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Thursday, 23 October 2014 00:00

MSO Consolidations in CA Heat Up Industry

Last month we reported on the final closing of the purchase of Holmes Body Shop’s seven locations by Cooks Collision Centers. The Holmes acquisition was initiated in May 2012 and concluded with the seventh Holmes location closing in September of this year, after our last issue went to press. With 35 locations in CA, Cooks is the largest independently owned and operated collision repair organization in the state.

But Holmes is not even the latest medium size MSO to be acquired by larger consolidators in California. In September, Service King Collision Repair Centers acquired Marco’s Collision Centers, a medium-sized MSO also having seven locations in Southern California. Shortly thereafter Service King reached an agreement to acquire Car West Auto Body, an MSO with seven shops in Northern California.

Is there some kind of ‘rule of sevens’ at play here? More seriously, we wanted to know what forces were driving the acquisition of small to mid-size MSOs and why they seem more attractive than individual shops for acquisition.

Nearly 20 years ago David Roberts, the co-founder and former Chairman of the Board for Caliber Collision Centers, wrote an article predicting the future of consolidations in the collision repair industry. It was entitled  Shop Consolidation: Is it Inevitable? Undoubtedly, Roberts said, “the answer is ‘yes.’ ”

Fast forward to the present time Roberts told Autobody News, “In the last 24 months nearly $3 billion of sales volume in the collision repair industry has changed ownership, which is 10 percent of the entire industry.”

Roberts is currently the Managing Director and Automotive Services Group team leader for FOCUS Investment Banking. He said there are several reasons for this sudden acceleration, including the availability of acquisition capital and the number of MSOs looking to sell. “There are more than 44 MSOs with $20 million or more in revenues with another 110 between $10 and $20 million.”

“Consolidators are looking to get bigger and achieve more scale, which has rewards for the acquirers as well as for insurers and consumers,” said Roberts, whose company has offices in Atlanta, Los Angeles, and Washington D.C.

“Large insurers have increasingly rewarded the best performing consolidators and large MSOs with more volume. Cars are repaired faster, with less hassle, and more predictable costs and quality.”

We asked Lillian Maimone, former CEO and co-founder of Marco’s Collision Centers, for her perspective on the industry. She was excited about her upcoming retirement, saying, “Marco and I have nothing to do and all day to do it, and we like it that way. It’s a wonderful sense of freedom and piece of mind.”

“Seeing the trends in the new cars and the new equipment that was necessary to repair these cars, I saw ourselves having a very difficult time competing against the consolidators. We knew it would cost my company hundreds of thousands of dollars in new equipment and training.”

While running Marco’s, which was established in 1972, Maimone said her primary function was ensuring the company was ready and geared for the future. “My focus was on dealing with possible threats and opportunities,” she said.

In order to stay informed about trends in the industry, Maimone regularly attended conferences, talked to industry leaders and listened closely  to what others were saying in forums such as the Mitchell webinars, for example.

“I went to Pepperdine’s business school [and used those skills in analyzing the industry.] I spent a lot of my time looking at what is happening in the industry and how it was affecting my company,” she said. Eventually she and husband Marco decided they “didn’t want to be in the game anymore.”

When employees asked why they sold, she explained, “We were the powerhouse in our area. We were the big fish in the little pond.” With the changes in the industry and larger MSOs coming in, she said they realized how increasingly difficult it would be to compete.

For example, the benefits they gained as a midsize DRP over the years were no comparison to the gains made by the national DRP programs. She invited her employees to consider the buying opportunities with the national DRP accounts, rather than local ones. “I figured whatever percentage of claims would drop as a result of that is enough to make me know that we will be in trouble,” she said.

“My employees are better off this way,” said Maimone. “Several have been given a promotion and better opportunities. I couldn’t give them that.”

Shortly after acquiring Marco’s, Service King reached an agreement to acquire Car West Auto Body, an MSO with seven shops in Northern California. With these additions as well as the 62 Sterling Collision Centers the company acquired earlier this year in April, Service King now has 191 shops in 20 states, including 18 in CA.

Service King, based in Dallas and founded nearly 40 years ago, told Autobody News that, due to company policy, they weren’t able to comment further until their acquisition of Carwest was finalized.

However, Service King released the following statement: “Our recent Sterling Autobody acquisition and Marco’s Collision Centers acquisition serve as a platform for our growth in the California market,” Chris Abraham, the CEO of Service King, said in the press release. “The addition of Car West and their 360 teammates will give us an even greater footprint in the heart of Silicon Valley. We are excited to have the team on board and look forward to delivering the Service King standard of exceptional customer service and high quality repairs in these communities.”

“People are selling because of many different reasons,” said Farzam Afshar, CEO of VeriFacts Automotive, a well-respected training company that describes itself as the industry’s only “independent onsite quality verification service and in-shop technician assessment provider.”

One reason, Afshar said, “is that they able to get a very high rate of return on their investment. In addition, business owners increasingly need to compete with consolidators in their backyard while vehicles are becoming more complex.

“Fixing cars is become more and more challenging than ever before,” said Afshar. “The vehicles are so different now and they may look the same outside but what’s inside is not the same.” With the standards set by the Insurance Institute for Highway Safety (IIHS) and the Corporate Average Fuel Economy, cars need to be lighter but still pass safety requirements.

Afshar said another challenge for those in collision repair is employing proper technicians with the right mind set. Afshar, who sold his MSO Sterling Automotive Group in 1998, said technology is moving so rapidly that detailed knowledge, training and equipment is becoming even more necessary for shops to be successful and he encourages technicians to be open-minded and learn new techniques that they’ve never used before.

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