Making your MSO an attractive target for acquisition

“Some business people take cash out of their business,” says Marcy Tieger of Symphony Advisors, a consulting firm that has been involved with shop and MSO acquisitions. “That makes it very hard later on to reconstruct and establish the true value of your business based on your real income. And it’s an integrity issue. Not only do you not have accurate books, but you’re also confessing to a potential buyer that you’ve lied to the federal government.”

John Walcher of Veritas Advisors, another consultant experienced in mergers and acquisitions in the collision repair industry, agreed.

“If you’re running an excessive amount of personal expenses – or not running all of the cash ­– through the books, don’t expect the buyer to adjust for them,” Walcher said. “You’ve already enjoyed your upside.”

Your financials should effectively “tell the story” of your business by detailing each of the profit and cost centers, Walcher said. While this is a vital step to prepare for the sale of any shop, it is particularly important for MSOs, he says.

“The bigger the deal, the greater the number of accountants who will be sent in to test and validate the financials and the tax returns,” he said. “They will want, for example, to be able to match financial statements to tax returns and bank statements.”

Dan Dutra of Sigs Body Shop, a three-shop MSO in Hawaii, said that although his company is currently looking more toward growing than selling, he and his business partner have been scrupulous about keeping “personal” expenses out of the business books.

“It’s probably because as a partnership, we wanted everything to be transparent, above-board and visible to both of us,” Dutra said.

But he also noted that any business has expenses within their financials that a buyer isn’t likely to have after the sale; clean financials can help the seller clearly show these “add-backs” to the bottom line. Dutra, for example, said he regularly attends the Collision Industry Conference (CIC) meetings, a business expense that a future owner of the business may not have. “Add-backs” such as these should be easily pointed to within the company’s financial records.

“So that if there is an opportunity to sell the business, there’s no debate about it,” Dutra said.

Beyond clear and accurate financials records, what else should an MSO do to make themselves more appealing as an acquisition target? Here’s a checklist of suggestions.

Get your other numbers in line.
Your financials aren’t the only numbers that can help sell your business, one former MSO owner, now on the management team of a Big 4 consolidator, said. Make sure all your key performance indicators (KPIs) like cycle time and CSI are strong. Whether or not any DRP agreements you have will continue after the sale, a buyer will want to see that your operation is hitting whatever KPIs those agreements entail.

Another important number, he said, is five, as in, “5-S your shops.” Five-S is a “house-cleaning” that includes sorting, setting in order, sweeping (or shining) standardizing and sustaining. Essentially, he said, eliminate clutter, personal projects and anything in the shops you’re not using; establish a place for everything and train employees to keep it all in its place; and set up standardized procedures along with visual or other guides to help employees understand and use them.

While this alone can boost each of your shops’ productivity, the former MSO said, it also helps a buyer see what they’re getting and feel confident in the shop’s ability to perform post-sale.

Strengthen and lock-in your team.
Dutra said while a buyer may really want your capacity and location, it’s your employees that bring them the most value.

“They’re buying the business, but the business is really people,” he said. “They can go buy assets and equipment anywhere. That doesn’t generate much unless you have the people who know how to use it.”

That means they’ll want to see those people stick around, something you can help ensure through a long-term compensation plan, Dutra said.

“The bigger the deal, the stronger the correlation between valuation and the management team,” Walcher agreed. “This includes not only capable operations and marketing managers, but also strong center managers, estimators with good relationships with referral sources and lead technicians who can train the next generation. Consider locking up these key players with employment agreements.”

Build your sales volume.

Mike Anderson of Collision Advice sold his own MSO before becoming an industry trainer and consultant. He said now perhaps more than ever, sales volume is driving acquisition choices and selling prices. Businesses are generally valued as a multiple of their EBITDA (earnings before interest, taxes, depreciation and amortization). Although many factors can influence what multiplier a buyer may use to calculate your company’s value, Anderson said total sales volume can have a big impact.

Off-the-record interviews with former MSO owners who have sold seem to bear this out. Smaller MSOs generally reported selling prices of three or four times EBITDA; the multiple rose (and sometimes doubled) for those with annual sales above $25 million.

That means an MSO looking to be acquired to sell may still want to continue to grow.

“The more you’re doing in sales is going to help dictate your sale price,” Anderson says.

But Walcher cautions that performance, not just top-line sales, adds value as well.

“Earn the highest possible profit margin out of the business you have,” he recommends. “This will create more value, because it leaves room for the buyer to grow the top line of the business to make some money.”

Separate the business from the property.

Anderson said many buyers will want to acquire only the business and just lease the building and property. This can be a great source of revenue for a seller who owns both, but this entails separating the business and property from each other, something that he recommends be done years ahead of a sale.

Keeping the property also gives a seller a fall-back should the buyer fail in running the business, Anderson said, although the large consolidators can usually assist in the sale of the property if the seller wants out of both.

Address any environmental or regulatory issues.

Dutra and Tieger both said environmental issues discovered by a buyer can easily scuttle a potential sale.

“They’re not going to enter into an agreement if you have any issues with the ground,” Dutra said. “So at least get a Phase 1 report to be able to show the ground is clean.” (A Phase 1 environmental site assessment identifies potential or existing environmental contamination liabilities; a buyer may seek a more thorough analysis, but a minimum of a Phase 1 is generally part of any sale.)

Tieger said sellers should also be upfront about any licensing or regulatory issues before they are discovered later in the process.

Maintain good insurer relations.
Direct repair agreements are not transferrable, so they’re not necessarily a key to being acquired, but they generally can’t hurt.

“Consolidators prefer to acquire MSOs that are insurer friendly,” Walcher said. “A well-prepared seller will nurture its DRP relationships and have a DRP-friendly culture.”

“Having good insurer relationships, whether they overlap with the buyer’s relationships or not, will work to your benefit,” Tieger agreed.

OEM certifications may help – but don’t count on it.

Anderson said automaker certifications, like DRPs, don’t automatically transfer to a new owner of your business.

“So you my feel there’s value in that, but there may not be,” he said.

But Tieger noted that a shop location with the required equipment and trained employs to meet OEM certification requirements likely would still have those things post-sale, so a new owner may just need to apply to maintain that certification.

“Because larger organizations have the ability to load-level, your certified location may be a great tuck-in,” she said. “You may have a Mercedes certification, where the larger entity buying you may not.”

That can bring them a new source of business, and allow them to channel more Mercedes work, for example, to that location in that market.

Understand your leases.

Anderson recommends that MSOs maintain a detailed list of all property or equipment leases, as well as information on their contracts for such things as estimating systems, uniform service, trash hauling, etc. Know when all such agreements expire, whether they are transferable, or what kind of expense would be entailed in ending them early.

Also be aware of other types of obligations you might have at the time of a sale. Anderson said shutting down his company’s 401(k) at the time of the sale of his MSO cost him nearly $20,000. Another shop owner who sold, he said, had to pay $50,000 in vacation pay that had been accrued by his employees ­ – an expense the seller hadn’t planned for at the time of the sale.

Develop a good team of support.

At a minimum, you’ll need good tax and legal advice as a seller, so don’t put off developing relationships with trusted advisors.

“I’d suggest telling your financial or tax advisor, ‘I’d like to sell my business a year or two or three down the road; what things do you think I should be doing to get things in order?’” Tieger said. “Obviously, you can sell at any time, but if you’re really thinking proactively, it’s good to get some advice earlier rather than just at the time you’re ready to do it.”

Walcher agreed that a tax strategy is a must, and preferably well ahead of the sale.    

“The unfortunate truth is that most sellers don’t get to keep as much as they expected because taxes were not adequately anticipated,” he said. “For example, simply switching from a “C-Corp” to a “sub-S” can eliminate the double taxation, but that conversion needs to occur 10 years before the sale to completely avoid the [tax] double dip.”

Walcher said your pre-sale team of advisors could include a business consultant who can help your business (or a particular location) improve where it is underperforming. 

The team of advisors may or may not include a business broker or other business sales consultant, but everyone interviewed for this article agreed that if you use a broker or consultant, choose one familiar with the collision repair industry and the players who are potential buyers. One thing they can do is help you determine a fair value for your business, something sellers aren’t always good at doing themselves. Tieger said disagreements between buyers and sellers on value is the most common thing that scuttles potential sales.

“One good thing I see is that it’s much more common than it used to be for people to talk more readily with others about multiples and their EBITDA, and people aren’t afraid any more to be seen talking with the Big 4 consolidators,” she said.

Work yourself out of a job.

A business is worth a lot more to a potential buyer if it will run without the current owner. Anderson said MSO owners should consider what doesn’t work well within their business without their involvement, and start implementing changes to improve those things. That gives a potential buyer the confidence your locations will continue to perform after the sale – a key step, he said, in boosting the appeal and value of your business.