I am going to start off with a bold statement: There has never been a better time to own a collision repair business.
I’ll follow that up with another statement that may catch many readers off guard: There has never been a more profitable time to own a collision repair business.
The industry is changing rapidly due to the influx of massive amounts of Wall Street investment in the industry. There is no doubt that consolidation in the industry has put substantial pressures on margins, increased the administrative workload repair facilities are expected to administer, and generally increased competition across the board.
Now I’m not one to get up here and blithely parrot the oft repeated phrase “competition is good”. Competition is painful and difficult. It creates some winners and often many losers and is not always fair. For the unprepared increased competition can be disastrous.
Yet the result of this increasing level of competition is that there has never been a more profitable time to be in the collision repair industry.
Think back only a few years. In early 2001 Caliber operated in only California and Texas with 29 and 22 stores in each state, respectively. Service King had 17 locations as of mid 2003, all of them in the Dallas area. The Boyd Group was a leader in acquisitions in the industry with a total of 8 transactions in the year 2000. CARSTAR operated a handful of franchises in various pockets of the U.S. and Canada. Even as late as 2007 ABRA had less than 100 facilities.
Fast forward to present day. All of the organizations listed operate hundreds of facilities. They have revenues in the hundreds of millions of dollars (some of them will exceed a billion dollars in sales in 2015). They acquire 8 locations in a single transaction multiple times a year. They are effectively nationwide organizations with presence in the largest metropolitan areas in both the U.S. and Canada.
It is important to highlight the growth of these market leaders not merely to celebrate their success as impressive as it is but to highlight the change they have brought to the industry. Throughout most of the history of the industry, the collision repair industry has been an incredibly fragmented industry. Because of the fragmentation of the industry, the options available to owners of such businesses were limited.
Whether an owner wanted to stand pat, grow or sell, the options were incredibly limited. If an owner wanted to stand pat, yet run a more profitable operation few resources existed. There were few training opportunities from vendors in the industry. Franchises were still in their infancy and faced considerable growing pains. Partnering with a young brand such as CARSTAR was often perceived as a risky proposition by many owners because the franchise was so young and relatively inexperienced. The potential value of the brand was still to be determined. For most collision repair operators it was truly a “go it alone” model. (Editor’s Note: Keep an eye out for an upcoming article in ABRN on the economics of the franchise model.)
Selling a collision repair business was similarly challenging. For the vast majority of the industry it was not an option. Because no one had done it, it was difficult to convince investors that building scale was a viable value proposition. Sure there were a few startup companies like M2 or Caliber that were just beginning to acquire other businesses but in general there was no market for a collision repair shop. There were few sources of debt or equity capital that were willing to invest in such a proposition. When they did, they demanded high rates of return on their investments. As a result, valuations on individual collision repair businesses tended to be low to compensate for the higher perceived risk and the higher cost of capital faced by companies that were in growth mode. As one owner still active the business today confided in me, “I had an opportunity to sell in the early 2000’s to one of the large consolidators. But when the offer came through it was not enough. When you take into account the cash my business generated as well as the other perks that come with owning a business, it just didn’t make sense.” In economic terms, the market to buy or sell a collision repair business was out of equilibrium.
Today’s environment is very different. If an owner wishes to grow via acquisition, there are more financing options today than ever in the industry. For operators of at least $25 million in revenues, seeking out an equity partner from a family office or larger private equity group is a viable option. Due to the influx of investment dollars into the industry, there is increasing familiarity and coverage of the industry by Wall Street analysts and banks. For the smaller operators, it is thus easier to obtain financing through traditional bank lending or smaller family offices to complete smaller transactions in order to build scale. In short, there is more familiarity within the financial community of the collision repair business.
Similarly for a seller, investment and consolidation in the industry has resulted in a more balanced marketplace. Values for collision repair businesses are at all-time highs, in large part to a lower cost of capital. While a significant factor driving consolidation is a lower cost of capital as a result of large financial shifts at the federal and global level, increased industry exposure to Wall Street effectively “de-risks” the industry. Additional financial players entering the industry create more buyers, thus giving sellers more options. A central tenet of maximizing value for a seller is to allow the market to set the price of a business through an auction process rather than relying on a small handful of potential buyers to set the price of a transaction. The greater the number of potential buyers in any transaction, the greater the probability that the market price of a business reflects the intrinsic value of the business rather than a negotiated value.
While the market to buy or sell an individual collision repair business is healthy, those owners who wish to stand pat and compete on a stand-alone basis have more tools at their disposal than ever before. Whether through paint vendors, industry trade shows or through direct consulting agreements with operational experts, the opportunity improve your business have never been better. Franchisors, now operating on national and international levels, are able to leverage the resources of a larger organization to assist smaller organizations to compete head to head with large consolidators.
There truly never has been a better time to own a collision repair business. Regardless of whether you intend to stand pat, grow or sell, the tools and options available to you were not even imaginable a few years back.
I’m eager to hear from you. I would like to know if you what your plans are – stand pat, grow, or sell. As always, if you would like to discuss any of these strategies in more depth please shoot me an email via my contact page to discuss further. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
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Until next week.