In a large number of discussions with shop owners over the past 4 months, there is a marked divergence among MSOs about their plans for the future. Lots who have a strong rebound in revenues, have strong balance sheets and managed their expenses throughout the pandemic have embarked on more aggressive expansion. Other medication is reconsidering their alternatives post-COVID-19, as their recovery proceeds more unevenly and more slowly than anticipated.
The former are carefully identifying expansion opportunities. One client is in the process of buying a dealer repair shop. Another client has dedicated to creating a large greenfield location in a rapidly expanding part of his market.
Among those who are reconsidering their future are a few who've been planning their exit opportunities for a long time but happen to be unwilling to pull the trigger. Other medication is exhausted: “I just do not have it within me to roll this rock in the mountain once more. COVID really took it of me.” Slow recovery seems to be a typical thread: “I'm finally ramping up, but only at that rate it will take me more than a year to get back to where I was.”
COVID may be the straw that broke the camel's back for many. Between pressures from insurance providers , additional investments for certifications and new equipment, and also the retirement of senior technicians, several operators have decided that it's time for you to let someone else take over the company.
For a lot of our clients, hard decision to market has already been made. Now they're spending their time preparing their companies for a positive exit with a more defined future for his or her technicians and managers.
One operator who is still located on the fence is concerned that the acquirer may not treat his employees as well as he does. Another is worried that because his children don't have any interest in the company, the household name around the door will be lost forever. These guys uncertain about whether he'll ever regain his pre-COVID profitability despite the fact that his revenues are returning strongly.
For operators who're reengaging positively using their businesses, many took the chance throughout the pandemic to revamp their operations, restructure their teams, improve their training and upgrade their facilities. One of our clients improved his margins by two points during COVID. His comment was, “I finally got around to doing things I'd wanted to do for 15 years.”
Undoubtedly, savvy operators are recognizing that remaining in the will need more capital, more scale and leadership. Some have very frankly recognized their very own limitations and decided to add senior management with capabilities greater than their very own. Among the questions we obtain is, “How must i compensate a senior leader with better management techniques than me?”
Our fact is to never be afraid to pay somebody really well if they are contributing more quality towards the business than you can do by yourself. A smart operator who intends to create equity value in the business to be harvested later on can't do it alone. So be ready to pay an ample salary and benefits as well as some equity or stock appreciation rights to that new leader.
Another area where operators are finding increasing require is in finance. For those growing past the $20 million mark in revenue with six or even more shops, really competent and experienced financial assistance is a necessity. One option is to outsource contractors. Part-time CFOs are an alternative. A very well qualified controller or CFO can relieve the owners of numerous administrative and financial burdens in a growing rapidly organization.
Both expanding operators and those who are thinking about exiting the business are asking many of the same questions.
In general, all acquirers look primarily at the trailing Twelve months revenues and EBITDA. However, our firm continues to be successful in helping acquirers realize that twelve month 2021 and first quarter 2021 are fairly indicative of the ability and health of the business.
In looking ahead to 2021, business performance in 2021 is a fairly reliable indication of in which the business will probably return or exceed.
However, as 2021 falls farther during the rear-view mirror, we believe valuations will be more according to 2021 results as well as their progression.
PPP loans can be tough for acquirers to investigate. Their effect on the business is admittedly hard to tease out. Highlighting excess labor which was retained during COVID in accordance with the PPP loans has been a successful way for our clients to interact with acquirers. However, we've also been successful treating PPP loans as grants, and thus income, which tend to more than offset the extra costs imposed by their forgiveness criteria.
Yes. We think there are opportunities in only about every sell to find and acquire other operators who're struggling or who just want to exit.
By acquiring another operator, you get immediate cash flow and EBITDA, an experienced staff, and an operating business. Fixing an underperforming business isn't simple but if the core staff and relationships are there, it's a more immediate return than beginning with scratch.
A brown- or greenfield startup is plenty of fun and challenging with infrastructure costs, hiring staff, obtaining licenses, and establishing new DRP relationships, but EBITDA is slow in developing.
For those operators who are acquiring, we've also seen creative methods for financing the acquisition, including seller financing and SBA loans that wrap both business and also the real estate into one loan.
Almost every large acquirer paused briefly to reassess their very own acquisition criteria and to stabilize their operations. Caliber, that has slowed its pace of acquisitions over the last year and a half, temporarily suspended rent payments to a quantity of its landlords. Additionally, it paused or eliminated some external and internal initiatives. However, Caliber restored both back rent and current payments to landlords in the midst of the pandemic and it has not wavered since.
Several of the slightly older super-regional acquirers such as Crash Champions and Classic Collision hardly slowed whatsoever. And new entrants Quality Collision and CollisionRight launched in the midst of the pandemic. CARSTAR and Fix Auto USA continued to add new franchisees although at a slower pace than pre-COVID. Smaller operators such as Mitchco, now as much as 4 locations in Florida, G&C with 19 locations in Northern California, and several others took benefit of local opportunities to continue growing their footprint.
In short, the additional competition for quality MSOs has kept buying interest and valuations high despite the pandemic.
What to watch
People ask us what we should are paying most attention to in the industry.
What we expect
Much from the volume is going to be driven by the expansion plans of those acquirers. Many will be driven by potential tax rate increases both in the national and also the state level. Most be driven by retirements of operators. But yet, many will be driven through the exits of struggling businesses.
