Prepare Your Shop for the Rise of Consolidation
The increase in in-vehicle technology, the decline of do-it-yourselfers and changes in the economy have triggered a shift in the mechanical repair industry, says Tom Marx, CEO of Hart Marx Advisors. Another reason for the change, according to Marx, is the rise in consolidation and mergers in the auto repair shop space.
As more consumers become “do-it-for-me-ers” and look for repair shops to get work done, demand rises. Consolidators then start buying up shops to make more money faster. Independent shop owners have to look out for their businesses and plan accordingly, Marx says, regardless of whether they’re looking to sell the business or not. There’s no stopping consolidators; they will only continue to grow, Marx adds.
For that reason, shop owners need to understand what’s going on in the industry and the adverse impact shop consolidation may have on their own operations.
Marx, who has presented on the topic of consolidation for various industry organizations, spoke with Ratchet+Wrench and explained the key driving forces of mergers and acquisitions and how independent shop owners can better prepare their businesses.
Marx affirms that there are two types of investors that are motivating consolidations and acquisitions: strategic investors and financial investors.
“Motivations are very different between strategic and financial buyers,” Marx says.
Strategic investors, which account for 68 percent of the buyer share, are generally businesses that are buying other shops out because they want to expand their business at a faster rate than through organic sales. Financial investors, on the other hand, are driven by private equity firms that exist within the industry. Financial investors account for 13 percent of the buyer share. Those group have chosen to act as consolidators, Marx says, because they’ve discovered that larger businesses are worth more when they’re inevitably ready to sell the business.
What drives consolidation and promotes mergers and acquisitions? The first factor is reducing expenses, Marx says. Combining businesses, according to Marx, would eliminate duplicate costs and, in turn, save money. This would potentially make the business more profitable. The second driver of mergers and acquisitions activity is the elimination of competition.
“By buying out other businesses, you would have a broader reach and stronger position in the marketplace,” he says. “In some cases, the shop would be able to achieve a higher price point than a competitor that was selling at a lower cost.”
According to Marx, another driver is market advantages, which includes the addition of services, talent, technology and more that the shop may not have been able to afford on its own, but can if they are part of a larger company.
Consolidators have come to realize that they can buy up shops and expand them, Marx says. This gives them a branded presence in a broader marketplace, which is faster than going out and building a new shop.
Lower interest rates also promote mergers and acquisitions, but if the cost of capital increases, due to a hike in interest rates, this could actually be a detriment to those looking to buy or sell.
Knowing Your Market Value
Determining your market value provides a realistic dollar amount for how much you can sell your business—if that’s what you choose—and helps determine how your shop stacks up against competitors.
There are many ways to determine the value of a business. The first is through EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. EBITDA is used as a way to compare businesses on an equal basis, in addition to showing a shop owner how much their business makes versus how much it pay out. Marx notes that EBITDA is calculated by checking the net profit of your business on an annual basis and making the necessary adjustments. Once you’ve done this, you end up with what is called adjusted or normalized EBITDA.
For shop owners that aren’t looking to sell or be acquired, knowing your EBITDA is still important because it helps determine how profitable your business is. On the other hand, as Marx notes, an acquirer that wants to buy a shop is looking for that shop to have a 15–18 percent adjusted EBITDA.
From a small shop owner standpoint, another way to add value to a shop is by checking its highest revenue achieved. For example, if a shop is making $1 million in annual sales, then the shop owner may be able to sell the shop for that same amount regardless of whether or not the shop’s revenue was much smaller in previous years.
Preparing Your Shop
Without a doubt, there is a need for shop owners to understand forthcoming changes in the industry. This is critical to the success and value of their businesses, says Marx. For any shop owner looking to add value to his or her business, he says there are a number of steps that can be taken.
Look at the top-performing shops in your area and use them as a template for how you design and manage your business, he says. Pay close attention to the quality of the customer experience, shop accuracy and reliability, and the reputation your shop has for being timely and fairly priced.
The ability for a repair shop to grow and be successful is tied to its adoption of technology. Telematics, Marx foresees, will continue to grow its foothold in the industry and will serve as a major point for change. Shops will need to adapt and become familiar with this technology because it will add value to their shop and improve customer retention.
Even for shop owners that are not looking to sell or be acquired, it is still important to give your business a competitive edge, especially as the number of independent shops decreases over time, Marx says.
If you are considering selling your business, it’s important to start planning at least two to three years ahead of time. According to Marx, when an acquirer wants to buy a shop, the acquirer looks for a business that has experienced 3–6 percent annual growth over the past 3–5 years. Thus, you need to make sure everything is in order inside the shop and operationally.
“I think it’s important to be mindful of which buyer you would want to market your business to, if and when you decide to sell your business,” Marx says.