The Future of Industry Consolidation

June 1, 2014
Tom Marx, CEO of the Marx Group, discusses the next three to five years of industry consolidation

Consolidation has been a hot topic in the collision repair industry for years. According to the Collision Repair Education Foundation’s annual report, the total number of shops operating in the U.S. has decreased by 12 percent over the past 15 years. In addition, the number of multiple-shop operations (MSOs) generating annual revenue of more than $20 million grew from 9.1 percent market share in 2006 to 13.4 percent in 2011.

Although consolidation slowed during the first part of 2013, Tom Marx says there is no doubt it will remain a growing trend.

As CEO of The Marx Group, Marx advises automotive aftermarket buyers and sellers on maximizing transactions and supports companies with integration strategies. Marx recently sat down with FenderBender to discuss industry consolidation, pertinent ownership trends and the next three to five years in consolidation.

What is the current state of consolidation in the industry?

The basic reasons for industry consolidation persist. Owners are aging and those that do not have family in the business or do not have defined succession plans have little option but to sell or close the business. The MSOs’ size advantage puts smaller shops at risk, since they often cannot provide the same services as larger businesses. The continuing friction between insurance companies and shops motivates smaller shop owners to leave the business, often saying it’s not fun anymore.

On the other hand, MSOs and chains continue to grow and this presents smaller shops with the opportunity to cash out. Property values have increased, so sometimes the most important asset is the real estate, rather than the business. In a collision repair business doing $1 million a year, it may be making a 10–15 percent profit, which means the owner may be making $150,000. While the business itself could be sold for $600,000, the piece of property that’s been appreciating could be worth $1 million. The property can be leased for monthly income or sold for cash value. They might collect $15,000 a month in rent, which would be a nice retirement package.

What consolidation trends have you seen in the industry this year?

This year is proving to be consistent with 2013. Earnings at most shops are up. Vehicles cost more to fix and this presents an opportunity for shops to sell at improved multiples.

I think the tendency of the MSOs is to be in a similar marketplace. The only time I see that to be different is when it’s at the preference of the owner. But in general, I do think they tend to stay in a more restricted geographical area.

Similar to other segments of the aftermarket, we expect two major trends to continue: The chains and MSOs will improve revenue and profits through acquisition, as well as healthy organic growth. Smaller shops will continue to consolidate.

One is to get big enough that a bigger MSO or chain will become interested in acquiring you. Margins will continue to be challenged due to insurance companies, but we believe the tables will be turned. We’re seeing more shops standing ground against some of the insurance companies’ policies.

Again, more power is perceived by the MSO or chain than an independent. If you’re a larger business with more clout, it gives you the ability to negotiate with an insurance company because your business is valuable to them, just like their business is valuable to you.

That’s not to say insurance companies are out there doing a lot of deals with different people but we have seen modifications of policies with larger companies. Those that stay independent and have excellent reputations may be able to take a stand. Some will not.

What are the key factors driving industry consolidation?

Two primary drivers are private equity (PE) firms that are buying chains and larger MSOs. There is still an enormous appetite, and cash available, to make acquisitions. PE firms must keep their money working and their investors earning returns.

Private equity firms started to see the general automotive aftermarket as an important place to invest starting 10 years ago. The automotive aftermarket, in general, pretty much increases between 2.5 and 3 percent a year. It does that pretty much every year, so they see the aftermarket as a very stable and low-risk place to invest their money. They found that by buying companies, consolidating them together, and having that growth curve, they were able to meet the objectives of their investors.

What do shop owners need to understand about consolidation?

You need to understand the concepts of multipliers. … Multiples and prices are all over the place. If you hear that an MSO with a $10 million annual revenue was paid six times earnings before interest, taxes, depreciation and amortization (EBITDA) with a multiple of two to three, don’t equate that with your $800,000 business being paid anywhere near this amount. It is not a linear scale.

The buyer looks for financial as well as strategic benefits to be derived from its investment. A small business does not move the needle as much as a bigger business. You have to start positioning yourself three to five years years before being acquired. Operations and processes must be well-defined and efficient, customers and employees happy, marketing happening to build your brand, a good website in place and a very clean and healthy financial statement produced monthly. Tax returns must reflect good earnings. Investors look for 10 percent before tax and 15–20 percent EBITDA.

Can you discuss some recent ownership trends?

On the positive side, we’re starting to see more shops develop succession plans, encouraging key employees to earn equity in the business and small shops buying other small shops.
The importance of a succession plan is twofold. One, you never know when something will happen to you. A succession plan creates a situation where you have an orderly transfer that keeps the business and employees engaged. The second thing is it’s very upsetting to employees when they know there’s not a succession plan in place. Because they know if something happens to the owner, their jobs are at risk.

As far as the equity side of it, there are some employees that never want to run a business and there are some that have the talent but don’t have the money to start a business. By developing equity partners with your employees, you create loyalty and a partnership between the outgoing owner and the employees. If the owner decides to retire or slow down, you have people who are trained and can run the business for you.

On the negative side, we’re still seeing “delay and denial” about these topics, as the owner gets older and opportunities pass them by. I think the primary reason is that people deny that they’re getting older and ready to retire. What happens is that they don’t do the things that are necessary to create a succession plan that will allow them to exit the business. You either have to sell the business or close it.

The independent shop can thrive in this environment by offering superior quality and service when compared to competitors, whether they be other independents, MSOs or chains. Many consumers still prefer to work with the small business owner. Take care of your customers. Decide if you want to be a consolidator or be acquired. Plan your future accordingly.

How will consolidation affect other parts of the industry?

Watch what happened and continues to happen in the auto and truck parts aftermarket. On the automotive side, 50 years ago, there were a lot of independent jobber stores and independent garages. What happened was that the jobber stores were bought up by the big three—Autozone, O’Reilly and Advance Auto. What they do is buy these jobber stores and convert them into their own brand. Now we still have the same number of stores as 10 years ago (roughly 35,000) but the makeup is very different. Rather than having 25,000 independently owned stores, now you only have 15,000 independently owned stores and the rest of the stores are owned by the big three. 

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