What is Driving the Consolidation Wave

Writing about finance in the collision repair industry, naturally we speak quite a lot about business valuation and maximizing the value of your business. Buying or selling businesses are currently very prevalent activities in the industry. In financial terms, buying is often called an “acquisition” while selling your business may be referred to as a “liquidity event”.

There is a lot of industry chatter around these events. It seems that every week there is a new breaking story where one of the large consolidators acquires another group of repair facilities. By the end of 2015 it is a near certainty that at least one if not two companies will reach $1 billion in revenues with even more growth coming.

I often focus on the tactical, i.e. how to best position yourself to buy, sell or hold. But it is also important to take a step back from time to time to look at the overall picture. What is driving this change in the industry? Often we hear that the increasing technological complexity of repairing a vehicle drives consolidation. We also hear a lot about the benefits of scale, or how having a large nationwide footprint results in a competitive advantage in the result of increased revenue opportunities, a decreased cost structure, or perhaps improved operations. These are all valid reasons for growth but not necessarily the primary drivers of consolidation. […]

Using Finance to Drive Systematic Growth

Previously I spoke about how collision repair operators will have to develop new core competencies in order to compete against the increasing competitive pressures as a result of industry consolidation. As we saw last week, consolidation is a trend that is not going away, and most likely will continue in frequency and intensity. Collision repair is no longer just about fixing cars and minding KPI’s.

In business school we talked a lot about core competencies. The most basic definition of a core competency is something a business is really good at. In collision repair, most operators would have a core competency in vehicle repair and customer service.

In fact, we may actually be too good at those things. […]

The State of the Industry: How Consolidation Impacts Your Business

Recently I decided to take a closer look at consolidation in the industry since late 2012. It goes without saying that consolidation is a hot topic in the industry. We talk about it almost every week here. It also seems that every week a new mega deal is announced where one company buys another company.

Whenever rapid change hits an industry it often causes an emotional reaction. Some argue passionately against consolidation. Others strongly believe consolidation brings much needed improvement. Still others shrug it off with ambivalence.

My opinion of the consolidation trend is agnostic. […]

Grow Like a Consolidator

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!   […]

Buy, Sell, or Hold: The Risks

Last week we spoke about the conundrum that collision repair operators currently face. Because of the influx of Wall Street money and rapid consolidation, owners have essentially three choices when looking towards the future. They can:

  • Stay small and continue to compete on a standalone basis, or with the help of a franchise (more on the franchise approach in future articles);
  • Build scale, acquire competitors, open brownfields and compete with large MSO’s by becoming a small MSO;
  • Sell to a regional or Big 4 consolidator.

Each of these three strategies carries inherent risk, as well as potential rewards. This article will break down each of these three key strategies to help better explain the specific risks and rewards implicit in each. […]

Buy, Sell, or Hold: The State of the Industry Part II

Long time readers of my posts notice two main themes running through my writings. The first is a focus on corporate finance and how to apply those topics to a collision repair business to better manage a business. The second is a focus on M&A (Mergers and Acquisitions) and how to be prepared to buy or sell a business.

Many readers inherently see the logic of the first topic. Understanding the tools mid to large sized business use to manage their business allows the reader to better manage their business, and be more successful as a result.

The second topic is sometimes met with less clarity. It often begs the question: why so much talk about buying and selling a business? […]

How Financially Fit is Your Business: Understanding Working Capital  

Working Capital is something that is scrutinized by almost every company but rarely talked about in the collision industry.

But I guarantee every large MSO in your marketplace is actively managing Working Capital.

It is also something that major vendors will consider if you are negotiating for a pre-bate or other consideration for purchasing their product.

Banks look at it too. If you want to borrow money to grow, they will scrutinize Working Capital to ensure that you can afford the loan.

If you ever sell your business, it will be a hotly negotiated topic as well.

Most business owners do not look at working capital until one of the above situations forces a working capital negotiation. But that is the wrong time to start managing working capital. It is like going on a diet the week before your annual doctor checkup. […]

Don’t Let Inexperience Get in the Way of Success

The collision industry is a $30 billion market in the U.S.  But not a single company accounts for even $1 billion in sales. There is a race to get to the $1 billion in sales mark. (Editor’s note: keep an eye out for our upcoming article on what is driving this race to $1 billion).

The quickest way to get to the $1 billion mark is to acquire other businesses that already generate a few million dollars in sales. So the consolidators need you – but they are also afraid of you.

They are afraid of you because you lack experience.

The large consolidators by their very nature are incredibly cautious. They are backed by some of the largest financial institutions in the world and are stewards for hundreds of millions of investment dollars. They unfortunately cannot just “take your word for it”.

Sure you have been in business for years. You have long term employees. You have long term referral accounts via DRP’s or dealer referrals and repeat business.

But you are inexperienced in their world. […]

Hire a Manager and Fire Yourself

Many owners I interact with still run their business the same as the day they started. They are the first one there in the morning and the last one to leave. They know what is going on with every file. They are the only ones allowed to make decisions.

This level of dedication is admirable. Unfortunately while it can feel profitable and even feed our own ego, it often gets in the way of maximizing the value of your business. You want your business to run better today and be better positioned for tomorrow – even if you are not planning on selling any time soon.

In order to maximize the value of your business you have to view your business from the outside in. Or, as a good friend of mine once told me, work on your business not in your business. […]

6 Ways to Maximize the Value of Your Business

Previously we talked about valuation methods. Valuation is great, but like any tool, only as good as the person using it.

Anyone can tell you that your business is worth $10 million. But if you can’t find a buyer at that price, is it really worth that much? An investment banker once told me that a business is only worth what a buyer is willing to pay for it…PERIOD.

In order to maximize what a potential investor or buyer is willing to pay for your business you must be able to demonstrate the value of your business to them.

Understanding valuation methods is important (common valuation models are discussed in this article).

You also need to pay attention to recent comps. Know what other businesses in your industry sell for. If possible, know the profitability and size of those businesses so you can compare them to your own business.

But in addition to the above, here are six more ways to maximize the value of your business: […]

3 Reasons MSO’s Know Exactly What Your Business is Worth

A colleague of mine was recently approached by one of the Big 4 inquiring about his business. After a few brief conversations around his financials they came back to him and offered him a very specific number to buy his business.

He remarked to me, “They knew more about my business and what it was worth than I did. I had no idea.”

Ask 5 business brokers what your business is worth and you’ll get 5 responses. Ask 5 investment bankers and you will get 25 responses.

How do the MSO’s know exactly what your business is worth? How do you value a business?

There are three common ways I see collision businesses valued: by discounted cash flow (DCF), the multiple method, or by asset value.

Let’s break each one down. […]

Why You Should Not Make All the Money (Just a lot of it)

I wanted to take a break from talking about finance and the collision industry and spend a bit of time discussing the importance of employee alignment and engagement.

Normally we talk about growth and how to finance and account for that growth. But what gets lost in that narrative is that growth is impossible without a group of people working towards a common goal.

In corporate management speak, that is called “employee alignment”.

What is employee alignment? In its shortest form, alignment is about getting employees to think like owners. […]

You won’t believe how much money Caliber made last year.

Previously we spoke a bit about maximizing enterprise value vs. maximizing profit margins.

Many people in business fail to realize the distinction between the two concepts. If you maximize profitability, you maximize the value of your business, right?

Not always. In business everything is always a trade off. […]

How Private Equity Makes Millions in the Collision Industry

We’ve talked a bit about the state of the industry and the Big 4, or the Big Boys as I sometimes call them (Boyd/Gerber, Caliber, Service King, ABRA). While they may be in the same business of fixing cars, the way they do things is systematically different.

(Editor’s Note: Keep an eye out for our upcoming article on the role of franchise based MSO’s and their impact on the industry.)

Perhaps the least understood difference is at the core of their business – how they actually make money for their shareholders.

Some people believe they give heavy discounts and make it up in volume. Others believe they don’t actually make money, and are barely holding on.

The reality is that these businesses are making millions upon millions of dollars. But not the way you may realize. […]

What is this EBITDA thing?

EBIT…Huh? What the heck is that?

Say it out loud with me: Eeee – bit – dah.

One more time out loud.

EEEE – bit – daaaah.

 

Did your co-workers just look at you funny? Good.

EBITDA is short for Earnings Before Interest Taxes Depreciation and Amortization. It is a shortcut to estimate cash flow to the firm. It’s also one of the more common financial measurements used to value firms.

EBITDA approximates the cash the business is generating for all stakeholders (owners, investors, debt provides, etc.).

That is important for an investor to know. When someone invests in your business, they want to know what they are getting in return. EBITDA is a good way to measure that.

[…]

What’s a Leveraged Buy Out (Should I even care????)

Previously we talked about the state of the industry. Wall Street has arrived in the collision industry. And Wall Street doesn’t play nice when it comes to money.

The insurance companies we do business with every day are some of the most powerful financial institutions in the world. Even the small ones wield huge influence. Their campaign contribution dollars get favorable politicians elected. Their lobby dollars get favorable laws passed (Obamacare anyone?)

In other words, they get a great return on their investment. […]

Profits Don’t Matter – Why it’s really all about cash flow.

It’s all about profits, right? You can’t survive in this industry unless you mercilessly watch your profit margins. Parts margin, paint margin, labor margin, gross profit margin, overhead expenses, the list goes on and on.

But what if I told you that the big boys don’t care about their margins? […]

The State of the Industry (And why we’re all in trouble!).

In case you’ve been living under a rock for the past two years here’s a news flash – the industry is rapidly consolidating. Wall Street has arrived and they’re taking no prisoners. But what does that mean?

First it means that there are the “Big 4” – Caliber, ABRA, Service King, and Boyd/Gerber. You’ve probably heard of at least one of these guys, if not all of them.

They have hundreds of locations. They do hundreds of millions of dollars in sales a year. They are tied in with major insurance companies in a way you or I never will be. They’re financially backed by some of the largest most powerful financial institutions in the U.S. and Canada. […]

Who is Brad Mewes?

About Brad Mewes Who I am I am a business geek. I find corporate finance and strategy riveting (I watch Bloomberg for fun and relax by reading 10-Ks of companies I find interesting). I have nearly two decades of experience in the collision industry. I have an Masters in Business Administration (MBA) in Finance. I Read more about Who is Brad Mewes?[…]