I’m back from SEMA AAPEX and wow, what a show. Las Vegas never disappoints, and this year was no different. I had back to back meetings the entire time with large multi-national companies, individual business owners, and numerous of investors. My presentation Tuesday afternoon on growing in a consolidating industry was received with much fanfare. Wednesday was full of industry parties and the happy hour I planned on Thursday, in true Vegas form turned into a happy all night long into the wee hours of the morning. I was glad to get home in one piece by Friday night.
Continued Interest for Private Equity Investment in the Industry
While I was at SEMA AAPEX I had multiple meetings with investors and private equity groups that are very interested in the automotive aftermarket. These groups have been watching the industry closely in the past number of years, and see a lot of potential. The collision segment (collision repair, parts distribution, paint distribution, technology providers, etc.) of the automotive aftermarket is undergoing rapid change due to structural, economic and technological forces. But these forces are impacting the entire automotive industry at large. These investors are looking to understand this change, and in the process, identify and back entrepreneurs that are taking advantage of these changes.
A few weeks back when I was at NACE, I interacted with a number of investors and private equity firms at the conference. They were there to gain a better understanding of the industry. At SEMA AAPEX that trend continued. I met with folks from numerous private equity firms all interested in identifying opportunities to invest in the segment. Some firms had recently raised their first round of investment capital, and having heard of the success of other private equity firms are interested in the space. Other firms are already in the space, and want to invest further. Still others are interested in the technological change we are seeing in the industry, and are pursing investment opportunities more akin to venture capital rather than traditional private equity investing.
Challenges to Private Equity Investment in the Industry
But a clear challenge many of these investors faced is that, especially in collision repair, parts, paint and mechanical service segments, the markets are still rather fragmented. In the past four years, since the second wave of consolidation kicked off across collision repair, paint and parts distribution, the “middle class” of businesses have largely been acquired. In mechanical service, consolidation has not taken off to the same degree as elsewhere in the market. As one private equity investor lamented to me, “it’s very challenging to find companies of sufficient scale in which to invest.”
Sufficient scale varies depending by private equity firm. Generally speaking, most private equity firms are looking for companies with at least $5 million in EBITDA. But as investment opportunities have become more scarce in the automotive aftermarket, especially in collision, paints, parts, and mechanical service, some smaller funds are willing to drop down to $1 million in EBITDA, with the anticipation there will be additional investment in the form of follow on acquisitions.
Benefits of Private Equity Investment in Your Company
For a firm of sufficient size and growth potential, now may be an opportune time to seek out a private equity investment. Private equity brings many benefits to the table, including very deep pockets to fund future growth and the active involvement of very experienced deal professionals. However, these benefits can be a double-edged sword. Aggressive growth becomes a necessity and active partners also are likely to bring a level of sophistication and oversight not previously experienced by an entrepreneur. Taking on a private equity investment for the most part means dilution of ownership, by as much as 70%, although some firms are comfortable with minority positions. But even firms that take minority positions still exercise very strong influence over the direction of the company.
But generally speaking, because the private equity investor also has “skin in the game”, i.e. has invested substantially in the business, incentives between the entrepreneur and private equity group tend to be relatively aligned. This is important when pursuing an aggressive growth strategy, and often a reason companies turn to private equity over traditional debt financing to fund growth (or in addition to).
This is also a reason that private equity backed companies tend to grow faster than other businesses. A common and successful private equity growth strategy is known as “Buy and Build” or a “Roll Up” strategy. In this strategy, a private equity firm acquires a company with the explicit intent to continue to acquire additional companies in the space. Therefore, for a company to attract a private equity investment, not only does it have to be of sufficient size, but it also must have a clearly defined growth strategy and a management team with a proved track record executing on the growth plan.
If your company fits these criteria, now may be a great time to consider a private equity investment. Use my contact page to confidentially reach me (subscribers email me directly). There are many investors eager to partner with successful growing companies in the industry. If you’re not quite at $1 million of EBITDA yet, that is OK. Our buy side services are designed to get you there in a prudent and sustainable way, so that you are better positioned for a future investment and continued growth. Contact me to set up a discussion.
I always eager to hear from you. Is a private equity investment on your horizon? Is it something you have considered before? Would you rather sell 100% of your company now, or give up 70% in exchange for supercharging growth over the next five to seven years? Hit REPLY and let me know.
Until next week.