Stuck behind the consolidation curve? Discover why industry consolidation impacts the price of your business.

Consolidation has been going on in the industry in the U.S. since the 90s. There have been some major successes as well as some spectacular failures. The collision industry, and the entire automotive industry in general, is not the first industry to ever undergo consolidation. And it certainly will not be the last.

Consolidation has taken place for nearly two decades now. Nearly every current business owner in the collision industry “lived through” the first round of consolidation. Because of this “survivor bias” some feel that the current round of consolidation is destined to fail the way they believe the prior round did.

But as we discussed in the consolidation curve last week, the first round of consolidation in an industry is marked by fits and starts. It is rare for a $30 billion industry to transform from a highly fragmented industry to a fully consolidated industry overnight.

Consolidation will continue. The current round of consolidation is driven by a number of factors. There are financial forces driving consolidation as well as more strategic industry shifts. As the industry matures, this round of consolidation is has a major impact in a way that the first round of consolidation in the 90s and early 2000s did not.

Where are we now?

The industry as a whole is well into Stage 2 Acquisitions and headed to Stage 3 Expansion. But depending on where you are located in the country, your specific area may be in the early stages of Stage 2, already beginning Stage 3 or perhaps still in Stage 1 Fragmentation (Subscribers feel free to email me directly to discuss your individual market).

The four largest consolidators continue to grow market share, primarily through acquisitions and to a lesser extend brownfields and greenfields. They are also driving more work through existing locations, siphoning work away from existing businesses in the market. These companies are consistently growing at rates in excess of 25% annually. The Boyd Group doubled in size in two short years, increasing sales by nearly $400 million from 2012 to 2014. It is likely that Boyd will reach $1 billion (Canadian) in sales by the end of 2015, as will ABRA, Service King and Caliber (in US dollars). The large consolidators are clearly focused on building scale.

The large consolidators continue to pursue platform acquisitions as well as individual acquisitions. Platform acquisitions give the large consolidators the ability to rapidly grow revenues. They also present cost saving opportunities on a relative basis. Consolidators can manage costs by utilizing existing regional management and eliminating redundant overhead (i.e accounting, HR, marketing, etc.) when purchasing a larger platform.

How the stages of consolidation impact the price of your business

If you are considering a sale of your business it is important to understand how the cycle impacts pricing of your business. Just as the stock market has cycles so too do businesses. Timing the consolidation curve correctly can have a large impact on price.

The Regional MSO

Owners of regional MSOs continue to experience strong demand for their businesses from large consolidators. Due to both the revenue enhancements, future growth opportunities and the cost synergies mentioned above, the large consolidators continue to demonstrate a strong interest in your business. It is likely have already received multiple unsolicited offers from these consolidators.

Regional MSOs in a Stage 2 market have opportunity to consider multiple offers from interested buyers. A regional MSO is attractive to the large consolidators as a platform acquisition, or a launching board for these companies to move into new markets. For the same reason your business is also attractive as a platform investment to private equity groups eager to enter the industry.

Regional MSOs in a more consolidated Stage 3 market will continue to have opportunity to seek out interested buyers. But there may be fewer interested parties. Existing consolidators may have not be as willing to pay a large premium to acquire a business in a geography where they already have a large presence. Other players may be discouraged from entering the market if there is already a strong local competitor. In highly consolidated markets there may not be as many future acquisition opportunities for a new consolidator entering the market. As a regional MSO you may have a strong position in your existing market and there is always the opportunity to continue to operate and generate cash flow into the near tearm. But there is a chance of “missing the boat” and watching your business value diminish as the market consolidates around you.

The local MSO

Owners of local MSOs (i.e 2 to 5 locations) also experience strong demand in Stage 2 environments. While there is less cost savings to be had for a large consolidator in these types of acquisitions, these businesses continue to be attractive revenue enhancing opportunities. They are also serve as attractive “acqui-hire” transactions. An acqui-hire is when a business is bought primarily for the skills and expertise of its staff, rather than for the products or services it supplies.

As the local environment becomes more consolidated and shifts to a Stage 3 environment, local MSOs face an increasing risk from established players through brownfielding and greenfielding. Additionally as the local marketplace becomes concentrated, local MSOs can increasingly find themselves the target of increased competition from larger groups.

Local MSOs will continue to have the ability to attract multiple interested parties. Each of the Big Four consolidators closed at least one acquisition of a local MSO so far in 2015. As the larger regional MSOs ranks are thinned as they are acquired, the local MSOs will command additional attention from prospective buyers. While your business may command more attention, a smaller MSO is often perceived by a buyer as more risky relative to a larger MSO. Clearly articulating your financial value and management acumen in light of these risks is important in getting a deal closed successfully.

The Single Location

Perhaps the most frequent comments I hear from collision repairers is that the business is not what it used to be. Demands for rapid cycle time, self-managed severity, vehicle complexity, lack of skilled technicians, environmental regulations, labor laws, and insurance burdens (just to name a few) make running a successful business in this industry increasingly difficult. Add on the entrance of Wall Street backed firms with professional management teams and in house training programs with the ability to acquire new DRP accounts with the flip of a switch and it seems the industry gets tougher every year.

Currently there is still a strong market for well-run, single location businesses in the top metro areas from both regional MSOs and the large consolidators.  But strong valuations for single location businesses will not last forever. The large consolidators are increasingly turning to brownfield and greenfield projects in areas where they already have high market concentration or are unable to find affordably priced acquisitions. The large consolidators are also looking to build scale rapidly and cost effectively. For a consolidator, on a per location basis, it is much more cost effective to acquire a local or regional MSO than it is to acquire individual locations. Because of these reasons single location businesses will face substantial pricing pressures as the industry moves further into Stage 3.

Don’t get stuck behind the curve

None of this means the industry is coming to an end. Rather, competition will change going forward. Consolidation will continue to impact the industry.  We are currently witnessing a peak in the valuation for collision repair businesses. But just as in the stock market peaks do not last forever. So far 2015 has been decidedly less “rabid” than 2014. It may be a natural pause, but it may also be an inflection point away from the go-go days of 2014.

One of my favorite investing quotes is from Baron Rothschild, a member of the fabulously wealthy Rothschild banking family who said, “I made my fortune selling too early.” The quote “buy when there is blood on the streets” is also attributed to Rothschild.

I’ll be at SEMA this year and be making myself available to you as a subscriber to discuss your particular business. I would like to meet with you. These are informal meetings where we discuss how the consolidation curve impacts your specific business, how you may begin to think about developing an inorganic growth plan, or how to better manage your books and finances to ensure you are growing in a healthy and sustainable way. If you want to brainstorm or just throw some ideas off of me please visit my SEMA meeting request page and enter your contact info.

In the meantime, shoot me an email with your thoughts on the consolidation curve. Have you seen an impact on your business as a result of consolidation? Has that impact changed the way you do business or changed your long term plans?  Subscribers you can simply reply to the update email and get my inbox directly. If you’re not a subscriber you can use the contact page. Or become a subscriber by entering you email address on the subscribe page, or anywhere else you see a box to enter your email address.

Until next week!

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