Recently, I was working with a client. The purpose of the project was to evaluate the business, and some recent investments the client made. On the surface, the investments appeared to be highly profitable. They were yielding very strong EBITDA margins. So strong in fact, the analysis seemed almost after the fact. With such strong[…]
A common retort to the question of EBITDA multiples is often “multiple of what”. Sometimes people interpret that to infer “multiple of sales, multiple of net, multiple of EBITDA, etc.” But what the question really driving at is “How was EBITDA calculated?” or “What is and is not included in these EBITDA multiples?” Here are a few items that are often missing from EBITDA multiples.
The challenge with EBITDA multiples is they are general in nature, and almost always contain a myriad of assumptions. Furthermore, they can be easily manipulated to suit the party using the multiple. I think Warren Buffett says it best, “People who use EBITDA are either trying to…
Many business owners that I speak with are oftentimes surprised when a buyer of their business is not interested in the accompanied real estate the business sits on. For many business owners who own the both property and business, the relationship between the operating business and the real estate has been very profitable and mutually[…]
One of the great parts about my job is that I get to work with really intelligent people in really interesting places. I just got back from 5 days of client meetings in New York. It really fires me up to work with such motivated passionate people in the industry. During our meetings, one of[…]
Next week I’ll get back to my review if the Boyd Group’s financial statements. But I wanted to discuss something that has been on my mind lately. I’ll be travelling quite a bit in the coming weeks so if you are in the area shoot me an email and let’s meet up! This Saturday May[…]
Discover a simple way to determine the value of your business. Recognize common pitfalls. Avoid costly and risky mistakes when valuing your business.
Last week we spoke about the impact of interest rates on consolidation. While a low rate environment certainly provides incentive to companies to grow through mergers and acquisitions, good deals are good deals in both high and low interest rate environments. There is a financial component that drives consolidation but there is a strategic component[…]
It seems to be a forgone conclusion that the Federal Reserve will increase interest rates at their upcoming meeting. For years the Fed has repeatedly stated that they will likely raise rates in 2015. Now that December is upon us it appears the day of reckoning has arrived.
There is always a lot of consternation around rate changes, and this time around is no different. Effectively the Fed controls the price of money (interest rates) in an attempt to influence economic activity. The Fed lowers rates to spur economic activity and raises rates to slow it down. So a rate increase should be perceived as a generally positive event, an indication that economic activity is increasing. […]
I just wrapped up a week in Detroit where I presented at an industry event organized by a major paint manufacturer. I discussed growth strategies in a consolidating industry. We talked about industry evolution and ways to increase the value of your business by taking advantage of the same trends and using the same corporate[…]
The end of the year is almost upon us. Only 9 full weeks left in 2015. The last quarter of the year always goes fast. There are simply more holidays and outside demands in the last three months of the year.
I wanted to take a break from big, high-level industry analysis for a moment and drill down into the nuts and bolts of financial management. As the year begins to draw to a close it is a good time to take stock of the current state of business. Here are six simple financial KPIs to look at every month to increase the value of your business.
Many of these financial KPIs are similar to metrics that the large consolidators use to evaluate individual locations across their networks. While there are many more complex metrics that are important to evaluate regularly, this is a list of what I consider to be simple financial KPIs that a business owner ought to be looking at on a monthly basis, if not more frequently. […]
Growth to multiple locations is one of the most effective ways to substantially increase the value of your business. A business with multiple locations improves your value proposition to referral partners, improves your ability to increase discounts with key vendors, makes you more attractive to other companies looking to grow via acquisition and when you reach an appropriate size, makes your business more attractive to private equity groups investing in the industry. But it is also risky and can be financially disastrous when done haphazardly (M2 is often cited as an example of a growth plan that failed spectacularly).
In order to create a business that builds generational wealth […]
Consolidation is significantly changing the landscape of the collision industry. But it is not just the collision industry that is consolidating rapidly. Throughout the entire automotive aftermarket there are examples of consolidating industries. Paint distribution, first consolidated in the late ‘80s and early ‘90s is undergoing a second round of consolidation. LKQ and aftermarket parts distribution, consolidated once already by LKQ is in the very early stages of a second round of significant consolidation. Aftermarket mechanical parts distribution already dominated by behemoths such as NAPA (Genuine Parts Co.), O’Reilly and AutoZone, and are seeing continued consolidation activity. Even automotive retail and new car dealership industry, once a paragon of the family-held small business, is undergoing consolidation at the hands of AutoNation, Sonic, and Warrant Buffett’s Berkshire Hathaway Automotive Group. It begs the question, why is consolidation such a popular business strategy? […]
Previously we spoke about how the CFO drives growth, and three main areas the CFO adds value: historical financial and vendor analysis, current working capital and cash management, and future budgeting and investment analysis, including acquisitions. One area in particular that we did not discuss, however, was the benefit the CFO brings to the table as an outside strategist and leader responsible for setting and implementing strategy in conjunction with other senior managers within the company. As the primary individual responsible analyzing past and current financial data, as well as budgeting for future growth, the CFO has a unique perspective on the operations of the company. […]
Recently I was at NACE in Detroit. NACE brings together leaders in collision repair, automotive service, and the multitude of stakeholders in insurance, parts, paint, and technology industries. It was a fantastic event full of great networking and educational seminars.
I had the opportunity to sit down with a lot of business owners in the industry who were incredibly optimistic about their future. They clearly recognize the challenges facing their business but are actively engaging in strategies to mitigate their risk while growing and thriving.
Consistent throughout many of my discussions, however, was the concern of managing the financial risks that often accompany growth. The lessons of M2 and other failed bids at rapid growth are still fresh in the minds of many in the industry. While these business owners are excited about the growth opportunities available to them they recognize that growth will bring additional financial pressures and challenges. In light of these concerns, our conversations naturally shifted to the role of the Chief Financial Officer (CFO) and how a company manages the financial risks growth entails. […]
Private equity firms are very active in the collision repair market, and the automotive aftermarket in general. The rapid growth of the large consolidators has resulted in very attractive investment returns for these groups, further increasing the interest of other private equity investors hoping to invest in the industry. Of the “Big Four” consolidators, ABRA, Caliber, and Service King are all majority owned by global private equity groups. Boyd is publicly traded and not private equity backed, but the President of a Canadian private equity firm sits on Boyd’s board of trustees. CARSTAR also is backed by private equity, as is MAACO. Fix Auto recently received debt funding from a large Canadian investment fund that is active in private company investments. Kadel’s, the Pacific Northwest MSO recently acquired by ABRA, was backed by a smaller private equity group. Joe Hudson’s in the Southeast recently brought on a private equity partner as well. Yet for as active as private equity groups are in the industry, these groups are not well understood. […]
I talk a lot about finance. After all, I have a Master’s in Business Administration (MBA) with a specialization in finance and M&A. I think telling the story of a business through numbers and being able to interpret a business through financial reporting is pretty neat.
But more than just being neat, it is incredibly important and valuable. It is so important that in some Fortune 500 companies the CFO is as valuable as the CEO (in fact, a common way to become a CEO is by first becoming CFO). Sitting in on Wall Street earnings calls, often it is the CFO doing most the talking while the CEO can take a bit of a back seat. The large consolidators actively recruit seasoned CFOs that have experience in consolidating industries.
But this is less the case in the rest of the collision industry. […]
Real estate plays an important role in any business. As a significant long term asset, real estate represents a major financial investment. Whether it is owned or leased, real estate is one of the largest fixed expenses for many businesses.
Unfortunately many owners do not give enough thought to the role that real estate plays in their business strategy. Whether your plan is to stand pat, buy, or sell, the financial management of real estate plays a significant part in that strategy.
But many owners do not understand how outside parties view real estate and the implications that may have financially and strategically. […]
Recently I discussed the financial themes that I believe are driving consolidation in the industry. Specifically I discussed why a low cost of capital combined with multiple arbitrage is driving investment and consolidation in the collision industry. (Editor’s note: It is not only the collision industry undergoing profound transformation. Keep an eye out for upcoming articles discussing other adjacent industries that are undergoing rapid consolidation as well).
This week I thought it was important to spend some time explaining the financial mechanics of the cost of capital, and how a low rate environment impacts the entire financial ecosystem. Be warned, this delves into the realm of financial geekdom but has significant implications for your business which we will discuss later in the article. […]
Previously I spoke about how collision repair operators will have to develop new core competencies in order to compete against the increasing competitive pressures as a result of industry consolidation. As we saw last week, consolidation is a trend that is not going away, and most likely will continue in frequency and intensity. Collision repair is no longer just about fixing cars and minding KPI’s.
In business school we talked a lot about core competencies. The most basic definition of a core competency is something a business is really good at. In collision repair, most operators would have a core competency in vehicle repair and customer service.
In fact, we may actually be too good at those things. […]
Last week we spoke about the conundrum that collision repair operators currently face. Because of the influx of Wall Street money and rapid consolidation, owners have essentially three choices when looking towards the future. They can:
- Stay small and continue to compete on a standalone basis, or with the help of a franchise (more on the franchise approach in future articles);
- Build scale, acquire competitors, open brownfields and compete with large MSO’s by becoming a small MSO;
- Sell to a regional or Big 4 consolidator.
Each of these three strategies carries inherent risk, as well as potential rewards. This article will break down each of these three key strategies to help better explain the specific risks and rewards implicit in each. […]
The collision industry is a $30 billion market in the U.S. But not a single company accounts for even $1 billion in sales. There is a race to get to the $1 billion in sales mark. (Editor’s note: keep an eye out for our upcoming article on what is driving this race to $1 billion).
The quickest way to get to the $1 billion mark is to acquire other businesses that already generate a few million dollars in sales. So the consolidators need you – but they are also afraid of you.
They are afraid of you because you lack experience.
The large consolidators by their very nature are incredibly cautious. They are backed by some of the largest financial institutions in the world and are stewards for hundreds of millions of investment dollars. They unfortunately cannot just “take your word for it”.
Sure you have been in business for years. You have long term employees. You have long term referral accounts via DRP’s or dealer referrals and repeat business.
But you are inexperienced in their world. […]
A colleague of mine was recently approached by one of the Big 4 inquiring about his business. After a few brief conversations around his financials they came back to him and offered him a very specific number to buy his business.
He remarked to me, “They knew more about my business and what it was worth than I did. I had no idea.”
Ask 5 business brokers what your business is worth and you’ll get 5 responses. Ask 5 investment bankers and you will get 25 responses.
How do the MSO’s know exactly what your business is worth? How do you value a business?
There are three common ways I see collision businesses valued: by discounted cash flow (DCF), the multiple method, or by asset value.
Let’s break each one down. […]
We’ve talked a bit about the state of the industry and the Big 4, or the Big Boys as I sometimes call them (Boyd/Gerber, Caliber, Service King, ABRA). While they may be in the same business of fixing cars, the way they do things is systematically different.
(Editor’s Note: Keep an eye out for our upcoming article on the role of franchise based MSO’s and their impact on the industry.)
Perhaps the least understood difference is at the core of their business – how they actually make money for their shareholders.
Some people believe they give heavy discounts and make it up in volume. Others believe they don’t actually make money, and are barely holding on.
The reality is that these businesses are making millions upon millions of dollars. But not the way you may realize. […]
Previously we talked about the state of the industry. Wall Street has arrived in the collision industry. And Wall Street doesn’t play nice when it comes to money.
The insurance companies we do business with every day are some of the most powerful financial institutions in the world. Even the small ones wield huge influence. Their campaign contribution dollars get favorable politicians elected. Their lobby dollars get favorable laws passed (Obamacare anyone?)
In other words, they get a great return on their investment. […]