What to Consider When Approached by a Consolidator
Jim Keller has witnessed collision repair industry consolidation from virtually every angle.
He opened his first shop in 1981, began consolidating shops four years later, and currently serves as the president of the 1 Collision Network—a 40-location business based out of Milwaukee.
As such, Keller has no qualms about offering advice to independent shop owners who have been approached by a consolidator. After all, he has seen a few colleagues soured by the experience.
“I have witnessed shop owners that I know sell to consolidators, retire, and enjoy life,” Keller says. “And, I have seen friends sell and not have a positive outcome. It won’t always be a win-win.”
Ron Reichen, an Oregon shop owner with 45 years of experience, notes that consolidators typically have vast business experience and legal savvy, with expert accountants at their disposal. Therefore, he adds, those powerful companies know how to protect themselves in business transactions.
All businesses are sold at some point, so how can an independent shop operator protect themselves when approached by a consolidator? There are countless variables to consider. Below, industry veterans with nearly 85 years of combined experience offer their advice.
1. Seek consultation.
Just as shop owners would typically seek feedback from colleagues before investing in a welder or a 3-D measuring machine, it’s advisable to speak with others throughout the industry before selling a business. Speak with others who have dealt with the consolidator in question, for example. And, Reichen suggests, consult with a competent law firm and accountant.
Small shop owners need to do as much due diligence as they can before approaching the negotiating table.
“Don’t think that you can do it yourself, without having a good CPA and a good business attorney,” says Reichen, the president of three Precision Body & Paint locations. “It’s not going to end well if you don’t have good representation—that’s Russion roulette.
“Definitely get a good attorney that has a track record of negotiating business sales,” adds the Oregon shop owner, who has been approached by consolidators more than once in his career.
2. Consider all options.
Independent shop owners who are considering changing their business model are faced with the following options, Keller notes:
- Continue operating as an independent
- Take on a partner
- Affiliate with a network or franchise
- Sell to a consolidator
And partnering with a consolidator, network, or franchise certainly can bear fruit for independents, provided they enter the business arrangement on solid financial ground.
“For a shop doing $2 million per year or more in sales and perhaps having multiple locations,” Keller says, “affiliating with a network or franchise makes great sense, (due to) the marketing support, insurance connectivity, OEM relationships, large-scale vendor relationships, coupled with training and recruiting …”
And, he adds, “if a shop doesn’t have a succession plan, selling to a consolidator can be great.”
3. Remember the value of real estate.
Much of the equity an independent shop owner has in their business portfolio pertains to their real estate, Keller explains. And, he notes, many consolidators don’t want to purchase real estate.
“Shop owners should think through, very carefully, (when) making a deal with a
consolidator, to lease the building after the sale,” he says. “In many cases, it makes a great business deal to lease the building you own for anywhere from five to 15 years.”
Reichen suggests that, if negotiating with a consolidator, that shop owners completely separate their business operations from “the dirt” that a location sits on.
“That should be two separate negotiations, from the get-go,” Reichen says. “Because (consolidators’) attorneys and CPAs like to blur those lines. So I would absolutely recommend that they look at those as separate entities.”
4. Understand the buyer’s business model.
Before any business transaction, it’s valuable to consider the other party’s motives.
And, when an independent shop operator is approached by a potential buyer, an MSO may simply want to add to its profitability, while a national consolidator might have bigger plans. All that should be considered prior to negotiations.
“If it’s a national consolidator, they’re looking to build their brand and get a return on investment,” says Keller, who has closely monitored consolidation over the last 25 years. “The primary purpose of an investment company (is) to increase the value of their company and provide shareholders value and returns.”
It’s also important to consider the future of a shop’s culture following such a transaction. In a merger or acquisition, existing staff members are often retained, for example. But a consolidator, Keller notes, has its own SOPs, product usage and the like, that it will plan on implementing.
5. Consider your next step in life.
The goal when making any business transaction is to leave the deal in a better position than when you were first approached with it. So, it’s imperative to consider how selling your shop might position you for what’s next.
Consider your goals, and how they might be impacted by major professional upheaval.
“If you are offered a position in an acquisition, understand that your world will change,” Keller says. “The consolidator will have their own operating procedures, and people in positions that you won’t always be in agreement with.”
It’s also important to consider what you’ll do, as a longtime shop operator, with your assets when you pass on, Reichen says.
“Always bear in mind what the tax implications are,” the Oregon businessman says. “Once (a shop sale) is all done and has gone through, you’ve worked years to build your nest egg, and you want to leave something for your family.”