Perspective—that’s what Michael Caruso felt he was missing.
He spent the last week of February in a hollow daze. He signed the papers on Friday, and, afterward, as he pulled out of the parking lot, it hit him for the first time: He no longer owned Central Collision Center, the Chicagoland multi-shop operation that was his life’s work.
“[The business] is my baby, the thing I started when I was 23 years old,” he says. “I was surprised by how sad I felt.”
So, he went to see Sydney.
When Caruso held her, looking down at the face of his granddaughter—his first grandchild—that empty feeling washed away.
Perspective.
“I think I really needed that reminder,” he says. “This decision was about securing everyone’s future; it wasn’t about me and how I felt about it. We had to make the decision that was right for everyone, and would be best long term.
“[Sydney] was born right in the middle of all this [on Feb. 25]. It couldn’t have been a better distraction. I could look down at my granddaughter and know that I did everything I could to help her future. What more can I do?”
Caruso, a past FenderBender Award winner, sold his 34-year-old, six-shop business to Service King in a deal that closed Feb. 27. It was an unexpected twist in the transition of the business he built—the business that his children still work in.
“We always had a succession plan in place, but it never included selling it,” Caruso says. Transitioning a collision repair business is not a simple process, says John Walcher of Veritas Advisors Inc., especially given the challenges of the modern industry. Walcher has guided numerous shops through the trials and tribulations of mergers, acquisitions, and successions. And if there’s one things he’s learned, it’s that no two situations are the same.
“You have to find what works best for you, your business, your family, your circumstances,” he says. “You need a plan, you need to execute that plan—but it all has to be built around what will work best for you.”
The collision repair industry is in the midst of a transition itself: an aging owner demographic; increased acquisition and consolidation; and a shift toward a more sophisticated, technology-driven repair process. It’s important to fully develop and implement a long-term strategy for your business, Walcher says, whether you’re a new owner at the beginning of your journey, or looking toward retirement. The industry is too competitive and your business too important to leave it to chance. If you haven’t already started planning your business’s future, he adds, then you’re well behind.
A TRANSITION, PART I: BRIGHT BEGINNINGS
It wasn’t exactly a negotiating table, but Tony and Sharon Kempen sat across from Pat and Sandy Arnold until the early morning hours, hammering out the parameters of the deal.
Purchasing a business can be a time-consuming, detail-focused process. The minutiae can often wear on those involved.
Not so much with the Kempens and Arnolds.
“My first job was working for my aunt and uncle (the Arnolds) at their shop,” Tony Kempen says. “And my wife and I are very close with them. We vacation together every year. That’s actually where all of this came about—on vacation.”
Tony was an engineer at the time, Sharon an accountant and human resources specialist, both working for a soon-to be-closed, Wisconsin-based manufacturing company. They’d been through this before, having to jump from company to
company as the American manufacturing industry swooned over the last decade. As each factory closed, they were more and more concerned about their future, weary of an industry that seemed to weaken each year. Gearing up for what they assumed would be a lengthy, arduous job hunt, the Kempens joined the Arnolds on their annual trip in mid-2012.
And as it turned out, the Kempens weren’t the only ones contemplating their futures.
“We were just talking and talking about how we were tired of moving and we weren’t sure what we were going to do,” Sharon says.
“And Pat just kind of nonchalantly says, ‘Well, if you ever want a career in the collision repair industry, I have the shop for you. Let’s talk about it,’” Tony adds.
So, they did, and as it turned out, the Arnolds had a transition plan in mind—they were just looking for a new ownership team.
The plan was simple: The Arnolds would slowly transition out of ownership of their shop, Pat’s CARSTAR in Plover, Wis., while training the Kempens on all aspects of the business. Once the Kempens were fully prepared as a managerial team, the Arnolds would shift into minor roles in the shop, serving as mentors and providing some needed assistance (Sandy Arnold would continue with her bookkeeping role, and Pat would stay on part-time, overseeing quality control on the shop floor).
That vacation was in August. On Jan. 1, 2013, the Kempens were full owners of the business.
Business Valuations
John Walcher of Veritas Advisors Inc. has guided numerous shops through the trials and tribulations of mergers, acquisitions, and successions. Walcher says that determining a business’s valuation can be tricky. Most acquisitions do not report the amount a shop was bought or sold for, and private valuations are not always accurate (though they can give you a good baseline, he says). Really, there are only two ways to know how much your business is truly worth to a buyer:
Let the market figure it out. A business is only worth what someone is willing to pay, Walcher says. Accept bids, and see where your shop falls.
Take in competing/multiple bids. See where the competition stacks up, and where that puts your business.
A TRANSITION, PART II: FINDING A COMPETITIVE EDGE
The transition options that both Caruso and the Kempens took part in are the two most common in the collision repair industry, Walcher says. The Kempens’ plan is certainly thought of as the more “traditional” route, but it’s getting rarer and rarer.
Consolidation and acquisition have dominated headlines for the last decade; the large multi-shop operations continue to expand and grow market share.
According to the most recent numbers from The Romans Group LLC, 2014 was a frantic year for industry consolidation. Eighteen MSOs were bought and sold, totaling 184 locations and $515 million in annual revenue, nearly double the amount of repair dollars acquired the year prior (roughly $265 million in 2013). And the largest of the MSOs continue to dominate the industry’s $31.4 billion nationwide market. There were 68 MSOs that did $20 million or more in total, company-wide sales in 2013, accounting for 15.5 percent of the national market share. In all, 23.6 percent of the industry’s total sales currently comes from MSOs and franchise networks that do more than $10 million per year in sales. These numbers signal a sharp change in the industry, as the total number of collision repair facilities nationwide has shrunk (from just over 45,000 in 2006 to roughly 34,400 by the end of 2013) and the average annual sales per location has increased (from roughly $666,000 to $901,163).
Bottom line: Independent, single-location repair businesses are still plentiful, but many are finding it increasingly more difficult to compete with the resources of the country’s large MSOs.
“We see that, and it’s pretty obvious that MSOs are growing rapidly,” says Chris Andreoli of Progressive Insurance. “For us, from an insurance standpoint, it’s all about performance, and there are still plenty of independents that do a great job. Do certain segments of the industry have clear advantages in resources and things to perform better? Sure, they definitely do, but that doesn’t mean that independents can’t still compete.”
Caruso is well aware of all these numbers. In fact, Central Collision, prior to the sale, nearly fell into the category of an MSO with annual sales above $20 million (it did $19 million in 2014). The business was healthy, thriving at a level not yet seen in its history. And Caruso was proud of the business’s hard-earned reputation as a consolidator alternative—both for consumers and insurers—in a major metro market.
But the industry has hit a crucial juncture, he says, and he began formulating the best way to carry on a company, long-term, to benefit not only his family but the 92 team members (Caruso “hates” the word employees, he says) he had at his six stores.
“Forget about consolidation for a moment, and just look at the roles of repairers today,” he says. “This is a time of real transition. Vehicles are getting more and more complex, and the level of training and education and tooling and equipment that’s required to be competitive—that will be required to stay competitive—is so much higher today and will only grow. You have to find and keep that competitive edge.
“It can’t be just about what we’re doing right now to maintain our market, but what are we going to do to maintain and grow that in the next 10 years? Twenty years? What do we have to do to make sure this business provides for all 92 of these families?”
A TRANSITION, PART III: FORMULATING A FUTURE
It was a broken air compressor that sealed it for Caruso.
“The thing breaks down in one of our facilities, and I go about pricing it out—really pricing it out and finding the best possible deal I could,” he explains. “Found one for about $13,000, and felt just great about it. By this point (in 2014), I’d had some connection with Service King already, and I asked what they could get it for. About $9,200. It’s just not a level playing field.”
For years, Caruso had the outline for his succession plan, and it never included selling outside of his family. He has three children who work in executive roles, and a general manager who’d been with him for more than 20 years. They would be the ones to take over from him and his wife, Nancy.
Over the past few years, Caruso, 57, felt that time was nearing.
“But we looked at the way the industry was changing, and that didn’t seem possible,” he says. “We couldn’t stay the same if we were going to stay successful. To stay relevant in the insurers’ eyes, we needed greater size, and we needed to invest in newer technology—primarily being ready for aluminum repair.”
Caruso met with his family regularly to figure out the best path to pursue, the one that would keep the business thriving for 10, and 20, and 30 more years. To cover their market—and the projected amount of vehicles made of advanced materials it would soon have—Caruso and his team felt they’d need to continue to expand with six more locations and invest heavily in aluminum training and equipment.
The question became: “Is this a business you could invest $15 million to $20 million in to be able to get the footprint and aluminum capabilities to stay relevant?” Caruso says.
“Was that a plan that would put my family and our team in a position to succeed long term?”
They ultimately came to the same answer: no. Finding a buyer among the Big Four consolidators would help to ensure the company could have the resources to compete into the future.
Caruso invested nearly a year in researching and meeting with consolidators. Any time he read of a sale, he reached out to the previous owner to ask about the experience; he talked to more than two dozen, he says. He had multiple valuations done on his business, and he enlisted the help of lawyers and consultants.
Caruso had a set of overall criteria for a sale: The buyer had to be thriving, needed a long-term plan for continued success, needed to mesh with his business’s culture, and needed a strong history of successful acquisitions (types of shops bought, how they fared moving forward, etc.).
Then there were his own requirements: The deal had to be cash, he would retain ownership of six properties the facilities operated on, the employee benefits would be as good or better than what he provided, and the buyer had to agree to keep his teams intact at each location.
“This wasn’t an easy decision,” he says. “I knew that if I were going to sell, this would be the company my kids would be working for. It was very important to get it right.”
After months of due diligence, he struck a deal with Service King that matched his requirements and exceeded his own valuations.
“It was sad, but at the same time, I know it’s the right thing for us in our situation,” he says. “I know this was the route we had to take.”
A TRANSITION, PART IV: A NEW ERA
Tony Kempen sees a lot of similarities between engineering and collision repair: “Really, what we’re doing is ‘remanufacturing,’” he says.
“There are a lot of challenges in this industry, but
really, there are a lot of commonalities in every industry,” Tony adds. “You just have to find an approach that’s successful.”
The Kempens have done just that. Since taking over Pat’s CARSTAR in January 2013, they had double-digit sales growth, and the 17-person, 8,500-square-foot shop topped $2 million in total sales in 2014. And they’re expanding the business. The Kempens acquired another shop within 15 months of taking over ownership of the first. CARSTAR Eau Claire South in Eau Claire, Wis., has a larger facility (roughly 10,000 square feet), and a much larger, more promising market.
Sales at the second location typically hover around $1 million, the Kempens say, but they see it eventually becoming their larger and more successful store.
With their quick growth and look toward the future, the Kempens were given CARSTAR’s annual Next Generation Award at its conference in June. At the ceremony for the award, CARSTAR vice president of operations Dean Fisher praised the Kempens for their success and said they were a prime example of the opportunities that are out there in the industry.
The Kempens, meanwhile are ready for what lies ahead.
“Every shop is different,” Tony says. “You have to figure out what’s best for you. We have a path we’re going down, and we’ll keep at it. You have to just come at it from the right perspective and figure out where your place is in all of this. I think we’ve found ours.”
