Buy, Sell, or Hold: The Risks

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.

Stay Small

Rapid consolidation notwithstanding, many owners with whom I interact consider both growth and a potential sale incredibly risky and would rather keep doing what they have always done. Often these owners express a desire to return to the way things used to be when the industry was much more simple, margins were better, and there were less outside demands on any individual business.

The perceived risk by those in this group is misplaced. Staying small carries with it a host of risks. For most owners, their business and/or associated real estate is the largest financial asset they own. Their risks are incredibly concentrated in one industry, one business, one city, one street, and one building.

Many of these owners have only a handful of key referral accounts, whether those be dealer or insurance based. There is no guarantee that these accounts will exist in perpetuity. There is also no guarantee that these accounts will maintain similar levels of profitability as they have in the past. As the industry matures and consolidation takes over more markets, these risks will become more acute.

While staying small and doing things the way they have always been done may feel safe, it is actually may be the riskiest strategy of all. In finance this is called “concentration risk” and is the equivalent of putting all your eggs in one basket. It may feel good and work for the foreseeable future, but as a wise man once told me, on a long enough timeline, the survival rate for everyone drops to zero.

Build Scale

Go out and buy your competitor. Become a regional MSO. Sounds easy, doesn’t it? Until you go out and do it. For those of you who have, you understand how inherently difficult it is to acquire an existing business. There are millions of things that can go wrong and a million and one reasons not to do a deal. I suspect everyone reading this post has heard stories of acquisitions gone bad.

Further compounding matters, as the Big 4 get bigger we begin to see more consolidator on consolidator competition for acquisitions. The result is that it will become increasing more difficult for the smaller operator to build scale. While a small yet focused operator may be able to out-compete a larger national player on an operational basis, it is unlikely to be able to outperform a larger national player in M&A activity.

I’m not saying it can’t be done (in fact, next week I will spend time discussing where I believe the growth opportunities are in the industry). Successful growth via M&A can be done – but just realize you will be going head to head with organizations with substantial financial backing and deep experience. To grow via M&A your business becomes more than fixing cars and minding your KPI’s. You will have to develop new core competencies (i.e. things you are really good at) and build a team around you who are experts in business growth.

Sell

After all the doom and gloom I just dumped on you, you may be questioning why you are even in this business to begin with (I apologize – next week will be more uplifting I promise). It would not be the first time I have heard that sentiment.

But please do not do anything rash in desperation. Walk away from that ledge and DO NOT rush out and call your local consolidator without preparing first. This article is about risks and selling carries with it a whole host of additional risks.

Remember, the Big 4 are really good at getting deals done. But that does not mean that you can rely on them to do all the heavy lifting for you. In fact, they would actually prefer that a seller come to them well prepared, well documented and organized. Selling a business without proper preparation is a disaster waiting to happen. In fact, despite the rapid pace of consolidation, if you are not organized in a way that makes sense to multi-million dollar intuitions, you may not be able to sell it at all.

Think of your business as a used car. An owner that continuously cleans and maintains their car, and keeps meticulous service records completed only by dealer factory trained techs and has all the documents proving their expenses will easily sell their car quickly and for a premium. By comparison, the owner with the jalopy with no service records other than he swears he changes his oil in his garage “all the time” will have a much more difficult time selling their car for the price they think it is worth.

Your business is the same way. Selling a business successfully requires that you clean up your business. The Big 4 have proven time and time again that they will happily pay a premium for well run, well organized, financially fit businesses represented by a competent, articulate seller. This is not unique to collision either – most acquirers regardless of industry prefer this type of transaction.

Conclusion

Due to the pace of consolidation there may never be a better time than now to sell. On the other hand, this may be a great time to grow – but growing requires a very different business model – one that specializes on acquisitions and integrations. Successful consolidators will need to be experts in operations and finance and acquisitions and integrations.

As consolidation increases, it will become increasing difficult to grow via acquisition yet it will also become increasingly difficult to sell without multiple locations. Successful growth will require that the business develop new core competencies that are likely very foreign to most collision repair operators. This presents a bit of a Catch-22. It is not an impossible situation to overcome, but it will require the business owner to invest significantly in building core M&A and financial capabilities.

As always, if you would like to discuss any of these strategies in more depth please shoot me an email via my contact page.

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Until next week.