That’s WACC! Understanding how interest rates and the cost of capital impact the value of your business.

Recently I discussed the financial themes that I believe are driving consolidation in the industry. Specifically I discussed why a low cost of capital combined with multiple arbitrage is driving investment and consolidation in the collision industry. (Editor’s note: It is not only the collision industry undergoing profound transformation. Keep an eye out for upcoming articles discussing other adjacent industries that are undergoing rapid consolidation as well).

This week I thought it was important to spend some time explaining the financial mechanics of the cost of capital, and how a low rate environment impacts the entire financial ecosystem. Be warned, this delves into the realm of financial geekdom but has significant implications for your business which we will discuss later in the article.

What is Driving the Consolidation Wave

Writing about finance in the collision repair industry, naturally we speak quite a lot about business valuation and maximizing the value of your business. Buying or selling businesses are currently very prevalent activities in the industry. In financial terms, buying is often called an “acquisition” while selling your business may be referred to as a “liquidity event”.

There is a lot of industry chatter around these events. It seems that every week there is a new breaking story where one of the large consolidators acquires another group of repair facilities. By the end of 2015 it is a near certainty that at least one if not two companies will reach $1 billion in revenues with even more growth coming.

I often focus on the tactical, i.e. how to best position yourself to buy, sell or hold. But it is also important to take a step back from time to time to look at the overall picture. What is driving this change in the industry? Often we hear that the increasing technological complexity of repairing a vehicle drives consolidation. We also hear a lot about the benefits of scale, or how having a large nationwide footprint results in a competitive advantage in the result of increased revenue opportunities, a decreased cost structure, or perhaps improved operations. These are all valid reasons for growth but not necessarily the primary drivers of consolidation.

The State of the Industry: How Consolidation Impacts Your Business

Recently I decided to take a closer look at consolidation in the industry since late 2012. It goes without saying that consolidation is a hot topic in the industry. We talk about it almost every week here. It also seems that every week a new mega deal is announced where one company buys another company.

Whenever rapid change hits an industry it often causes an emotional reaction. Some argue passionately against consolidation. Others strongly believe consolidation brings much needed improvement. Still others shrug it off with ambivalence.

My opinion of the consolidation trend is agnostic.

Grow Like a Consolidator

For the past few weeks we have been speaking about the options that are available to a collision repair operator: stand pat, grow, or sell.

I spoke at some length about the risks involved in each strategy. Standing pat is a risky strategy due to the concentration of risk into a single business in a single city / region.

Growing is risky because it involves developing a new set of core competencies built around high level financial management as well as acquisition and integration competencies. Most collision repair businesses have not developed these competencies; and those that have developed those competencies now compete for deals against other large MSO’s with extensive experience sourcing, closing and integrating acquisitions. (Editor’s Note: Keep an eye out for an upcoming article about how the franchise model plays a role in growth.)

Selling is similarly risky as there is almost a certainty that a buyer will have vastly more experience in a business transaction, leaving you and your business vulnerable. Buyers will pay a premium for a well-documented, well-run business but most collision repair businesses have little experience presenting financial information in a usable format to a multi-million dollar institution.

Those are the risks. But I promised an article about opportunities!  

Buy, Sell, or Hold: The Risks

Last week we spoke about the conundrum that collision repair operators currently face. Because of the influx of Wall Street money and rapid consolidation, owners have essentially three choices when looking towards the future. They can:

• Stay small and continue to compete on a standalone basis, or with the help of a franchise (more on the franchise approach in future articles);
• Build scale, acquire competitors, open brownfields and compete with large MSO’s by becoming a small MSO;
• Sell to a regional or Big 4 consolidator.

Each of these three strategies carries inherent risk, as well as potential rewards. This article will break down each of these three key strategies to help better explain the specific risks and rewards implicit in each.

Buy, Sell, or Hold: The State of the Industry Part II

Long time readers of my posts notice two main themes running through my writings. The first is a focus on corporate finance and how to apply those topics to a collision repair business to better manage a business. The second is a focus on M&A (Mergers and Acquisitions) and how to be prepared to buy or sell a business.

Many readers inherently see the logic of the first topic. Understanding the tools mid to large sized business use to manage their business allows the reader to better manage their business, and be more successful as a result.

The second topic is sometimes met with less clarity. It often begs the question: why so much talk about buying and selling a business?

You won’t believe how much money Caliber made last year.

Previously we spoke a bit about maximizing enterprise value vs. maximizing profit margins.

Many people in business fail to realize the distinction between the two concepts. If you maximize profitability, you maximize the value of your business, right?

Not always. In business everything is always a trade off.

The State of the Industry (And why we’re all in trouble!).

In case you’ve been living under a rock for the past two years here’s a news flash – the industry is rapidly consolidating. Wall Street has arrived and they’re taking no prisoners. But what does that mean?

First it means that there are the “Big 4” – Caliber, ABRA, Service King, and Boyd/Gerber. You’ve probably heard of at least one of these guys, if not all of them.

They have hundreds of locations. They do hundreds of millions of dollars in sales a year. They are tied in with major insurance companies in a way you or I never will be. They’re financially backed by some of the largest most powerful financial institutions in the U.S. and Canada.