Independent collision repair shops consider factors like real estate, anticipated turnover and direct repair program compatibility when examining acquisition by a larger company, analysts recently told Autobody News.
Smaller shops should evaluate these and additional elements before executing any acquisition or shared-equity agreement with a bigger multiple-shop operator or private equity firm, according to consultants.
Last year saw 366 mergers and acquisitions in the automotive aftermarket totaling $11.2 billion, according to a January report by global investment bank Hamilton Lokey. The value was a five-year low, but the number of acquisitions was the second highest in five years, only surpassed by 2021’s 437 total transactions.
Even though the market is sagging partly due to high interest rates and tepid consumer sentiment, demand for nondiscretionary repairs will likely remain solid partly due to an aging and expanding pool of U.S. vehicles, according to an October report by advisory and investment firm Capstone Partners.
The average U.S. car was more than 12 years old in 2023, nearly one full year older than in 2014, the Capstone report stated. Further, the U.S. logged about 284 million registered cars in 2022, about 8 million more than in 2021, the report noted.
Buyers in the automotive aftermarket were more selective about paying premium valuations amid higher interest rates in 2023, but Capstone still noted the automotive aftermarket industry as a “hotbed” of investment activity, as the nondiscretionary nature of repair and maintenance insulates the industry from “broader macroeconomic headwinds.”
With the automotive aftermarket industry poised to grow, Autobody News interviewed several industry analysts to glean considerations mom-and-pop shops across the country should contemplate before deciding whether to be acquired by a larger entity.
Amass Three to Five Years of Stable Revenue and Performance Pre-Acquisition
Acquirers commonly use earnings before interest, taxes, depreciation and amortization (EBITDA) as a key measure of a target company’s health before striking an acquisition.
Having three to five years of strong EBITDA is a key indicator a company may be ready to move to acquisition, said Matt Lofton, director of coaching for automotive consulting firm Elite Worldwide.
A very important piece of that calculation is making sure major discretionary expenses are actually necessary; for instance, calculating the total cost of a major planned annual expense and comparing it with expected cash flow over the next five years can help companies calculate whether the investment is worthwhile or cuts too much into margin, Lofton said.
Such expenses can significantly devalue a company if they’re unnecessary, he said.
Lofton, who also owns StrutDaddy’s Complete Car Care in Roxbury, NC, advised shop owners to build their business from the outset as if it’s going to be acquired.
“Financially, the very first thing is making sure that you have good financial statements that go back at least five years,” he said. “If you're a larger entity and you can afford it … audited financial statements, certified financial statements always make acquisition a lot easier because you have a CPA that is certified. The findings are there, which means there's less due diligence on the buyer.”
Stable revenue and strong performance over roughly three to five years isn’t essential for repair shops to garner acquisition interest, but it generally helps put upward pressure on transaction values, noted George Kiwada, a partner at consulting firm Bain & Co. who also leads the organization’s automotive practice in North America.
“If you’ve got a longer book of business, that’s great,” he said. “Not just stable revenue, but are you already on some of the insurance program direct repair programs, the DRPs? Are you performing well in terms of cycle time, customer satisfaction, an ability to show [to acquirers], ‘I’ve already got a well-run shop, so you’re not just buying the actual real estate?’”
Services and DRPs Should Complement -- Not Duplicate -- Your Buyer’s Offerings
While having a diverse range of services can help companies balance their offerings, it can also be superfluous for potential acquirers that don’t have mechanical, glass or paintless dent repair, for example, as part of their business model, said Barry Neal, a senior partner and automotive consultant for global management consulting firm Roland Berger.
To be folded into the new firm, services must fit the parent company’s strategy and facilitate ease of integration, he said.
A larger MSO “should have some DRP management in place to help you optimize the way that you work with your customers,” Neal said. “And they should have a bit of a methodology already for how they do integration and drive it.”
Kiwada noted larger operators will help just-acquired shops to migrate their DRP relationships into the new framework.
“If it is one of the big national MSOs that is going to completely change the way the shop looks and feels to a customer, they're going to already have a playbook,” he said.
One shop owner indicated too many DRPs can actually work against a company’s success, particularly shops with OEM certs. VIVE Collision CEO and co-founder Vartan Jerian Jr. recently said on The Collision Vision podcast that some of the chain’s locations don’t have any DRPs, partly because it “creates an issue” to add too many DRPs to a facility with OEM certifications.
Determine Whether to Sell the Real Estate or Continue Leasing It Out Post-Acquisition
There are pros and cons to selling real estate as part of an acquisition, Lofton wrote in an email.
“The real estate is often the largest part of the business valuation, so the downside to not selling that along with the business is that the cash value of the sale will be reduced significantly,” he wrote. “The upside is that the owner still has residual income for years to come and still has an appreciating physical asset in their portfolio.”
Shops considering selling to a larger, corporate buyer can expect the latter to push for real estate to be included in the transaction, Lofton said.
“If you have a good location, you’re probably going to get contacted,” he said.
National collision repair companies prioritize new real estate or “greenfield,” particularly for purposes of regional expansion and overall density, according to Neal.
But shops should be mindful that some acquisitions may bring about the post-transaction shuttering of certain locations close to the company’s existing facilities, he noted.
It’s not uncommon to hear things from buyers like, “'These one or two actually are ones that we may want to exit because we already have another shop one or two miles from here,’” Neal said. A November report by automotive M&A advisory firm FOCUS Advisors noted as auto repair consolidators’ growth is accelerating, mom-and-pop shops are consistently closing.
For example, Crash Champions grew from six shops in 2017 to more than 600 shops in 2022, and Gerber Collision expanded from about 500 shops in 2017 to almost 800 by 2023, the report noted.
Meanwhile, the report added, “hundreds of small independent shops continue closing each year.”
Larger Firms Generally Retain Their Practices; Smaller Investors May Embrace Yours
The most major outfits are generally interested both in new real estate and bringing in their own management style post-acquisition, Kiwada said.
An “operationally rigorous” collision center like Caliber Collision installs its own standard operating procedures post-acquisition, which can be palatable for some independent shop owners who don’t mind sacrificing decision-making post-acquisition, and for shop owners exiting the industry, Kiwada said.
“If on the other hand, you want to stick around and you want to continue to make a lot of decisions, that's going to steer you to a different set of buyers,” he added. “There are a lot of smaller private equity firms who are very interested in participating in collision.”
Shops looking to scale to 10 to 20 locations over five to 10 years can find private equity firms that will “back a management team that they like” with capital to help them grow their business while maintaining some authority in the company, Kiwada said.
“You're going to give up some ownership to them,” he said. “But if both you and those investors are successful in the plan, then that can be a pretty lucrative idea as well.”
Operations will change post-acquisition. The questions are how much and to what degree.
Independent shops can vet several practices of potential acquirers, Neal said. Among other things, independent operators can examine the larger company’s opportunities for people development, including training for area and regional managers, as well as whether the larger entity has teams dedicated to calibration, scanning, OE tools or educational training, according to Neal.
He pointed out two general ends of the acquisition spectrum.
“Do I want to look to someone like a Quality Collision that typically retains the name and the brands of the companies that they buy and typically keeps more management in place?” Neal said. “Or am I looking to something with a stronger, more centralized operating model like a Crash Champions or a Caliber, where one of the first things they're going to be doing is wiping my name off the placard and putting up theirs and putting in their operating model?”
Capstone Managing Director Yogi Punjabi, lead contributor of the October report who advises companies on M&A in the automotive repair industry, told Autobody News many larger acquirers are looking for good technicians at independent shops who can professionally develop under the new company banner.
Though independent shop executives often don’t stay after an acquisition, mid- to senior-level managers -- such as store supervisors and area managers -- frequently have opportunities to move up and manage a wider region under a major consolidator, Punjabi noted.
“Outside of just operational synergies and geographic expansion and the like, they're really looking for good people and giving folks opportunities to move up within a much larger platform, as those businesses are obviously much larger than what they're acquiring,” Punjabi said. “That trend has certainly continued from a strategic standpoint.”
Consider Future Employee and Equipment Turnover
Companies with younger employees, cutting-edge equipment and consistent financial stability should probably keep ownership of their business over the next five years, Lofton said.
There’s another set of considerations on the flipside. Lofton painted a picture of several factors that could point independent shops to a potential sale.
“If your equipment is 20 years old, you're getting ready to have to reinvest in equipment, then your overhead’s getting ready to double,” he said. If “your lead technician is 55 years old and he's been with you for 20 years, and you're getting ready to have to replace him with a younger person in the open market, your overhead’s getting ready to go way up.”
In that situation, “it would be worth looking at any reasonable offer,” Lofton said.
Generally, it behooves shops to be patient in considering an acquisition, as the U.S. car parc continues steadily aging and expanding, Kiwada said.
Shops would ideally sell amid strong profits in a good interest rate environment, he added.
But the absence of such a circumstance shouldn’t stop shops from getting acquired if it’s the right time for shop owners, Kiwada said.
“I wouldn't say, ‘Hey, you should wait five, 10 years because your business will be worth more.’ You've probably got other stuff you want to do,” he said. At the same time, “you should be patient. You’re not trying to time the market here in that sense.”
