Business selling and acquisition in our industry requires some careful consideration.

Brad Mewes is the founder and Principal at Supplement Advisory, which provides strategic and financial advisory services to the automotive aftermarket industry. With an extensive background in collision repair, as well corporate finance and M&A (mergers and acquisitions) he is able to understand the needs and objectives of business owners as well as well as the financing options available and solutions that work effectively for lenders. With consolidation, mergers and acquisitions continuing to be at the forefront of the collision repair industry, we asked him to share some of his thoughts on the subject.

Do you think it’s important for collision operators (and businesses in general) to understand that there’s a distinct difference between growth and value when it comes to their operations?

Value is probably one of the most overused terms in business today and it means lots of different things to different people. When we refer to growth for growth’s sake, that can be dangerous and there are numerous cases where companies have grown in an unsustainable away and are unable to generate lasting value for their stakeholders. One of the ways we work with our clients is by focusing on value-enhancing activities, in other words, how do you build a valuable business?

Can you provide some examples?

Many small business owners try to focus growth on increasing revenue or profits by X amount of dollars. The trouble is, that thought process doesn’t often create value in their business. Financial growth is important but perhaps even more so, are systems and process, i.e. how dependent is the business on its owner for operating procedures or decision making? Also, how does the company position itself in the marketplace? How is it differentiated and unique? These can be incredible drivers for adding value.

From your perspective, what steps can a collision repair business take to make its business attractive to potential buyers?

One of the things I often ask business owners that are looking to sell is, think from a potential buyer’s perspective. What would attract you to this particular business and what wouldn’t? Most buyers are looking to acquire an asset that has the ability to do more than what it currently is doing, and they will be looking at factors such as how dependent the business is on the owner. If the owner has made every key decision for the last 15 years, that’s a risky proposition for a buyer. Alternatively, if the business empowers its staff to make decisions and has clearly defined systems and procedures in place, it becomes much more of a plug n’ play proposition for a buyer.

What are some of the reasons why mergers and acquisitions fail?

There are many different reasons, but sometimes a deal might fail because of long-term contractual agreements.

Let’s say for example that a collision shop entered into an agreement with a paint supplier to provide paint for five years and received a rebate up front. If the owners of the shop decide they want to sell the business after two years, that agreement is still in place, and they will have to pay back a lot of money to the paint company to get out of the agreement, money they were hoping would be made on the sale of the business.

In most cases, a buyer isn’t willing to assume a seller’s obligations, whether it be long-term contracts, tax obligations or owner or client concentration risk. Client concentration risk (where a shop has been doing 60 percent of sales with one key client for, say, 10 years) can be a big deal breaker.

We’ve seen a lot of collision industry growth in both Canada and the U.S. in recent years through store acquisitions and the growth in banners and franchise networks. What, in your view, have been some of the key drivers for this in both markets?

I think there have been several key drivers. First, the industry is still highly fragmented. The second is that there are some large, well-capitalized players for which acquisitions represent an attractive return on investment. Another is that many collision shop owners are reaching retirement age, while a fourth is that there is a lot of capital available and a lot of money invested in private equity and debt markets.

The combination of these factors has led to an explosion in consolidation and probably more acquisitions going forward. I don’t see that trend changing anytime soon.