Making Solid Acquisitions
Keep your emotions out of it. That’s Rule No. 1, says Vatche Derderian, owner of three Fix Auto locations in the Pasadena, Calif., market. But that’s easier said
When looking to expand to a second location, Derderian had an ideal facility in mind—actually, it was more of a dream vision of the kind of shop he desired. Then he found a shop for sale with a location and footprint that fit his criteria.
The only problem was that he didn’t like the business already in place at that facility.
“A guy was retiring and he asked me if I wanted to buy,” Derderian says. “I was looking to expand, but I wasn’t extremely excited about the shop. But I did like their numbers.
“Sometimes, you have to take your emotions out of it and just trust in the process.”
And there’s rule No. 2: Trust the process, or, for starters, simply have a process.
In growing his business, Derderian relied on a strict set of rules and criteria to help shape his decision. It wasn’t anything complex; more like simple guidelines to help him make an objective choice that would, above all else, benefit his business and allow the company to grow.
Opening an additional location isn’t a simple task, says Paul Krauss. It needs to be backed by a thorough process, like the one Krauss used in opening each of his 17 locations of Virginia-based Craftsman Auto Body.
Whether you’re looking to acquire an existing business or an empty building, Krauss and Derderian share their tips to knowing how and when to open an additional location.
When to Buy
A common mistake, Derderian says, is to assume you can solve your shop’s backlog of jobs or chaotic shop floor by expanding. Making an acquisition is rarely the answer in those cases.
Before ever thinking about expanding your business, Krauss says that you must have everything in order at your original location. Both owners say there are certain aspects of the business that must be in order before expanding:
• Key Performance Indicators (KPIs). You need to know, understand and religiously track the crucial numbers that give the pulse of your business. Know where you stand against industry benchmarks, Derderian says, and if you’re not hitting on all cylinders, you’re likely not ready to expand.
• Streamlined Operations. Your shop needs to be efficient, repeatable and run on a strict set of standard operating procedures (SOPs). Your SOPs act as the blueprint of your operations; they help eliminate the business hinging on the success or failures of individuals, Krauss says. And most importantly, they allow the business to operate successfully without heavy involvement from the owner. “We have very refined processes,” Krauss says, “and that allows us to transfer the way we do things from one facility to another. It’s always going to be the same.”
• Operating Capital. Most acquisitions take place when the shop being bought is underperforming. Because of that, it’s rarely cash-flow positive in the first months following the takeover. That’s why it is essential to have at least two months of operating capital in savings before opening a new location—and that’s on top of the planned expenses for opening and acquiring the new shop.
• An Expansion Plan. Who’s going to run the new shop? Who’s in charge of the existing one? How are you going to address staffing needs? What about equipment needs? The planning and organization that went into your existing location’s success needs to be repeated in the planning phase of the new location. Have a plan in place to hit the ground running, Krauss says.
What to Buy
If your business is ready for expansion, Krauss says the next step is identifying locations that will fit your needs. This comes in two parts: choosing the correct market and finding the right building.
Identifying a Market. To do this, you first must have a complete understanding of your existing business model: Who are your best customers? Who are your ideal customers? What vehicles are you most equipped to work on? What vehicles and jobs are most profitable for your shop? Is your shop’s workload dependent on direct repair relationships with insurance carriers or on referral work through OEM certification programs?
Develop a clear ideal customer based on age, income, social class, and vehicle make, model and age.
“You have to have a target in mind,” Derderian says. Once you do, you can then look for markets that will have those desired demographics.
There are a number of resources for finding markets that match your needs:
• Census information
• Local and regional real estate companies
• Your existing shop’s vendors, paint suppliers, and other industry partners your shop already works with on a regular basis
• Insurance carriers
• Local chambers of commerce
“Giving our customers good coverage is important,” Krauss says. “We get information from our vendor relationships and paint suppliers. We use Internet searches and do our own research with census data and advice from insurance companies to find the right fit.”
Locating a Building. Once you understand and choose the right market, you can then look for facilities available in that area. There are some basic details that must meet your criteria: size, accessibility, amount of competition, and price.
Those are true for every shop, Krauss says, as is analyzing the amount of renovation required to set the shop up in the way you desire. That’s going to add to the total cost, and can’t be ignored.
There are also some additional factors to consider if you’re purchasing an existing business.
First, analyze the shop’s profit-and-loss statement. This can be an awkward request at times, Derderian says, but it needs to be a requirement of the process. Just as you needed to know your own shop’s status, you need to fully understand where this business stands and whether you’re starting from scratch or building on existing success.
Also look at the shop’s current vendor and insurance relationships. Are there any that can carry over? Or are they tied to individual relationships?
Finally, take a hard look at the staff that’s in place.
In 2012, Krauss’s company acquired a shop that ended up being the near perfect fit. The owner wanted to retire, and all the employees wanted to stay. He decided to get to know each staff member and see just how good of a fit they would be for his model.
“We went out to lunch with everybody,” Krauss says. “We were able to have a level discussion because we had a good reputation in the market.”
He started with key staff members and worked his way down. Krauss wound up keeping everyone onboard. The purchase went through in October of 2012. In 2013, that location was the highest performing shop in the company.
The overall goal, Krauss says, is to look at what the potential new location can offer you, and what you will be able to add to it in terms of your company’s processes, systems and reputation.
How to Buy
Once you’ve found the facility that fits all your criteria, the actual purchasing process begins.
Any shop owner who has gone through this will give the same piece of advice: Get legal guidance.
No matter how many acquisitions your business has gone through, having professional, legal counsel is always beneficial.
An attorney will help you with making an official offer, crafting a letter of intent, doing due diligence, and crafting the final, official purchase agreement.
But, for your own part, remember Derderian’s first two rules.
“I do whatever I can to keep my emotions out of it,” he says. “This can’t be about my personal feelings. It has to be about what’s best for the business. You have a process in place; follow it.”
“Buy right, and you’ll be rewarded,” he adds. “If you don’t, it’ll suck you up. You’ve got to do your homework.”