Guest only column: Body shop responses to COVID-19 include resilience, achievement
Editor’s Note: Focus Advisors CEO David Roberts recently wrote an analysis of the state of the crash industry as the COVID-19 pandemic hopefully comes to an end. At that time when repairers could catch their breath and take stock, his perspective offers both MSOs and repairers at one location a sense of where the market might go, changes to a business model that might be needed – and competition. feeling.
By David Roberts
In the dozens of discussions with traders over the past four months, there is marked divergence among MSOs as to their plans for the future. Many of those experiencing a strong rebound in income, have strong balance sheets, and have managed their spending throughout the pandemic have embarked on more aggressive expansion. Others are reconsidering their alternatives after COVID-19, as their recovery is proceeding more unevenly and slower than expected.
The former carefully identify opportunities for expansion. A customer is buying a body shop. Another client has committed to building a large, blank site in a growing part of their market.
Among those who reconsider their future, there are some who have been planning their exit opportunities for a long time but are reluctant to pull the trigger. Others are exhausted: “I just don’t have the courage to roll that rock once more up the mountain. COVID really took me away. The slowness of recovery seems to be a common thread: “I am finally ramping up, but at this rate, it will take me over a year to get back to where I was.”
COVID may be the straw that broke the camel’s back for some. Between the pressures exerted by the insurance companies (notably the abandonment by State Farm or USAA), the additional investments in certifications and new equipment, and the retirement of senior technicians, several operators have decided that it it was time to let someone else take over the business.
For some of our clients, the difficult decision to sell has already been made. Now they are spending their time preparing their business for a positive exit with a more defined future for their technicians and managers.
A trader who is always sitting on the fence is worried that an acquirer will treat his employees as well as him. Another worries that because his children are not interested in the business, the last name on the door will be lost forever. Another does not know if he will ever regain his pre-COVID profitability even if his income comes back strongly.
For operators who are re-engaging positively in their activities, many have taken the opportunity during the pandemic to reorganize their operations, restructure their teams, improve their training and modernize their facilities. One of our customers improved their margins by two points during COVID. His comment was, “I’ve finally managed to do things I’ve wanted to do for 15 years.”
There is no doubt that savvy operators recognize that staying in the industry will require more capital, more scale and better leadership. Some have quite frankly recognized their own limitations and have decided to add senior executives with greater abilities than theirs. One of the questions we ask ourselves is, “How should I pay a leader with better management skills than me?”
Our response is to never be afraid to pay someone really well if they add more value to the business than you can on your own. A smart trader who intends to create equity value in the business to be reaped in the future cannot do it alone. So be prepared to pay a generous salary and benefits as well as capital or stock appreciation rights to this new leader.
Another area in which operators find a growing need is that of finance. For those whose turnover exceeds $ 20 million with six or more stores, truly knowledgeable and experienced financial help is a necessity. One option is to outsource the subcontractors. Part-time CFOs are an alternative. A truly well-trained controller or CFO can relieve owners of a lot of the administrative and financial burdens in a rapidly growing organization.
Questions if you are selling or expanding
Expanding operators and those considering leaving the company are asking many of the same questions.
What about evaluations? How much will my COVID numbers hurt me? Will I be considered valued on my 2019 numbers or on my 2020 numbers?
In general, all acquirers focus on revenue and EBITDA for the past 12 months. However, our company has been successful in helping acquirers understand that the full year 2019 and the first quarter of 2021 are quite indicative of the capacity and health of the business.
Looking ahead to 2021, the performance of the business in 2019 is a pretty reliable indication of where the business will return or likely overtake.
However, as 2019 rolls back in the mirror, we believe the ratings will be based more on the 2021 results and their progress.
How do acquirers view EBITDA during the PPP loan period?
PPP loans can be difficult for acquirers to analyze. Their impact on the company is admittedly difficult to disentangle. Highlighting the excess workforce that was retained during COVID in accordance with PPP loans has been an effective way for our clients to engage with acquirers. However, we have also been successful in treating PPP (and EIDL) loans as grants, and therefore income, which tend to more than offset the additional costs imposed by their forgiveness criteria.
Is it a good idea to grow taller now?
Yes. We believe there are opportunities in just about any market to find and acquire other operators who are struggling or just want to quit.
By acquiring another operator, you get immediate cash flow and (hopefully) EBITDA, trained staff, and an operational business. Fixing an underperforming business isn’t easy, but if the core staff and relationships are there, it’s a more immediate return than starting from scratch.
A brown- or greenfield start-up is a lot of fun and challenging with infrastructure costs, hiring staff, getting licenses, and building new DRP relationships, but EBITDA is slow to grow.
For traders who are acquiring, we have also seen creative methods of financing the purchase, including seller financing and SBA loans that bundle both business and real estate into one loan.
Almost all of the major acquirers paused briefly to reassess their own acquisition criteria and stabilize their operations. Caliber, which has slowed its pace of acquisitions for a year and a half, has temporarily suspended rental payments to several of its owners. He also paused or eliminated some internal and external initiatives. However, Caliber reinstated both rent arrears and current payments to landlords amid the pandemic and has not eased since.
Several of the more seasoned super-regional buyers such as Crash Champions and Classic Collision have barely slowed down. And the new entrants Quality Collision and CollisionRight were launched in the midst of the pandemic. CARSTAR and Fix Auto USA continued to add new franchisees, albeit at a slower pace than before COVID. Smaller operators such as Mitchco, now up to 4 locations in Florida, G&C with 19 locations in Northern California, and several others have taken advantage of local opportunities to continue to grow their footprint.
In short, the additional competition for quality MSOs has kept buying interest and ratings high despite the pandemic.
What to watch
People ask us what we pay the most attention to in the industry.
Number 1: OE requirements and certifications. We believe OEMs are increasingly recognizing that access to technologically complex parts and certifications gives them more ways to improve their OEM parts sales and margins. A $ 4,500 headlight with a patented sensor included is a not-so-subtle way to keep parts profitable.
Number 2: consolidation. We expect the acceleration of consolidation to continue.
Number 3: Diversification. Caliber has focused on its diversification into glass, service and ADAS work. LKQ has added ADAS services to its offerings and is acquiring smaller ADAS businesses. LKQ now affirms that with the creation of the subsidiary Elitek, it is the largest American mobile telephony provider. Regional operators also create their own ADAS companies.
Number 4: Changes in DRP networks. The growth in benchmarks accompanying the gradual growth in market share, the changes and eliminations of GEICO DRP in State Farm and USAA DRP have impacted both large and small MSO companies. Replacing State Farm volumes with smaller DRPs cannot make up the difference.
Number 5: Evolution of the insurance market share. Considering the remarkable changes among auto insurers over the past 10 years, the most surprising and profound impact is how direct marketers – GEICO and Progressive – have increased their total market share. . These two companies have gone from 16% to 27% of all premiums written in the United States in a decade. The top 10 insurers have grown to almost 75% of all vehicles insured. More and more influence is shifting to fewer and fewer insurers.
What we expect
Miles traveled: We believe road travel will make a comeback. People are so eager to move around the country. They still can’t travel to Canada or Mexico very easily, so expect summer travel to the United States to exceed 2019 levels.
Many more transactions: With two active national consolidators, five super-regional MSOs and at least six private equity firms still looking for platforms, we expect to see many more deals in 2021 and 2022.
Much of the volume will be driven by the expansion plans of these acquirers. Some will be motivated by potential increases in tax rates at both the national and state levels. Many will be motivated by the retirements of operators. And unfortunately, many will be driven by the exits of struggling companies.
David Roberts is Managing Director of Focus Advisors.
David Roberts, specialist advisers, May 13, 2021
Some repairers may have emerged from the COVID-19 pandemic under pressure, while others may be ready to throw in the towel. (alexsl / iStock)
Focus Advisors predicted body shop buyers would rate them based on the first quarter of 2020 and 2019 – not the pandemic quarters of 2020 (matejmo / iStock)