The State of the Industry: Understanding Consolidation Risks

In conversations I have with business owners throughout the industry I often notice a negative view expressed toward the large consolidators, specifically that the large consolidators could never produce the same quality of product or service as a smaller privately held business. While there may be some truth to this (studies looking at franchises have shown that owner operated franchises tend to perform at a higher level relative to corporate owned stores[1]), there is much to be learned from the success of these larger organizations.

In the past few years, these large MSOs have grown at a rate that have left even the most well-informed and well-connected individuals shocked at the pace of industry consolidation. Boyd increased revenues by over $400 million in two short years – doubling in size. The large consolidators have acquired more businesses and integrated them more rapidly than most thought was possible. The large MSOs have developed a core competency in sourcing, acquiring, closing and integrating independent businesses. The result is that these businesses, using the tools of corporate finance, have fundamentally altered the industry and developed a competitive advantage that many small and mid-sized businesses will find difficult to overcome.

I tend to be agnostic about consolidation, neither assigning a “good” or “bad” value judgment and rather looking at what “is”. I am, however, pro-business, and continue to be impressed from a business standpoint by the rapid and profitable growth of these companies. The large consolidators have done an excellent job of building a comprehensive collision repair business as opposed to a collection of collision repair shops.

Going forward, it is clear that the large consolidators will achieve nationwide scale. There will be continued consolidation, both on the individual shop level, the regional MSO level, and possibly even large consolidator on consolidator acquisitions. At some point it is likely that one of the large U.S.-based consolidators will go public. Boyd, a company that started as a single location shop in Canada a mere 20 years ago, has proven that the large MSO model is viable both from an operational as well as a capital markets standpoint.

By many measures, there truly is no better time to be in the industry. Valuations for collision repair businesses are at all-time highs. The availability of capital to the industry has never been greater. Access to training and business resources is abundant. But the level of competition has never been greater in the industry. The industry has matured rapidly and, in many parts of the country, is now dominated by a handful of larger players with professional management teams. Inorganic growth via acquisition will continue.

The challenge for midsized MSOs and smaller single or dual location businesses is to keep up with rapidly increasing scale of the large players in the industry. The large consolidators have repeatedly demonstrated the ability to generate substantial financial returns, thus attracting some of the largest and most sophisticated investors on the globe. These investors gladly turn over tens of millions of dollars to the management team to invest in the operations of the business, confident in the prospect that the business will generate a superior rate of return. Boyd is a great example of this trend, raising $110 million (Canadian) in equity and convertible debt investments 2014 alone. The more cash the management team generates for investors, the greater the confidence investors have in management, resulting in a greater willingness to hand over additional capital to the management team. This creates a virtuous cycle, where the management team continues to re-invest into the business, generating even more cash while creating significant barriers to entry and competitive advantages that become increasingly more difficult for outsiders to overcome.

As the large consolidators continue to build scale, they are better positioned to recruit and attract talent, from helpers to management. They are better positioned to invest in and build a true consumer recognized brand. They are able to invest significantly in customer service, insurance relations, and general corporate training. They are able to provide comprehensive compensation packages, using their scale to economically provide employee benefits that many smaller operators are unable to match. The large consolidators are able to make significant investments in specialized tooling and training to adapt to aluminum, carbon fiber, and the myriad of other new vehicle materials entering the market. This does not imply that smaller independents and regional MSOs are unable to make similar investments in training and equipment, only that due to their size and ability to generate strong returns, large MSOs are well positioned to continue to reinvest in their businesses at a rate smaller organizations may find it difficult to match over time.

The influx of large investment dollars into the industry is permanently shifting long held business models. Owning a successful collision repair business used to be just about fixing cars and minding KPIs. No longer. Successful collision repairers now have to understand recruiting, marketing, branding, and corporate finance. To be successful owners have to understand how to raise capital, calculate rates of return, manage CAPEX, and evaluate capital structures. The large consolidators have raised the bar for all industry participants.

While the rapid growth of the large consolidators presents a serious competitive risk for many in the industry it also presents a significant opportunity, if managed appropriately with the right team. The risk is that the large consolidators continue to grow at the pace they have grown at for the past few years and continue to successfully integrate making it difficult for smaller players to raise the capital necessary or grow rapidly enough to compete with a handful of large nationwide players. Think Home Depot and Lowes, Hertz and Enterprise, or CVS and Walgreens.

The opportunity, however, is for the smaller regional MSO or single or dual location independent owners who have a longer time horizon to build a business and grow like a consolidator. To do so effectively requires a solid grasp of corporate finance, as well as other key business management principals. It requires that a business have a team in place that can manage growth, both operationally and financially. The most successful of this group may attract the attention of private equity groups that are actively seeking opportunities to invest in well-managed collision repair businesses that are positioned for additional growth.  As consolidation continues and more regional MSOs are acquired by larger MSOs, the opportunity to grow from a handful of locations to a regional presence remains a very attractive business model for many in our industry.

We will continue to talk more about the tools of growth. We will also discuss private equity, what it is, how it works, and if it may be right for you. But I am interested in knowing more about you. Have you considered the opportunity to grow in the collision industry? What are some of the challenges you have faced in growth? How have you recruited the right team to help you grow? Please shoot me an email via my contact page and tell me more. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.

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