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Buying A Body Shop

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David Mulder is about to make it 20. That’s the number of body shops he’ll own after he acquires his next one this year. In 34 years of business, Mulder has bought, on average, a shop every eight months. And he’s acquired about as much wisdom as he has equipment and buildings while growing Collision Centers of America, based in Woodridge, Ill., from two locations in 1991 to 19 today.

“It’s a good model, as far as you can do it,” Mulder says of the strategy of growing through acquisitions. “We were carving out our niche.”
In spite of—and maybe even because of—the tight economy, Mulder is continuing to find opportunities to buy because there are a lot of good deals out there right now, and lots of people opting to get out of the business. “A recession has typically been a good time to expand our business,” Mulder says.

With banks tightening up their underwriting standards these days, one popular way to finance an acquisition is seller financing.

There are many things to consider when deciding whether to buy a body shop: buy an existing shop, build a new one, or convert an existing building into a shop; buy or lease the building; how to finance the transaction; how to incorporate new employees into your business; and learning how to delegate authority as your business inevitably expands. Mulder has been there, done it. Here we share some of his wisdom—along with advice from accountant Mark Ayers.

ARE YOU READY?

The first thing to consider is whether you and your company are truly ready to make an acquisition, says Ayers, a CPA with Macdonald Page & Co. in South Portland, Maine, and director of the firm’s automotive consulting group.

“You need to have your own house in order before you take another enterprise on,” Ayers says. “You have to make sure you’re financially stable, have plenty of funds, and have sufficient credit.”

In today’s economy, with commercial credit tightening up, banks and lenders are looking harder and longer at a company’s finances before deciding whether to loan money. It can take longer and be more difficult to secure capital, so it’s important to be prepared.
If you’re looking at buying your first body shop, it’s important to have a well-thought-out business plan in writing, Ayers says, adding that this is good even for companies that are acquiring additional locations to do this as well. “You should have a realistic financial projection,” he says.

WHERE TO LOOK   

The next step is figuring out where to learn about shops or locations that are for sale. For existing shops, there are a few different reasons they might be looking to sell—and those reasons will probably determine how you might hear about them. One reason a shop might be for sale is that it’s in distress, says Mulder, who has bought four such shops over his career. Shops in distress are likely to be listed for sale and you can find out about them from commercial brokers. 

Shops might also be put up for sale because an owner is looking to retire. With a large contingent of baby boomers nearing retirement age, more and more of their shops will be going on the market. One of the best ways to find out about this kind of shop early on, says Mulder, is from equipment suppliers, such as a paint supplier.

“He’s a great source of information,” Mulder says. “He might say, ‘Hey, I know a guy who wants to sell,’ and he can give you the contact information. It’s kind of a natural approach instead of cold calling.”

WHAT TO LOOK FOR

There are many different aspects to consider when deciding what makes a shop good for a company to acquire, Mulder says. Throughout his career, different types of shops have appealed to him for different reasons. Geography has often been a significant factor.

Early on, his company had shops mostly in the western Chicago metro area, so he expanded north, and then south. “We wanted to start spreading our wings,” Mulder said. “There’s big business in Chicago. We could probably keep adding shops until my youngest child is a grandfather and not run out of turf.”

Mulder once found a shop for sale west of Chicago. It was the only shop in town, so Mulder knew it was a good bet. He ended up offering the owner 50 percent more than the owner had originally asked to secure the deal.

Another consideration for Mulder is the property’s location within the town. “Sometimes you can find a sleeper piece of real estate,” he says of a location that maybe hasn’t worked for other businesses and is therefore priced affordably, but could work great for a body shop.
If you’re interested in converting another business into a body shop, you’ll have to deal with zoning and ordinances, which means getting involved with city council.

“When you start something new, the sale is usually subject to the approval of the village,” Mulder says. He has done five of these types of acquisitions during his career and says they can be worth it though they’re more work.

Mulder also says that moving into a new geographic location requires more than just a commitment to the shop. It also requires a commitment to the community you’re moving into. “You don’t just invade a community,” says Mulder, whose company has a marketing department to take care of this part of the business. “You have to prove that you’re trustworthy to do business with, and that means making connections, getting involved in the Chamber of Commerce, knocking on dealership doors to let them know you’re in town.”

 

GET OTHERS INVOLVED EARLY

It’s important to get your accountant, attorney or consultant involved in the acquisition process earlier rather than later, Ayers says.
“It’s not a good time to call your accountant when you’re one step away from the deal being done,” Ayers says. “If you’re just looking, get your financial projections in order. Once you identify the shop or location you’re interested in, get your accountant or attorney involved. You don’t want to spend a lot of time and money on the process and then have it not work out.”

FINANCING OPTIONS

With banks tightening up their underwriting standards these days, one popular way to finance an acquisition is seller financing, says Ayers. With this type of deal, the seller agrees to take payments in installments, rather than getting all the money up front in what’s usually a loan from the bank. This works particularly well with shops whose owners are retiring, and who could use a steady income stream.

Mulder likes shops that are willing to do seller financing. In one case, he purchased a shop and equipment for $200,000 by paying $100,000 up front, then holding a five-year note on reasonable terms for the balance. “There are less taxes on the front end, and they get a little stream of income.”

In another case, the owner was interested in scaling back his involvement in the shop, but he wanted to continue working part-time to get some income and health insurance.

When writing up the contract, it’s important to have a non-compete covenant in place, Ayers says. That means the seller can’t go set up a shop a mile away and take your employees and customers from you.

Another thing to consider is whether to buy or lease the property your new shop is on. Mulder says he always tries to buy the property because it’s easier to negotiate the terms of the financing. “If you’re buying the building, [the seller] will often relax their price structure,” he says. Buying is also a good way to get an income stream, because you can lease part of the property to another business, as Mulder does at a few locations. 

MARRYING CULTURES

When acquiring an existing body shop, it’s essential to consider the challenges of combining the cultures of two different companies. This is true of both employees and customers. Mulder says that he expects to lose at least some employees and customers when he acquires a shop.

“If it’s a little Ma and Pa shop, a lot of times you lose most of the customers unless you really work hard at it, and employees are the same way,” says Mulder. “They’re used to working someone else’s system. We try to keep [the employees] but sometimes you’re holding them to a higher accountability and you lose some folks that way.”

Mulder says the key to whether an employee will stick with his company after the acquisition is open-mindedness. “We try to train people if they want to learn,” he says. “If they show a desire to learn, then they’re going to be a good fit.”

Mulder gives employees a transition period so the change isn’t such a shock. For example, if the shop has different pay system than Mulder does, he’ll pay them on their old system for 90 days. However, after that they have to switch over to Mulder’s system, and no matter how good they might be at their job, Mulder doesn’t negotiate that. “We don’t usually tamper with things like workflow and clean-up systems, but we have a system, and they have to get used to that.”

LEARNING TO GROW

As a small business owner adds locations, he has to learn how to manage a company that’s growing. Presumably, if a company is in an acquisition mode, it’s changing from being a small business to medium-sized business, or even a large company like Mulder has.

Running medium- to large-sized body shops takes a different management style than just operating one or a couple locations, says Ayers. “With a small shop, the owner can keep his or her finger on the pulse of the shop and not have to delegate,” he says. “Once you’ve got multiple locations, you have to involve other managers and delegate authority to them.”

Ayers says that when he’s consulting with a business that’s growing, he recommends that it has at least one off-site planning session for half a day to analyze what’s going on with the business and what direction the owners want to take it in. “It’s an opportunity to get away from the business for a few hours and develop a good communication strategy,” Ayers says. “When management gets spread out, communication becomes more difficult, but more important, too.”

Jennifer Niemela is a frequent contributor to FenderBender. Last month she wrote about how to find the right consultant.

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