Growth Opportunities in a Consolidating Industry - Collision Repair
•Download as PPTX, PDF•
2 likes•788 views
Discover five foolproof growth strategies to trounce the competition in 2016. Understand how consolidation will continue to impact the industry and how to compete taking advantage of the same tools and trends as the large consolidators.
Recommended
More Related Content
What's hot
What's hot (20)
Viewers also liked
Viewers also liked (20)
Similar to Growth Opportunities in a Consolidating Industry - Collision Repair
Similar to Growth Opportunities in a Consolidating Industry - Collision Repair (20)
Recently uploaded
Recently uploaded (20)
Growth Opportunities in a Consolidating Industry - Collision Repair
- 1. HELP MY INDUSTRY IS CONSOLIDATING Five foolproof growth strategies to trounce the competition in 2016 Brad Mewes Principal, Supplement brad.mewes@supp-co.com supp-co.com
- 2. Who is Brad Mewes? Brad Mewes, Principal • MBA Finance, UC Irvine • B.A. Economics, The George Washington University • Management Consulting, Equity Research, Investment Banking • Collision Repair Industry
- 3. What We Do We increase the value of your business using the tools of corporate finance. Buy Side (Acquisitions) Sell Side (Business Sale) CFO & Financial Advisory Strategy & Execution
- 4. Why We Do It The industry is rapidly evolving. What used to work no longer does.
- 5. State of the Industry Consolidation Curve Inorganic Growth What Not to Do Pricing Trends
- 6. STATE OF THE INDUSTRY The Current State of the Industry and Why Consolidation Will Likely Continue
- 8. “Within 10 years 2/3rd of the revenues of [the] industry will be captured by the four consolidators (or their successors if they merge).” Rex Green, Managing Director Automotive Aftermarket Investment Banking Jefferies LLC
- 9. “Eventually, they will do virtually all of the carrier-paid repairs.” Rex Green, Managing Director Automotive Aftermarket Investment Banking Jefferies LLC
- 10. Despair.com
- 11. Acquisitions 2013 to 11-9-15
- 12. History of Collision Consolidation Source: BB&T Capital; IBIS
- 13. As of 11-9-15
- 15. What is Private Equity???
- 20. CONSOLIDATION CURVE The big get bigger. How industry lifecycles impact competition and consolidation.
- 21. “I believe there will be more consolidation.” “Let’s face facts: There are a lot of independents out there. Dealerships are struggling in this environment. When you have a well-capitalized multishop operation, that creates more opportunity.” Steve Grimshaw, CEO Caliber Collision Centers July, 2010 Interview with FenderBender
- 22. “The industry has been fragmented and is in an overcapacity situation. Since the industry itself isn’t growing quickly, the better operators are taking market share from the marginal operators.” Duane Rousse, CEO ABRA Auto Body September, 2012 Interview with Bodyshop Business
- 23. “The trend is for consolidation. The biggest question is, who will be the successful consolidator? Cathy Bonner, Chairman Service King Collision Repair Center July, 2012 Interview with Bodyshop Business
- 25. Stage 1: Fragmentation Stage 2: Acquisitions Stage 3: Expansion Stage 4: Maturity Market Share 10% - 30% 15% - 45% 35% - 70% 70% - 90% Growth One-Off Acquisitions Platform Acquisitions Mega Deals & Greenfields Defense & Maintenance Strategy Build Revenues and Brand M&A and Integration Profitability & Scale Manage Regulatory Environment Stages of Consolidation
- 26. Economies of Scale: The reduction in average and marginal costs arising from an increase in size of an operating unit.
- 27. Investment Competitive Advantage Retained Earnings Acquisitions, Scale, Barriers to Entry Business Attracts Additional Capital The Virtuous Cycle of Investment
- 28. Options Stand Pat: Operational Excellence Grow: Develop Scale Sell: Realize Value Now (or transfer to the next generation).
- 29. INORGANIC GROWTH Build and Execute an Inorganic Growth Strategy
- 31. • Start with the end in mind • Build a team; both internally and externally • A proactive acquisition strategy • Develop non-auction deal flow • Evaluate your alternatives Five Inorganic Growth Success Factors
- 32. Start with the End in Mind
- 33. Build a Team, Internally and Externally
- 37. WHAT NOT TO DO Identify and avoid common buy side pitfalls
- 39. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 40. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 41. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 42. • Over-optimistic Projections • Worst Case Scenarios • Cash Flow vs Profit • Working Capital Needs • Under Capitalized / Insufficient Funding • Deals take on a life of their own Five Common Acquisition Mistakes
- 43. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 44. • Lack of Focus • Strategic Drift • Diligent Due Diligence • Existing Team Bandwidth Five Common Acquisition Mistakes
- 45. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 46. • It Really Is All About the People • Ego • Culture • New Team Integration • Who’s Responsible for What? Five Common Acquisition Mistakes
- 47. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 48. • Post Deal Integration • Employee Retention • Cost Synergies • Cash Needs • IT, HR, Accounting, Shared Services, etc. Five Common Acquisition Mistakes
- 49. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 50. • Over-optimistic Projections • Lack of Focus • It Really Is All About the People • Post Deal Integration • Ignore the Advisors Five Common Acquisition Mistakes
- 51. WHAT IS IT WORTH? Pricing Trends and Valuation Methods
- 54. A Primer on Valuation • EBITDA and Multiples • DCF, IRR & Hurdle Rates • Multiples & Comps • Strategic vs Financial • Control & Liquidity Premiums • BASF Collision Center Expansion Model
- 55. • Brand • Location / Market • Management Team • Facility • Operational Excellence Non Financial Premiums
- 56. Let’s Grow Together Contact: Supplement Financial Insight for the Automotive Professional 714.658.5518 brad.mewes@supp-co.com http://supp-co.com
Editor's Notes
- I’m going to start off with a stark message and not mince any words. “[quote]” Rex made this comment just a few months ago offshore at a large investor conference in Greece. I assume most of you know who the consolidators are, but in case you don’t….
- The sum of all these positive trends is to attract sophisticated investors to the industry. Public market investors, private equity investors, moguls and tycoons. In short, these guys (point to picture).
- But how do these guys work? Private Equity invests on behalf of institutional pensions, insurance companies, endowments, wealthy family offices and other aggregators of capital. Rather than investing in public markets, Private Equity Groups, or PEGs invest directly in privately held companies. And they have a lot of money to invest. The sum of all these positive trends is to attract sophisticated investors to the industry.
- Private equity generates substantial returns for investors by employing leverage, or debt. So while they may acquire a firm for $100 million, the way in which the acquire a company is funded through a combination of debt and equity. Much like buying a house where only 20% is put down, private equity firms leverage their banking relationships to acquire companies as well. But the real beauty of the private equity model is that while the company only grows 40% over 5 years, the value of the equity investment triples over the same time. While the rest of the world measures returns in percentages, private equity measures in multiples.
- Here is the reason why. Industries follow a predictable pattern of consolidation. While I wish I could claim this as my own, it is not. Actually a bunch of Harvard economists back in the early 2000s did a study on industry fragmentation and consolidation. They found that nearly every industry follows a very predictable pattern of consolidation, from highly fragmented to highly concentrated. What made this study even more interesting is that within each stage they identified key strategies that successful companies employed to not only survive but aggressively outgrow and outperform their competitors.
- What made this study even more interesting is that within each stage they identified key strategies that successful companies employed to not only survive but aggressively outgrow and outperform their competitors. And these strategies shift over time as the industry becomes more consolidated. But, at the core, the companies that were successful and survived industry consolidation focused on two key things: Developing Economies of Scale Developing a core competency in acquisitions and integrations to drive profitable growth In other words, intelligent inorganic growth
- Or in other words, the bigger you become the lower your average cost structure becomes. Economies of scale are the only way to create a true cost advantage in business.
- The virtuous cycle of investment is the idea that companies make an investment to develop some sort of competitive advantage, something that gives them an edge in the market place. As the leverages the competitive advantage the business attracts additional investors and capital, and often represents and opportunity to lower their cost of capital. This then leads to additional acquisitions, the development of scale, barriers to entry, etc, resulting in additional retained earnings and returns to investors, which logically leads to additional investment in the firm and the cycle repeats itself. This cycle of investment is the key reason that large companies continue to grow. It also is the reason there is a true first mover advantage when developing scale.
- In a consolidating industry, the big will continue to get bigger because they will continually reinvest in their business through acquisitions. That leaves the smaller companies with essentially three choices: Stand Pat Grow Sell Now I’m not going to get up here and tell you now is a great time to sell. I’m also not going to get up here and tell you how to run a better dealership. I am going to tell you how to build scale by developing an inorganic growth strategy.
- Inorganic growth is the process of expanding your business through acquisitions. It differs from organic growth in that it is based on expanding into new areas whereas organic growth is about increasing sales at existing locations. Specifically, inorganic growth gives a business the opportunity to supercharge growth. Inorganic growth allows a company the ability to leverage the past 10, 15, 20 years of effort of an existing businesses to grow.
- So, how does one become a leader in developing an inorganic growth strategy? Well, here are 5 key success factors we have identified.
- Start with the end in mind. Before you go down the path of developing an inorganic growth strategy you have to ask yourself what the objective is? Is it an offensive strategy or a defensive strategy? Is it a me too strategy? Is it an exit strategy or a moat creating strategy. Perhaps diversification or margin enhancing? These questions matter as they will dictate how you grow, where you grow, how you finance the transactions, etc. A lot of growth strategies are actually exit strategies in disguise. The quickest way to increase the enterprise value of your business is to roll up a few competitors at x multiple, pay down some debt, and sell for y multiple.
- Build a team, both internally and externally. Pursing an acquisitions based strategy requires an experienced management team. OEMs hold significant sway over the viability of an acquisition and prefer to see experienced leadership at the helm. Bring in management that has experience in acquisitions and integrations. As an owner, don’t expect to do it all on your own. If you are an owner that goes on vacation but doesn’t really go on vacation it may be appropriate to evaluate the capacity of your existing team to handle additional acquisition duties. Your external team is as important as your internal team. Acquisitions are complex and distracting. Integrations even more so. Successful acquisition strategies leverage outsourced advisors to get the deals done quickly and efficiently. M&A advisors, transaction attorneys, tax lawyers and CPAs are all indispensable in the process. The most successful acquiring firms rely heavily on these advisors. While it may seem expensive, the cost of a misstep in a multi-million dollar transaction is measured in multiples of the fees these advisors charge.
- Develop a Proactive Strategy Developing a proactive strategy that defines ideal acquisition targets, target markets, brands, business fit, size, etc. allow an acquirer to fit the acquisition to their strategy, rather than fitting their strategy to the acquisition. A proactive strategy provides flexibility to the buyer and also mitigates your risk and avoids acquisition drift. It keeps your team focused on delivering results that enhance shareholder value. It also develops a pipeline of targets, allowing a buyer to essentially “reverse auction” a seller, keeping pricing expectations in check.
- Develop Non Auction Deal Flow When you’re selling a company you want to do everything possible to develop an auction scenario where buyers compete to buy your firm. But as a buyer you want to do everything possible to minimize this scenario. Warren Buffett is a master at this. You rarely hear about Buffett acquiring a firm in competition with another firm. Instead these are always handshake quiet announcements. As in the Van Tuyl case, he spent years cultivating the relationships before the sale was consummated. Non auction deal flow is important in both price and terms. In a non-auction situation, as a buyer and careful listener, you can often provide creative deal structure and terms that meet the sellers needs in exchange for valuable pricing consideration. Perhaps the seller wants to ensure his son remains employed as GM for a number of years, or wishes to retain the real estate for the family. A savvy buyer can leverage these unique requests in a way that creates a mutually beneficial structure. Rather than waiting for a seller to come to you, go out to them. A number of studies suggest that as much of 80%of industry participants would be sellers “under the right circumstances”. New buyers often translate that to mean “at the right price”, but price is often not the only consideration, or even the primary consideration for a seller.
- Evaluate your alternatives. Using the tools of corporate finance includes evaluating multiple sources and uses of capital and choosing the lowest cost sources for the highest return uses. Are you certain that the investment in a specific project is the best use of your limited capital? Does acquiring both the real estate as well as the business generate the highest return on your invested capital? Have you considered the impact to your cash position of inventory, AR and AP policies. Have you considered sources of financing, uses of capital, and expected returns? In all these scenarios brining in a team experienced in mergers and acquisitions provides a lot of value.
- Overoptimistic growth scenarios are a common killer deals. The reality is that everyone wants a deal to get done, and often good numbers are created for a poor acquisition. To avoid overoptimistic growth projections it is important to consider: Worst Case Scenario. Look at multiple scenarios, including the worst case. Then develop a financial and strategic disaster strategy to mitigate that risk. Cash flow vs profit. Understand the difference between the two. Recognize that the cash required to get the deal done is separate from the cash required to float the business post transaction. A profitable transaction can also be a cash intensive transaction, so prepare accordingly. Working Capital Needs: Similar to cash, understand your cash conversion cycle, how many days the existing business will have to finance the working capital of the new business and plan accordingly. Under Capitalized. In short, ensure that a deal that looks good on paper doesn’t fall apart because you are underfunded post close.
- Lack of focus comes in three key areas. Strategic drift, Due Dilligence, and Existing team bandwidth. Strategic drift comes from not having a strategy, or moving away from your acquisition strategy. It can become a significant drain on the business, financially and operationally. But more important, diligent due diligence. Here’s the thing about due diligence. No one likes doing it, neither the buyer nor the seller. It involves calling the baby ugly. The buyer has to tell the seller why their business they worked hard on building for the past 15 20 years is not as amazing as they think it is. It is tedious, it is frustrating for all parties. So often it gets swept under the rug, shortcuts are taken, and it becomes a checklist rather than a value enhancing strategy. Effective buyers have disciplined due diligence processes that ensure the process is done efficiently and thoroughly.
- Poor cultural fit is one of the big killers of integrations. Culture often gets overlooked in an acquisition process. It is hard to quantify. We tend to be focused on hard numbers, financials, strategic fit, etc. The thing about culture, however, is that it does not magically change over night because there is a new owner. Culture takes years to build, and it also takes years to change. Smart buyers critically asses culture and build that into deal evaluations.
- Post deal integration. You may notice that the mistakes we’re highlighting here tend to arise post transaction. The most important part of the deal is post deal integration. As we discussed, a MAJOR reason for doing a deal is to leverage cost synergies and build economies of scale. But these things do not magically appear. People have to go out and get them. The best acquisitions have a detailed post deal integration plan in effect, to leverage cost synergies and team integration. OEM integration is especially important as well.
- Advisors bring experience and foresight to the transaction.
- A common way to establish value in the industry is to use net assets plus blue sky approach. It is common because it is a very straightforward easily understandable approach to valuation. But as a financial guy, I cringe when I hear buyers or sellers relying on multiples to determine value. The most common refrain in the industry is “multiple of what”. What that means, is not multiple of EBIT, EBITDA, sales, etc. Instead, what this means is that cash flow, or EBITDA, or any of those metrics, are often calculated in very different ways company to company. The accounting for real estate, personal expense, non discretionary expenses, etc. varies considerably from company to company. Using a simple multiple runs the risk of serious mis valuation Sophisticated buyers, i.e. private equity, institutional investors, Warren Buffett, Carl Ichan, etc. tend to use DCF and IRR to determine fair value. DCF stands for discounted cash flow and IRR stands for internal rate of return. Essentially, DCF is a financial calculations to determine the present value of a future stream of cash flows. IRR is a also a financial calculation that projects an expected return given certain assumptions. The reason this is important to understand as a buyer, and a seller, is that depending on the specific structure, assumptions and projections of a given firm, there is often a very justifiable business case to pay full value for a firm and still reach the hurdle rates required to justify paying a premium. As both a buyer and seller it is important to know the theoretical maximum purchase price irrespective of what the “going multiple” is at any given time. Multiples are designed to act as a sanity check, or a general comp, but not to drive specific valuation.