For the past few weeks we have been speaking about the options that are available to a collision repair operator: stand pat, grow, or sell.
I spoke at some length about the risks involved in each strategy. Standing pat is a risky strategy due to the concentration of risk into a single business in a single city / region.
Growing is risky because it involves developing a new set of core competencies built around high level financial management as well as acquisition and integration competencies. Most collision repair businesses have not developed these competencies; and those that have developed those competencies now compete for deals against other large MSO’s with extensive experience sourcing, closing and integrating acquisitions. (Editor’s Note: Keep an eye out for an upcoming article about how the franchise model plays a role in growth.)
Selling is similarly risky as there is almost a certainty that a buyer will have vastly more experience in a business transaction, leaving you and your business vulnerable. Buyers will pay a premium for a well-documented, well-run business but most collision repair businesses have little experience presenting financial information in a usable format to a multi-million dollar institution.
Those are the risks. But I promised an article about opportunities! Given you properly manage the process, there is actually a lot of opportunity to grow “inorganically”, or via acquisition. Industry leaders have proven that it is not only possible, but it is an incredibly lucrative strategy when done correctly. For this reason, private equity groups continue to invest in the industry. Mid-sized MSO’s continue grow via acquisition even if we tend to only hear about the big sales to the consolidators.
The opportunity for growth for the small to mid-sized collision repair operator is to develop a core competency around managing inorganic growth. In the collision industry very few companies are truly focused on inorganic growth. There is an opportunity for the focused and organized business owner to take advantage of the same trends that are driving consolidation in the same way that the large players do. However, to do so successfully will require that the business develop both an acquisition strategy as well as a team specifically designed to manage that growth.
There will always be challenges when growing via acquisitions. But as with anything in business, success is driven by developing an analytical process. New core competencies in financial management, and acquisition and integration have to be developed.
While earning my MBA I had to do a lot of industry analysis. A lot of equity research and strategic consulting I have done is focused on industry analysis as well. An effective way to identify growth opportunities is to look in two areas: identify how the industry leaders drive growth and copy them; and analyze growth trends to see not only where the industry was, but where it is going.
If you want to grow, it is important to understand how the largest players have grown so you can mimic them. It is also important to understand what happened in the past so you can position yourself for the future (and not get steamrolled in the process).
How do the large consolidators manage growth?
Three ways: Build the right team; understand and manage financials; and bring in outside experts.
Build the Right Team
A major reason the consolidators have grown so rapidly is because for many years (since at least the 1990’s) they have dedicated the resources (i.e. money and salaries) to managing growth. In other words, they consciously developed a core competency in acquisition and integration management, otherwise known as “corporate development”.
Corporate development is corporate speak for inside M&A (mergers and acquisitions) professionals. This is the team responsible for evaluation and valuation of a proposed acquisition. The team lead is often an executive level staff member (i.e. V.P., Director, etc.) and reports directly to either the CFO or CEO. Almost always they have an MBA or Master’s in Finance along with investment banking and M&A experience. If you want to grow via acquisition, it is essential that you have an experienced executive that can evaluate and manage the financial and operational risk of inorganic growth.
Understand and Manage Financials
Successful businesses have a deep and intimate relationship with their financials. Growth decisions are made on the basis of financial planning and pro forma budgeting. The decision to expand CAPEX, take on debt to grow inorganically via acquisition, or use working capital to fund organic growth through investment in operational initiatives is all driven by financial management and analysis.
Take the Big 4 for example. Before they hired a corporate development team, they each hired a dedicated CFO. It is the CFO’s job to evaluate and manage the financial risks of the corporation. Growth is risky – regardless of how it is achieved – and a key part of the CFO role is to understand, measure, monitor, communicate and manage that risk. If you have a desire to grow, it is essential that you have an expert on your team managing the financial risk of growth.
Bring in Outside Experts
Even the most sophisticated companies turn to outside experts to help manage growth. In the case of the top 10 companies in the industry, most have traditionally turned to private equity, investment bankers, and dedicated M&A advisors to supercharge growth. In fact, part of the reason of taking on a financial sponsor (private equity) is to leverage the financial expertise of a larger investment partner. Bringing on board outside experts gives your organization the ability to benefit from having someone on your team who has “done it before”.
Taking on a private equity partner is not just for huge multi-million dollar businesses either. Carousel Capital, a PE group in North Carolina, recently invested in Joe Hudson Collision Center, a 23 location MSO located in the Southeast U.S. Kadel’s, another 23 location MSO in the Pacific Northwest also took on a financial partner when they only had 10 locations. A number of other private equity groups are interested in the collision space as well and are ready and willing to provide growth capital and expertise in exchange for a portion of equity. In fact, I have been advised by investment bankers active in the industry that some PEG’s are considering investments in companies with annual sales starting at the $25-$30M range.
However, if you are not ready to bring on private equity partners (and it is a big step indeed), you may consider bringing on outside experts that have the financial experience necessary to properly set your business up for growth. Having a partner that has “done it before” and is incentivized to grow with you may be the difference between successful and painful growth. Transactional/corporate attorneys and CPAs experienced in business combinations and taxes also are an indispensable part of the team.
Even if you can not afford a full time financial expert, it is still critically important that you are actively managing and assessing your financial risks. Often a company can utilize the resources of a part time or fractional CFO. Commercial bankers and accountants can provide assistance as well but may not have the level of industry sophistication to fully evaluate the risks. (Editor’s note: Keep an eye out for an upcoming article on how to leverage the resources of a fractional CFO).
Knowing what needs to be done in order to achieve growth, next week we’ll talk about markets that have been affected by consolidation and what you can learn from observing what has already happened. Understanding industry trends will help you be better prepared for future growth.
As always, if you have questions about how to build the right team, better understand and manage your financials, or bring in outside experts please reach out to me on my contact page. All communication is kept extremely confidential.
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Until next week.