by Chasidy Rae Sisk & Alana Quartuccio
Your business is your baby; your life likely revolves around it. Running a collision repair facility keeps owners busy, day in and day out. Some owners love what they do and are looking forward to a future filled with advancement and expansion, while others are counting the days until they wash their hands of the whole thing. But whether you’re looking to grow or get out, your path begins by positioning your business to be successful without you.
For growers, it’s physically impossible to be in two places at once, so you’re going to need to empower your team to make decisions and keep things running smoothly in your absence. For the “get-outers” seeking to sell, no one wants to buy a business if the most valuable component is the current owner who certainly won’t be part of the sale.
Luckily, right now is one of the best times to be in this business! Sure, there are lots of challenges, but the influx of new technology – ADAS, EVs, autonomous vehicles and so on – combined with the opportunity to differentiate your shop through OEM certification and specialization (see last month’s cover story, available at grecopublishing.com/hammer-and-dolly-january-2024) also offers a lot of opportunity for growth and the ability to create a truly successful business…whether you’re planning to operate it for several more decades or simply positioning yourself for a stronger sale.
Ultimately, no one can work forever, and even if you plan to spend many more years in your shop, most people hope to retire eventually. No matter if you plan to pass the business along to a family member, sell to a valued employee or join the consolidation bandwagon, walking away from the shop isn’t as simple as typing up a letter of resignation or relinquishing your key to the front door. It’s a process that requires forethought and preparation…or at least, it should if you want to walk away with something to show for all your hard work.
“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.”
But when should you start planning your exit strategy? And what are some of the most important things to consider? Well, for starters, exiting the business is not a process that can take years; it should take years, according to some industry experts.
“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. Shop owners reach out to me at various points in their planning; some may be five years out, some need to get out now and some aren’t looking to get out but want to begin to put the plans in place.”
Although the actual time frame necessary for any specific shop depends on the owner and the business itself, preparations should begin as early as possible.
Maylan Newton from Educational Seminars Institute believes that one should start thinking about how they will exit their business from the very day they purchase it. He suggests 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,” adds Newton. “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.”
White agrees and 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.”
Shops often neglect to develop an exit strategy – they simply decide to sell without any advance preparation, and as a result, a lot of shop owners are very disappointed to discover the true value of their business.
“A lot of shops are barely making a profit; they’re not worth much more than their assets,” White 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.”
So, how does a business owner know if they are ready to move on?
DiFrancesco believes it’s important for shop owners to think about what they want life to look like after they transition away from the business. “If they don’t have a picture of what that looks like, it makes it difficult to be able to structure a plan according to what they want. The starting point comes down to figuring out if they want to fully exit or still be involved but not with the day-to-day operations as they want the flexibility to travel, play golf or go hunting. Once they know what that life looks like, we can start to build out the different ways we can structure a transition plan.”
White concurs, offering a personal anecdote related to a “challenge after the sale that a lot of people don’t talk about:
“After I sold my shop, I struggled to figure out who I was for a couple years. I grew up in the industry, and that’s what I was: a shop owner. But suddenly, I wasn’t a shop owner anymore! I really struggled with my identity for a while, and that’s something everyone should be aware of. When I’m working with a shop owner who intends to sell, I immediately back them off by one day, so they spend only four days per week at the shop. Then, we discuss how to fill that time with things that will get them excited about enjoying life and help them see who they are beyond being a shop owner.”
According to Newton, shop owners interested in getting out of the business should begin by taking a look at their shop to see what is most valuable. Is it the business itself or him or herself – 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.”
“The business has to be able to operate without the owner; you cannot be a key component to the business’ success,” White stresses. “If the shop owner is also the lead technician, service advisor and HR, the business isn’t worth as much as it would be if the shop operated effectively without you sitting in the office. The owner cannot be directly tied to the day-to-day operations of the shop because that creates a situation where the value of the business is irrevocably connected to that person’s presence.”
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.
Branding is another value-added consideration that owners should evaluate before signing their shop over.
“If your name is in the shop’s name, that may have a detrimental effect…or if you have a great reputation, you need to decide if you’re willing to leave your name on the shop when you’re no longer there,” White points out. “Their quality and customer service will be associated with you if your name remains on the building, and no one wants their name tarnished based on someone else’s actions.”
Of course, profitability isn’t the only factor impacting a shop’s value. The assets being sold with the shop make a huge difference in the price tag you can place on the business. Buyers will get more use out of well-maintained (or new) tools and equipment, and they’re also going to consider the condition of the shop facilities and whether additional investments will be necessary before they begin operating.
Typically, the real estate associated with the shop emerges among the most important assets to consider.
“Will the purchase include real estate or not?” White questions. “If you currently rent the land your shop is on, the lease options will factor into the value someone is willing to pay. If you own the real estate, hopefully it’s been split out into a separate holding company or realty trust that rents the land to your shop because that protects you from a liability standpoint, but it also allows you to sell the business and maintain the property for additional income.
“At the same time, if the business is worth $1 million, but you’re retaining the real estate, it’s going to be more difficult for the purchaser to get a loan since there’s no real collateral,” he continues. “Are you willing to hold the mortgage note? There are definitive benefits to that as well; you’ll collect more income from interest on the loan, plus you’ll typically pay less in capital gains since the money you’re receiving is spread out over a longer period.”
DiFrancesco often finds that sellers keeping the real estate as an income stream works best for all parties. “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.”
Unfortunately, shop owners often tarnish their ability to collect the highest possible amount for their business by making some common mistakes, such as neglecting to maintain confidentiality. One doesn’t want to alarm their staff by talking about their exit plans too early in the process.
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.”
“Hopefully you have already planted the seed for them,” advises Newton who stresses 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.”
Focus can also be a struggle.
“Clients get really excited about the sale, but they forget to keep their eye on the ball,” White states. “The business has to continue moving forward profitability, and it doesn’t take long for things to go sideways when you’re not paying attention. You need to stay focused on your operation until the day it’s not your operation.
“And you need to put your patience hat on,” he continues. “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.”
Ultimately, it’s about being able to walk away from one’s business in the most profitable manner one can.
Many may not be aware of the true value of their business, so it’s important to have an assessment done as a first step. “You should always do a valuation, and not just of the value of the business but what your free cash flow is in the business,” suggests DiFrancesco. “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.”
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.”
So, what type of sale is right for you?
“There are three options,” DiFrancesco indicates. “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. There is even what could be called a fourth option where one does an internal succession, but does not completely step away. The owner still maintains some control, but they give equity to employees so they no longer have to be involved with the day-to-day stuff. That is a lifestyle exit where they still have control over the business but no longer participate as part of the daily operation. That equity can be structured either as a stock purchase program for key employees or an ESOP (employer stock option program).”
Consolidation is becoming increasingly common in some markets while seeming to skip other markets altogether.
“This is the age of acquisitions with lots of major players buying businesses while many smaller independents are pulling out,” White believes.
If consolidation is the route that makes most sense for your business plan, one important thing to realize is that everything is negotiable in the process, from the big stuff to the tiny details.
There are many different deal structure platforms taking place when it comes to the sale of collision shops. There’s MSOs buying other MSOs, private equity deals and shop owners looking to grow their business by acquiring other shops, or those simply just entering into a succession plan. 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 February 2024 issue of Hammer & Dolly!