Consolidation Deal on Your Radar? What to Know Before Selling

by Chasidy Rae Sisk

Maybe you’ve already been approached by a consolidator and are considering their offer. Perhaps you are interested in getting out of the business and debating whether that’s the route you want to take. Or it’s possible that the idea of handing over the shop keys to someone else isn’t even on your radar – yet.

Whatever your current situation, only one thing remains consistent in this business: change is inevitable. And the best way to successfully tackle what comes next is to be prepared for the various possibilities. For any business owner, the day will come when it’s time to close up the shop and pass the keys on, and while many shop owners plan to pass the business along to a family member or sell it to a valued employee, others have no family or employee successors on deck, creating a scenario that’s ripe for capitalizing on the consolidation craze. 

In fact, plenty of shop owners have been approached although selling wasn’t on their radar, but when a great deal was placed in front of them, they simply couldn’t pass up the opportunity to take advantage of that pretty profit while saying goodbye to the stress of staffing shortages, training on new technology and contending with increasingly challenging customers. While consolidators may offer a nice chunk of change when they’re interested in a shop, savvy shop owners realize that they can walk away with even more if they know a little bit about the process, so AASP-MN News sat down with some subject matter experts who shared some insights into what shops need to know about consolidation before signing on the dotted line.

The first thing to be aware of is the prevalence of consolidation in one’s market. “Minneapolis, St. Paul and outlying areas within 60 minutes of those metropolitan areas are red-hot markets,” reports Consolidation Coach’s Laura Gay. Although “the market has cooled slightly due to performance and staffing with some consolidators,” there remains a lot of opportunity for those looking to sell.

For anyone actually seeking to exit the business, “It’s never too early to begin thinking about it, and, as a matter of fact, every move that a shop owner makes should have succession in mind,” suggests certified exit planner Matt DiFrancesco, whose company High Lift Financial specializes in working solely with collision repair businesses. “Shop owners need to put the vehicle in place, so when the time comes, they are able to exit on their own terms.

“There are three options,” DiFrancesco continues. “They can do an internal succession to a family member or an employee. They can do a third-party sale, whether it’s to a consolidator or a small MSO, or they can look for another third-party buyer in the market who may be looking to acquire shops.”

Maylan Newton from Educational Seminars Institute suggests that one should start thinking about how they will exit their business from the very day they purchase it. He believes a minimum of five years is needed to prepare, but he recommends, “If you bought your shop today, I’d tell you to pick a day 20 or 30 years in the future and make that the day you plan to stop owning or working on that business. It’s never too early to plan, but in many cases, it can be too late. For most people in our industry, the exit strategy winds up being death, and they leave behind a business that has no value to their heirs because they didn’t build a business that stands on its own and is therefore sellable.” 

That’s why Newton insists shop owners should begin by taking a look at their shop to see what is most valuable. Is it the business itself or the owner? If the owner is the most valuable part of the business, a lot of work will need to be done to change that so the business can be sellable. “They will need to build the business so they – the shop owner – won’t be required to be there.”

Instead, the shop’s staff has to be trained to know all the processes, policies and procedures. There should be an operations manual outlining how the business functions so it can be profitable “because people who buy businesses want the ability to profit,” Newton says, explaining if one is able to walk away from the business for 60 days and it’s still functioning, the business will survive. If not, it is not the time to sell.”

Newton emphasizes the role that having everything properly documented – from wills and a trust, tax information, operation manuals, etc. – plays as it will make the business attractive and more valuable. “The more documentation you do today, the more profitable your business becomes in five, 10, 20 years.” 

“When many shop owners get out of the business, their decision is a reaction, instead of a well thought out plan,” notes Rick White (180BIZ). “They get tired of the daily grind and just don’t want to deal with it anymore. The problem is how few people consider an exit strategy ahead of that day. And when you fail to plan, you are planning to fail.”

White encourages shop owners to invest a little time into their exit strategy. “The business needs to be profitable before you try to sell it, and that means being able to show four or five years of consistent profit. For a shop that isn’t profitable, it may take five years to generate a profit and another five years of maintaining it before selling is in your best interests.

“A lot of shops are barely making a profit; they’re not worth much more than their assets,” he laments. “Yet every owner assumes their shop is worth $1 million…and it’s really sad when they find out what it’s actually worth.”

Although Gay agrees that it’s never too early to start thinking about one’s exit strategy, she acknowledges that the actual time frame necessary for any specific shop depends on the owner and the business itself, especially when it comes to consolidation. “I think most shop owners fall into the category of not wanting to deal with it until the time comes,” she observes. “Obviously, that’s not ideal, but it’s not a deal killer either. There are plenty of shop owners who are just focused on running their business the best they can, being the most efficient. If you are running a good shop from top to bottom, that’s really what you need to focus on because at the end of the day, it comes down to having a really nice, well-run facility. That is what brings the dollars.”

And consolidators definitely are bringing the dollars these days and likely will be for some time to come. In 2023, over 550 shops from coast to coast were acquired by the “Big Five” (Caliber, Gerber, Crash Champions, Classic Collision and Joe Hudson’s), seven private equity (PE)-backed accelerators and dozens of independent MSOs and dealers. 

“This is the age of acquisitions with lots of major players buying businesses while many smaller independents are pulling out,” White believes. 

“I don’t care what state you’re in; you’re not stuck,” Gay insists. “If you have a shop in a populated location with over 10,000 people, a facility with at least 10,000 square feet and sales of $1 million or more, a buyer exists for your facility. Sales to consolidators are often best because they have the cash on hand. There’s even more potential for profit if you own and retain the real estate as long as you have a strong lease in place.”

DiFrancesco agrees. “If you go to a third party, especially with consolidators, they want the owners to maintain the real estate, and that remains a cash flow stream. On insider sales, I like to see them hold on to the real estate as an income stream, but also if the owner has children who are not involved with the business, the real estate can be part of their legacy. I try to maintain that family unit, so if there is one child getting the business, the others don’t feel slighted and you can structure the real estate to be able to create a fair distribution and maintain that family harmony.” 

Since many may not be aware of the true value of their business, DiFrancesco also recommends having an assessment performed as a first step. “You should always do a valuation, and not just the value of the business but what your free cash flow is in the business. That’s what a consolidator or a third-party buyer will look at since they want to buy a business that’s profitable. With an inside transfer, you can utilize free cash flow to fund that transition, so getting that valuation as soon as possible is a key first step.” 

Patience is key during the sales process, according to White. “There will be struggles and delays, and you can nearly guarantee that it’s going to take longer and be more challenging than you think it should be…but don’t count your chickens before they’ve hatched! It’s common for a seller to get excited in the nth hour and buy that $300,000 motor home because they know they’ve got $1 million coming in. But then the deal falls through. It’s never a good idea to spend money before you have it.”

Owners should also be patient and identify the right time to tell their staff about their plans to sell. DiFrancesco suggests waiting until all one’s ducks are in a row so that conversations don’t begin prematurely. “You’d want to go to the successors first and then talk to your employees once the plan is determined and you know what directions things will go in.” 

“You don’t want to create unnecessary anxiety, turmoil or loss of production with something that may not occur,” Gay emphasizes the need to make sure the time is right before announcing your plans. “The announcement should be thoughtfully decided upon between the buyer and seller. 

“It’s a personal relationship,” she continues, regarding the seller’s relationship with his or her team. “Those people made him or her who he or she is. I was close to my employees. I still am and talk to them often. The buyer is buying your people, what you created, and it’s very important it’s done thoughtfully.” 

“Hopefully you have already planted the seed for them,” advises Newton as he reiterates the importance of the business being able to operate without the owner present daily. “When you aren’t the main person anymore, it makes it easier on your staff to tell them you plan to retire.” 

If consolidation is the direction that makes most sense for your business plan, Gay recommends beginning by determining what your strategy will be. “Are you going to do it alone, or are you going to get someone to help you? If you do it alone, you have to come up with your own internal strategies on how to handle it, specifically confidentiality and how you are going to look at what the different buyers are and how to make sure you don’t leave money on the table. If you decide you want someone to help you, you need an understanding of what the business is worth versus what you can get for it. That’s a big disparity. You can probably get a lot more for it than what it’s worth in a lot of markets. It’s just getting red hot with consolidation, and more and more buyers are entering the market.”

She believes it’s important for anyone considering consolidation to realize that everything is negotiable in the process, from the big stuff to the tiny details. “The important part is not leaving money on the table, and that is easy to do if you don’t know what you are doing…you can do so without even knowing that you did it!”

There are many different deal structure platforms taking place when it comes to the collision consolidation: MSOs buy other MSOs, private equity deals take place, and shop owners seek to grow their business by acquiring other shops. But one thing that everyone seems to agree on is that there’s no reason for shops to feel pressured to sell if they don’t want to sell.

Although “the environment with consolidation is very bright,” DiFrancesco insists, “The independent shop really has a place in this environment. It may be a different place, but I think it’s a very important one.”

Want more? Check out the June 2024 issue of AASP-MN News!