Nothing Lasts Forever: What to Know Before It’s Time to Sell Your Shop

by Chasidy Rae Sisk & Alana Quartuccio

Running a business is more than a job; it’s a way of life.

And for many collision repair shop owners, it seems like it is their life – they’re often so busy tending to today’s needs, such as investing in new equipment and employee training, that it may be difficult to look around the corner to the future. No matter how much one loves what they do, all things eventually come to an end; the day will come when it’s time to retire or sell the business. When that time finally arrives, many realize that – although they’re ready to get out – they aren’t actually prepared.

Whether you plan to pass the business along to a family member, sell to a valued employee or join the consolidation bandwagon, exiting the business isn’t as simple as typing up a letter of resignation or relinquishing your key to the front door. The process requires forethought and preparation…or at least, it should if you want to walk away with something to show for all your hard work. In fact, exiting the business is not a process that can take years, it should take years, according to industry experts.

“The time to start thinking about exiting the business and making those future plans is NOW,” stresses Rachel James (Torque Financial Group). “Ideally, a shop owner should be thinking about this decision five to 10 years before they actually plan to sell or retire because the more time you have to plan, the more options you’ll have later.”

“It’s never too early to begin thinking about it, and, as a matter of fact, every move a shop owner makes should have succession in mind,” agrees Matt DiFrancesco (High Lift Financial). “Shop owners need to put the vehicle in place, so when the time comes, they are able to exit on their own terms.”

James worries that many shop owners have an “expectation that once they’re ready to sell, the transaction happens immediately, so it takes them some time to come to terms with the idea of exiting the business and then to deal with the reality that it doesn’t happen overnight. It can take a couple years to transfer ownership due to titling, building, zoning, etc. Any number of things could delay the process.”

Although Consolidation Coach’s Laura Gay agrees that it’s never too early to start thinking about one’s exit strategy, she points out that the actual time frame necessary for any specific shop depends on the owner and the business itself. “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.” 

In fact, in the world of consolidation, “Not having an exit strategy may not be as big of a deal as it used to be,” Gay claims. “Planning is good, but if you want out, most shops can find a buyer, especially if they are located in a populated area with a 10,000 square foot shop that does over $1 million in annual sales. Of course, in the Northeast, some shops are smaller because of space constraints, and they are still viable sales because that’s normal for the market.”

So, what is the first thing a shop owner should keep in mind when they make the decision to get out?

“The business owner should start by considering the income they’ll need to live off,” James suggests. “It’s tricky because we don’t have a crystal ball to predict how many years they’ll need to survive on a specific amount, so it’s important to honestly evaluate one’s health, longevity and family history to estimate how many years they need to plan for. Don’t forget to think about the expenses that the business pays for, like health insurance, that will also need to be paid from that fixed income.” 

The first thing all shop owners need to think about is what they want their post-transition/exit life to look like, DiFrancesco adds. “Without a picture of what that looks like, it is difficult 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.” 

Many may not be aware of the true value of their business, so it’s important to have an assessment done early in the process. “You should always do a valuation, and not just 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.” 

Many different deal structure platforms are 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 entering into a succession plan. Each type of sale will require some different considerations, but regardless of deal structure or which entity is buying the business, shop owners will want to position themselves to make the most profit possible from the sale, and they can do that by “consistently reviewing their financial statements to stay ahead of business trends,” according to James, who recommends frequent perusals of all documents, from profit and loss statements to balance sheets and taxes. “You want to figure out the value of your business well in advance so, if it’s lower than you’d like, you have plenty of time to pivot and make changes to increase that value. By evaluating in advance, you can make small tweaks over time, but if you wait until the 11th hour, it’s a lot harder to make impactful changes.”

She compares financial planning to repairing a vehicle. “You can’t just spray basecoat on a dented panel, and it’s magically restored. Properly repairing a vehicle to its pre-existing condition requires a strategy and many components. The similar is true with financial planning. And just like each damaged vehicle has different circumstances and requirements, people are unique, so they’ll want to evaluate their income needs, liabilities, health care options, legacy and estate plans…In the shop, the first step is to begin. With succession planning, the best way to get started is to start, and just like your customers want a qualified shop to repair their vehicle, it’s wise to contact a CPA or trusted financial advisor who can help you understand the plans you need to make and walk you through the process.”

“Always keep in mind what your strategy is going to be,” Gay agrees, emphasizing the value of relying on experienced experts to help throughout the sales process. “Are you going to do it alone, or are you going to get someone to help you? 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. 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, especially in the northeast. It’s just getting red hot with consolidation, and more and more buyers are entering the market.”

While consolidators have historically avoided the New England market, that trend has begun to shift, as discussed in last month’s New England Automotive Report (read the story online at Gay indicates that consolidation in Massachusetts is “on fire! VIVE Collision is the leader; however, Caliber, Gerber and others are active. Many new private equity folks have formed and are working that area.”

Consolidation isn’t the only option, of course. “There are three options,” offers DiFrancesco. “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).”

According to DiFrancesco, “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. 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.”

The type of entity one chooses to sell the business to can have a significant impact on how much the property is worth, Gay points out. “If you lease it to an individual or a private entity, the property value will be significantly different. Selling to a consolidator typically means a cash sale, and if you retain ownership of your real estate, property value will increase post-sale with a strong lease in place.” 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, according to Gay. 

The influx of consolidators in the Commonwealth community may actually have an added benefit for Massachusetts shops that have been dealing with a suppressed labor reimbursement rate for far too long as some research indicates that consolidators may be more successful at negotiating labor rate increases with insurers. Gay confirms, “If a consolidator owns 10 shops in a market, they control [the market’s labor reimbursement rate] to a degree.” 

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 it’s a very important one.”

Want more? Check out the June 2024 issue of New England Automotive Report!