As vehicles and repair procedures become more complex, the single store generalist body shop model is becoming less sustainable.
The Collision Vision podcast, driven by Autobody News and hosted by Cole Strandberg, is exploring the three paths forward to increased profitability for such shops: specializing, scaling and selling.
Strandberg, who is also a managing director with FOCUS Investment Banking, specializing in M&A and raising capital for companies in the collision repair industry, spoke to two of his colleagues at FOCUS -- Giorgio Andonian, managing director, and Mike LeVasseur, senior advisor -- for a closer look at selling.
All three have been involved in selling either their own or their family's business. The discussion touched on every aspect of selling a collision repair business, including how to maximize value, the importance of culture fit, and the emotions involved in selling a business the owner may have had for a long time.
Trends in Collision Repair Selling
Andonian said consolidation activity is increasing in the industry, not just among the large MSOs, but among smaller ones trying to pick up single- or two-location businesses to grow their own presence.
“This goes across the entire automotive aftermarket post-COVID,” he said. “We've realized anything in the auto aftermarket is pretty much an essential business. It's required. It's stable, it's consistent, it's good with cash flows.”
Andonian said there is also “very limited succession planning” among owners, making collision repair a prime opportunity for investors to buy smaller businesses and make them part of something bigger.
Increased interest in buying collision repair businesses also brings increased valuations, Andonian pointed out.
LeVasseur said private equity interest in collision repair is another driving force.
“Private equity likes to back companies that can do well in this space. So there's where the consolidators are shining right now,” LeVasseur said.
Increased pressure on operators to keep up with OEM repair procedures and the equipment, staffing and training required to complete them, as well dealing with insurance companies, is also making selling more attractive to some owners, LeVasseur said.
When Is It the Right Time to Sell a Collision Repair Business?
Andonian said some owners decide to sell when they see a lot of other local businesses getting acquired, which means interest in their market is high -- and so are valuations.
“If everyone around you is sold, you're running out of potential buyers, and you'll end up having to put it on a listing website or brokerage, which will probably charge you higher fees,” Andonian said, adding those options also mean less effort goes into marketing the business.
“I'd always suggest to be ready. Have your books in order,” Andonian said.
LeVasseur added owners interested in selling should make sure their shops have “good curb appeal,” with friendly staff who greet customers and up to date equipment.
“Just like staging your house when you're going to sell it, always have your business ready to sell,” he said.
It comes down to supply and demand, LeVasseur said. Consolidators are more interested in multi-shop businesses with good processes and solid leadership, but there are fewer of those available to buy.
Strandberg agreed, saying there are 100-plus private equity groups on the sidelines looking to get into the collision repair industry, competing with the big national consolidators also trying to acquire those businesses.
There is less desire to purchase smaller single shops, but LeVasseur said there are still ways for a shop to cut a deal.
Maximizing Your Collision Repair Business Valuation
LeVasseur said the first thing to do is ensure the business has good management and a solid financial system. “That one feeds the other properly and feeds the shop and then it feeds into the bank,” he said.
The second thing to do is a “5S” -- sort, set, shine, standardize and sustain. “It's all the things we do to make our shop look like an operating room,” LeVasseur said.
Training is also key. “Get your guys I-CAR trained, get them OE trained, get them vendor trained,” LeVasseur said. “Then start to build the culture that we are the best. And this is why we're the best.”
Andonian said there is a misconception about what it means to clean up a small business’ financials.
“We're used to seeing all kinds of personal expenses running through the business, and that is completely OK,” he said. “Most buyers know to expect that.”
Accuracy is most important, “whether it's in your balance sheet or on your financial statement,” Andonian said. “You have to be able to say, this exact charge is for my personal vehicle. Being able to reconcile all of those is incredibly important.”
It’s also important to consider the business’ corporate structure. Andonian recommended discussing the possibility of a future sale with a financial advisor to make sure the business is properly structured.
“This is something that comes up way more often than it should, where there are some major negative tax ramifications for prospective sellers if they're not in the right structure,” he said.
Strandberg recommended working with a good CPA or hiring an in-house accounting team member or business attorney to ensure the financial health of the company, which will make it more seamless to sell, and likely bring a higher purchase price.
OEM Certifications
LeVasseur said DRPs often lead to a “repairer versus manufacturers” battle with an insurance company in the middle. OEM certifications, on the other hand, allows the shop to be more confident in the repair.
“The certification for each OEM, I think, is the wave of the future,” LeVasseur said. “Fix it the way the manufacturer wants it fixed.”
There can be some disadvantages, LeVasseur acknowledged.
Each OEM certification has different criteria, and “if you have two very similar programs, it could cost you a lot of extra money to buy their preferred equipment,” he said. “It's getting better than what it was. But that's one of the downfalls, where you have to over equip, you have to overtrain sometimes.
“But in the long run, the benefit is you repair the car properly, you get paid properly for what you do based on what the OEMs are directing, and that the cars are coming out properly, so you have the lack of the liability issue,” LeVasseur said.
The Selling Process
Andonian said the selling process with FOCUS takes six to nine months. It starts with FOCUS learning the business inside and out -- financials, processes, operations, equipment -- to be able to market the “story” of the business to potential buyers.
FOCUS produces a confidential memorandum detailing the business, as well as a “blind teaser” to introduce the business to buyers in a generic way. “Say we have a five-location MSO, with about this kind of range of, revenue and size,” he said.
Interested buyers have to sign an NDA and approval from the seller to receive the confidential memorandum.
“I think that's one of the most important things that we try and echo to our clients, is you have full control,” Andonian said. “You have full approval on everything that's in the materials, on who we talk to, who we don't talk to, and a veto any time we need to bring that in.”
Once a potential deal reaches the stage where the seller is receiving a letter of intent from a buyer, FOCUS works with the seller and their attorney in a negotiating period with the buyer.
“From there, it's a lot of work,” Andonian said. “It's the due diligence period where buyers are going to be asking for a lot of background information, financials, operations, history.”
Strandberg said beyond the sale price and the terms of the deal, it’s important sellers choose a buyer they are comfortable giving the keys.
LeVasseur said when he sold his own business, if he hadn’t had a broker like FOCUS, he “probably would have left some things on the table, whether it was money or opportunity.”
“I would say, yes, get yourself a broker, get yourself some advice and don't sell yourself short,” he said. “It's your life's work, so it's real important for you to tell that story to the broker or whoever you're working with to sell it.”
The Emotional Impact of Selling
LeVasseur said he was proud of the deal he made to sell his business, but about two weeks later -- when the new owner started making changes -- “I felt like somebody ripped my kids out from under me.”
“Owners usually don't do well, moving into the next phase, unless they have a completely open mind,” he said. “I think the trauma of that is not realized until after it's done.”
Strandberg said when his family sold their business to a private equity group, it was important to make sure their employees were taken care of, as well as the brand.
“I think finding the right partner and exiting at the right time for you really makes it more exciting than mournful,” he said, and recommended taking some time to celebrate the sale as a victory.
LeVasseur said it was “freeing” after the sale to no longer think about things that used to keep him up at night.
“Here's the word that I get a lot, including from my father and a few of our clients as well: it's weird,” Andonian said.
When his family sold their business, they walked away from it entirely. “It was a 100% equity sale,” Andonian said. “No continued involvement in the business on day one.”
Andonian said his dad didn’t know what to do with his life, but he eventually directed funds from the sale toward his passion for developing real estate.
“I tell him he's busier now than he ever was with the business, but it's in a much more relaxed state where he's enjoying everything,” Andonian said.
“Freedom is what that buys, and it's well earned,” Strandberg agreed.
Final Thoughts
“Buyers are hungry,” Andonian said. “The next couple of years is the best time to sell, if you're looking to maximize value.”
The industry is evolving so quickly, he added, single shop operators need to decide if they are going to specialize, grow or sell.
“Don't sell for fear,” LeVasseur added. “That's not the time to sell. Look at what you have and have a succession plan. Do you have somebody else that's going to come in? if you don't have any of that stuff, just get your business ready. Always have it staged and ready to go. And, when it comes time, just make it happen. Just call one of us. We'll get you there.”
Abby Andrews