Previously we spoke a bit about maximizing enterprise value vs. maximizing profit margins.
Many people in business fail to realize the distinction between the two concepts. If you maximize profitability, you maximize the value of your business, right?
Not always. In business everything is always a trade off.
For example, you could increase your labor rates to $200 an hour. Sure that would maximize your profitability, but probably decrease your sales as well.
You could also invest in building a brand through marketing and advertising. That will cost money and increase expenses, but you will see increased sales as a result.
You could also invest in growth, and take out debt to expand your business or acquire a competitor.
Building a brand and expanding through acquisition are examples of maximizing enterprise value. Increasing your margins at the expense of sales does not increase the value of your business.
The Big 4 (Boyd/Gerber, ABRA, Service King, and Caliber) focus relentlessly on increasing enterprise value. In fact, they actively look for ways to use expenses to maximize value.
They happily take on debt and the associated interest expense to grow. They buy businesses, they buy assets, they invest in marketing.
All of those investments represent significant expenses. It’s possible that from a GAAP accounting standpoint none of the Big 4 show a profit any given year.
But that doesn’t mean they are not hugely profitable investments. It is estimated that when Caliber was sold in 2013 by ONCAP to OHMERS, the sale netted ONCAP $425 million.
In case you’re wondering, ONCAP originally invested $58 million in Caliber in 2008. Not a bad return for 5 years. (That’s nearly $75 million a year for those of you counting).
In the same amount of time, Caliber also grew from 66 shops to 157.
Returns like that will keep private equity in the industry for the foreseeable future. And all this time you though Caliber made money by fixing cars.