markets could cause this to change quickly. Known as “liquidity”, access to money could dry up if a crisis emerges even if rates stay low. The Fed could also raise rates more aggressively than anticipated, increasing borrowing costs.

In both scenarios, a rapidly increasing rate environment or a liquidity crunch can have a negative impact on prices and acquisitions. But as I previously stated, a gradual and measured increase in rates will have little impact on consolidation trends in the industry at present.

Where to Go from Here?

Supplement is designed to increase the value of your business. Working with me, my goal is to double the value of your business. Whether you are considering a sale in the coming weeks or months, have a few years to grow before retirement, or still have 20 years ahead of you, everything we do at Supplement is designed to increase the value of your business.

If you want to increase the value of your business (and I believe you do) let’s get started! Our recently launched Simple Financial Dashboard is a good place to start. For those of you looking for a more hands on approach our CFO and strategic advisory services are customized to your specific business need. And of course, if you are looking to sell your business (or perhaps acquire another business) our transaction management services are a must. Don’t know where to begin – use my contact page and we can set up a time to talk.

Until next week.

Increase the value of your business. Sign up and get my weekly notes straight to your inbox. I keep your email private and do not share your info. Easily unsubscribe at any time.