3 trends that can change your price and timeline.

I’m in Florida this week presenting to a performance group on how to compete in a consolidating market. I’m curious – do you attend 20 groups? Why or why not? Simply reply to the email to tell me. Tell me about the industry groups you’re involved with and why you choose to associate with them.

Previously I discussed two questions I ask when working with clients to help them determine when the right time is to grow a business or sell a business. I want to know your walk away price and how much time do you have to get there.

Knowing the answers to these two questions is important when setting your business plans. They are generally controllable factors. We can exert a certain amount of influence over bother factors. But there are also outside factors that will always impact both your price and timeline, but with the proper planning you can reasonably control both. But these are three things that may influence your price and timeline.

Consolidation is Changing

I have said many times that consolidation will continue, but it will change. It will change because consolidation is not unique to collision repair, or even the automotive industry in general. Industries consolidate over time. They also follow a predictable path of consolidation. Within the collision industry we are already seeing signs that the largest consolidators are moving into a new phase of consolidation, where mega deals, new developments (i.e. brownfields and greenfields) and cost rationalization take on a larger role.

The result in many markets, especially markets where consolidators already have a strong presence is a softening of prices. This is especially true for the single and dual location businesses. But I have also seen some evidence of prices softening even for larger regional MSOs in markets with multiple consolidators. Every market is unique, and I continue to hear of aggressive unsolicited anchor offers being made and deals being done on very aggressive timelines. Which begs the question, why such the rush to get deals done?

But in markets where consolidators already have a major presence there is less of a need to pay a significant premium to acquire a business when the consolidator can develop brownfields and greenfields at a much lower cost. Consolidators are taking advantage to build new developments in lieu of buying businesses. In the absence of a compelling business case, many buyers are taking a wait and see approach.

Supply and Demand

Because consolidation has been such a buzz word in the industry more and more business owners are evaluating if an exit is right for them (if you to explore if a sale is right for you email me). The benefit of a sale is that it gives you cash now for the future cash flows of your business. So you convert future risk to present gain. Depending on your ability to continue to take on risk, a sale may or may not make sense.

While the opportunities to sell a collision repair business have never been better, there is  another reason we’ve seen so many transactions – the aging of average owner. Many owners in the industry are quickly nearing retirement age, if not having already surpassed retirement age. And is not just in automotive. This is happening nationwide across multiple industries.

Between now and 2020 the number of businesses owners attempting to sell will continue to increase. While it is a seller’s market now, no seller’s market lasts forever. Basic economics tells us that prices will decrease as more sellers enter the marketplace. When it comes to selling an asset, it often does not pay to be late to the party. As Baron de Rothschild once famously quipped, “I made my fortune by selling too early”.

Technology & Capital Intensity

Industry wide, regardless of your segment, the companies investing heavily in technology are emerging as winners. The amount of money it takes to equip a top of the line shop continues to increase as vehicle complexity increases.

This holds true for all many different sections of the industry. Paint distributors increasingly have to invest in technology and hardware to develop efficiencies. LKQ has invested significantly in technology to streamline procurement, warehouse operations, inventory management and delivery (among other areas). To reduce costs and add value for their customers Enterprise has invests significantly in co-located call centers and technological solutions like ARMS and Cyncast to boost efficiencies. Leading companies continue to invest heavily in solutions that allow them to remain “ahead of the curve”.

When considering whether now is a good time to grow or exit, it is prudent to take into account the additional investment required to operate the business over your expected time horizon. Capex, or capital expenditures, can be easily overlooked. But the largest and most successful companies in the industry pay close attention to their capital expenses, and plan accordingly.

When looking at the next 3 to 5 years, what sort of equipment will you have to purchase to stay relevant? What types of new technologies will you have to adapt to and implement to stay competitive. What sort of return will these investments generate? Sometimes investments in technology can take many years to generate a return. Still other investments in technology can quickly become the “ante” to merely remain competitive in an industry, otherwise referred to as the “cost of doing business”.

Companies that invest now in technology need time to realize a return on that investment. But companies that do not invest now face the risk of decreasing relevance in the industry over time. Companies that do not invest now are less attractive at the time of a sale, as a buyer will naturally discount the expected investment they will have to make in a business to bring it up to speed.

Tell me what you think

Changing consolidation trends, supply and demand, and technology are just some of the factors that can influence your timeline and your walk away price. Next week I’ll tell expand a bit more about what I think, the opportunities, the risks, and how to manage both. But I want to hear from you first. What do you think? Are you planning on building a business over the next 10 years? If so, where do you think the best opportunities are?  Or, if you’re on the fence and thinking about a sale, but think there is still opportunity I’d like to know too.

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Until next week!

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