The past four years have seen an unprecedented level of buy/sell activity in the industry. Mergers and acquisitions have dominated the industry. Private equity groups have invested heavily in the largest companies in the industry, further increasing consolidation. Consolidation will continue, but it will be different than it has been in the past. As a business owner how do you know when to sell and when to grow?
There is no one size fits all answer to that question. Perhaps the largest consideration to effectively answer that question is to know your timeline. The second largest consideration is to know your walk away price. When working with clients, whether we are growing their business or preparing them to sell, I always ask these two questions.
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Many clients are surprised to discover that your timeline can be play a larger role than your walk away price when developing a growth plan. To know if it is appropriate to grow or to sell, it is important for me to understand your timeline. Everyone has a different exit date in their mind, but by far the most common date I hear is “I want to be done working by the time I’m 60”. The second most common one is 50. Sometimes I hear “sometime in the next 5 years”. No one has yet to tell me they want to be done by 40 (if you fall into that category email me now – we have some work to do together!)
Your timeline impacts how you grow, but it also impacts the risk you take on in your business too.
Timeline is important because it will influence how you grow. The shorter the time horizon the fewer the options for growth. A longer time horizon opens up additional investment opportunities. For example, a greenfield development may require 18 – 24 months of planning and construction time, in addition to the time required to get the business fully ramped up (both sales and staff). For someone with a shorter term time horizon a greenfield development may not be appropriate.
Greenfields may take a long time to get up and running, but you can make a lot of money over time through a greenfield development, relative to other forms of expansion. Because no “blue sky” is paid to acquire an existing asset (building or business) a greenfield represents one of the lower costs methods of expansion. So not only must you have a longer time line, you must also have the ability to finance the up-front investment of the greenfield, keeping in mind that during development there will be no additional revenues available to offset the development expenses.
Your timeline has an impact on the risk you take on as a business owner as well. The longer your timeline the greater risk you have a as a business owner. Technology changes and what was once a stable industry may change over time. The collision industry has a host of technological challenges on the horizon, with some clamoring that self-driving vehicles, advanced materials, or telematics will be the end of the industry. Even if you are of the opinion the industry will adapt and evolve (as I am) at some level these technologies will have an impact on industry profits.
The risk of changing technology underscores a larger point – the longer your timeline the greater the uncertainty at exit. The greater the uncertainty, the greater the perceived risk, and the greater the future value of an asset is discounted. That is why we would all prefer to have $100 today rather than $100 in a year. There is risk in waiting a year to receive $100.
While the prices for collision repair businesses are at historic highs, there is no guarantee this trend will last forever. Consolidation will continue to change. Prices fluctuate. Prices can continue to increase, but they can also fall precipitously. A major investor pulling out of the space, a major player slowing down or halting acquisitions, or unforeseen financial difficulties for a large industry stakeholder could have a major thaw on prices and buy/sell activity in general. Regardless of the cause, there are a lot of factors that have the potential to negatively impact acquisition activity.
If you have a time horizon of 15 years or more, this may be less of an issue for you as you can grow the business and build value in excess of any downturn in future prices. But if your time horizon is 10 years or less, there may not be enough time to recover from a downturn. The shorter your time horizon, the less time to recover after a downturn. The longer you wait to exit the greater your risk. And that is a risk you likely will not be compensated for when it comes time to sell your business.
The second question I ask when working with clients to build a growth and exit strategy is the walkaway price. In other words, what number would someone have to offer you tomorrow to motivate you to hand them the keys and walk away from your business.
In my experience, many owners have a walk away number that exceeds the current value of their business. A common reason we work with business owners growing their business is to bridge the gap between the current value of the business and their walkaway price. But while there is often a gap, many owners are surprised at how quickly the valuation gap can be bridged with a few well-planned strategic acquisitions.
With proper planning and often a few well-planned acquisitions, planning for a successful exit at your ideal walk away number is attainable. But even well-planned acquisitions take time. Determining if now is the right time to grow or exit depends on your timeline as well as your walk away price.
If you contemplating whether or not now is the right time to grow I can help. Email me or use my contact page. Type “Grow or Sell” in the subject line so I know what we’re talking about.
I would like to hear from you too, even if growth or a sale is not on your agenda. I enjoy talking with people passionate about an industry I am passionate about. Tell me about your business, what your struggles are, and where you have had success. I like the success stories most of all.
Until next week!