By Jeff Sanford
Detroit, Michigan -- July 27, 2015 -- The big story in the industry these days is the ongoing process of consolidation. There are several major firms involved in buying up existing collision repair facilities to create large chains of stores that can offer lower cost service by reaping economies of scale. This is exactly the sort of issue that the MSO Symposium at NACE was created to discuss. According to the members of MSO Symposium’s panel on the finance trends involved in consolidation, this is a trend that will continue for at least a couple more years.
Some of the comments from panel participants:
- “This is a fabulous time to sell. Interest rates are low. The private equity guys love your industry. They want to be in your business.”
- “The big four consolidators are the most sophisticated. There are likely eight to twelve private equity firms looking to put money to work. We think there are twenty buyers in total in the market.”
- The reasons store operators might want to sell: “Get into a less-risky business.”
- There is a ‘Hierarchy of Value’ in the industry today. “Platform acquisitions” in the top markets get the biggest valuations. Platform acquisition in less-desirable markets are second. MSOs with two to three shops are next in the chain. At the bottom, single shops outside of major markets.
- When valuing your company consolidators look at net asset value of the shop. “No one buys real estate. They probably won't buy your inventory.
- There is “Financial risk on top of business risk. You must operate it better than the seller."
- Other good news, some of the big private equity funds and mezzanine funds are “going to the lower end of the market.”
- Operations hoping to find a buyer need to be sophisticated. “If you don’t do monthly, clean reporting, you are going to have problems attracting professional investors.” But remember, if you sell a stake to a fund, “the monthly reporting necessary is time-consuming.”
- When it comes to negotiations with funds, “Get fees on the table early and understand those.” Also, “Have a concise story about why you’re in the business and what you’ve done.”
- Consolidation is “proceeding rapidly. But there is a way to go yet.” Just a few years ago no single entity had more than 2 percent of the market. Today, one of the big four consolidators, Caliber, still only has “less than 5 percent” of the market. “Lots of runway left,” said one of the participants.
- If you are looking for a buyer, “Spend time packaging historical data. Have data available at the ‘location level.’”
- Keep the numbers clean. Sure, expensing stuff to the company is something everyone does. But proceeding to a buyout requires a new level of sophistication. And that means clean books. You don’t want to “be that guy,” and get a reputation as someone whose numbers can’t be trusted.
- When it comes to the various types of organizations that will buy you out there are vast differences in the type of control that will be given up in the case of an investment. “Banks are not patient. If something goes wrong they will want their money back,” said one of panel member. Financing companies will be more wide ranging, but will write in guarantees. Mezzanine financers will be more patient but will want a seat on the board and a say in hiring. Private equity funds will be the most patient if something goes downhill. But they will want the most control over operations.
- Interestingly, there is a “shortage of talent in terms of people who can run big, busy shops.”
- As is the nature of markets: “Multiples offered on businesses will go down as interest rates rise.” If, as many expect, interest rates begin to rise this fall, this is a reason to go ahead and pull the trigger on a deal. As one participant pointed out, “Even if you wait and grow your business by 20 percent, if there are increases in interest rates, multiples could come down by 25 percent.”
- Another reason not to sit on an offer: “If you wait, and then one of the big four comes in and buys up another shop in your area, your attractiveness goes down.”