Recently, the Investment Banking Team at Focus Advisors sat down with some key industry leaders and posed a number of provocative questions about pressing issues. Over the course of many hours, these deeply experienced entrepreneurs shared their own thoughts, opinions and principles on which they are growing their businesses.
Contents
Matt Ebert, CEO, Crash Champions
Shawn Crozat, CEO, G&C Auto Body
Scott Leffler & Vartan Jerian, Vive Collision
Jacob Tilzer, CEO, Kaizen Collision
Vincent Romans, CEO, The Romans Group
David Roberts, Managing Director, Focus Advisors Automotive M&A
Matt Ebert, CEO, Crash Champions – 175+ Locations
Q: What aspects do you consider in your key criteria for deciding whether to buy or pass?
There are multiple aspects, and I don’t think any of them are magic. Of course, we look at the quality of operations and the type of operation they’re running – meaning are they insurance friendly, are they OEM certified, and other similar aspects. Geography matters if it fits into our planned growth or not. The purchase price is a consideration but it’s probably the last one – nobody is really giving anything away. Is the shop in line with someplace you want to be or someplace you want to grow, and how will the operations line up? As you go to integrate, is it going to be hard or easy, and we might do it either way, it’s just a factor to consider. Is there a need in the area, and can you grow it? So that ties into square footage and whether there is the capacity to grow from where they are now or if they’re already maxed. Another is how good is the team, which is an important aspect to consider.
Q: What is the best preparation a seller can make?
Profitability matters, so they want to run their business well. You want to make sure that they have a good reputation. Staying current with equipment and training is always a plus. Training especially, to get accounts turned on, if they’re not anywhere near ICAR Gold or something like that, you have to do a lot of training before you can get accounts turned on.
Q: Does shifting market share among insurers affect your appetite for expansion?
Market share has been shifting to the largest companies for a while now, so if that’s where all the work is going, it seems to me like that’s where you want to be. That’s helping create the appetite for expansion.
Q: Just along those lines, Geico has been gaining market share and Allstate has been losing market share, and Progressive has been gaining. Do you see anyone else gaining as rapidly as Geico and Progressive?
No, I look at it from a nationwide perspective. The big 4 would be State Farm, Allstate, Progressive, and Geico. Then in different markets like California, you’ve got other ones that are much bigger than in other parts of the county like Mercury and Farmers. But the top 4 to me seem to be consistent everywhere. I don’t see that as organic growth, but you never know who buys who. Number 5 can buy number 6 and all of a sudden they’re number 3.
Q: You’ve always had a lot of Allstate business around Chicago, right?
We have more now. Service King dominated all of the Allstate work after they acquired Sterling. When Service King came to Chicago and started buying the MSOs there, Service King was the lead referral source for Allstate. With Crash Champions getting bigger and Service King’s exclusivity going away, we started to pick up more business from Allstate.
Q: Does the industry really need 30,000 shops? How many do they need?
Here’s how I would present the math. There’s a certain size where the profitability makes sense. Pick a number, say a shop does less than $300,000 a month. Maybe in the right areas where the rent is cheap enough, it makes some financial sense. But in my experience, for the numbers to be profitable, you need at least that much volume at a location.
With the average shop in the US doing about $1 million annually, that not sustainable for the industry or the people in it. It takes more like $2 million to be viable long term. Ultimately, I don’t think the industry needs 30,000 shops.
David Roberts: I don’t think that’s a secret to anybody. My guess is that the industry would have contracted by 50% if it weren’t for the PPP loans.
I think it did contract and more than we know. There are so many shops with so many cars, I mean, today shops are turning work away nationwide and I don’t think the claims count is significantly higher than pre-COVID. There’s just nobody to do the work, so I think that as far as manpower and with robots unable to fix cars, the industry might have contracted more than we really have our minds wrapped around.
Q: How does the technician shortage affect your growth plans?
Our ability to attract and retain technicians is basically the revenue limiter on our growth plan – that’s how I always look at it. The number of technicians that you have is really going to determine how many cars you’re able to fix. The key concentration is to grow the number of technicians, either through training, development, or recruiting.
Q: What are the most alarming and reassuring trends you saw or experienced in the collision repair space during COVID?
The inflation is alarming. Historically, as an industry, our ability to charge increased prices has been really slow. What has the labor rate changed in 10 years? Maybe 2-4 dollars over that
given period. It seems like the costs are skyrocketing, and if we’re at any pace that matches what we’ve seen historically, it won’t allow us to continue if the costs keep this trajectory.
Even more alarming is the lack of interest in the future workforce. There’s no magic thing that has happened to make the industry more appealing for people that want to jump into it. The problem of attracting young people to the industry has kept a lot of people up at night. I don’t think that there’s anybody who has come up with a solution to attract people to the industry at the rate that we need them.
Q: What about the competition between dealers and OEs; are you seeing a lot of pushback from dealers about giving you certifications or allowing you to buy their parts when they want to sell only OE parts?
Yeah, a little bit. Particularly with high-end vehicles, you need a dealer to sponsor you to become certified. The dealers in the middle can make it challenging at times. Receiving an OE sponsor doesn’t mean you’re the best shop to have a relationship, it just means you are the shop that the dealer is willing to partner with. So if they have a relationship outside of you that they feel benefits them more, it can conflict. I don’t really think that suits the insurer, the manufacturer, or consumer the best, it just suits that dealer the best and there should be a better way to work together.
Shawn Crozat, CEO, G&C Auto Body – 21 Locations in Northern California
Q: What aspects do you consider in your key criteria for deciding whether to buy or pass?
We have a matrix to rank all the shops we are considering for acquisition. We look at a few things: sales price, required capital investment, potential revenue, market size, and what DRPs we can get. Then we look at strategic geographic locations. How does this fit in with our other stores? We might pay up for one that makes sense strategically for us. We walked away from an opportunity because it was too far outside of our geographic location and the market size just wasn’t big enough. It was too big of a risk. We look at the rent per square foot, and we look at how easily we can get talent. We put all of our stores up and rank opportunities on a 1 through 3 scale. From there, we decide what deals to pursue and which to walk from.
Q: What is the best preparation a seller can make?
The difference between someone that is prepared and not prepared is usually clean financials and an updated asset list. They know what they have and they can tell that to you quickly.
Q: Would it be helpful for a seller to already have a lease with their landlord, or would you prefer to go after it yourself?
I’d prefer an intro and to talk it out with the landlord myself. If the seller owns the building, it’s nice if they’ve already done some market research and know what their building is worth.
Q: How will shifting leadership among insurers affect appetite for expansion?
It doesn’t change our plans. Our job is to perform for all partners and I want good relationships with all.
Q: Does the industry really need 30,000 shops?
No, there is a lot of production space and shops that aren’t fully utilized.
Q: How does the technician shortage affect your growth plans?
Not at all. Part of our growth plan is how do we get better at retaining my talent, how do we get better at growing new talent, and how do we get better at recruiting. That’s part of what I work on in my calendar everyday – staffing and recruiting for an hour. We work a lot on employee surveys and getting feedback. Part of growth is not just “how do you buy shops?” but “how do you keep your people happy?” – that’s part of what you have to do to keep growing. It’s not easy, but the technician shortage doesn’t affect our plans for growth.
Q: What are the most alarming and reassuring trends you saw or experienced in the collision repair space during COVID?
Even when we were at our worst, when our volume was low, we were still okay and able to keep our heads above water. We rapidly adjusted to a dramatic change in volume and that gave us confidence that when a recession comes, we will be able to do the same thing.
The technician shortage is crazy. What alarms me is the amount of people that don’t want to work anymore; what alarms me is our squeezed labor costs and how quickly things really escalated, and what alarms me is how much COVID has polarized people politically.
Q: What opportunities do you foresee in the next five years in a post-breakout (but not post-COVID) world?
I’m hoping we all realize that COVID is permanent. It’s not a pandemic anymore, it’s endemic, it’s not going anywhere – especially now with Omicron. I think we just navigate that. I don’t think it really changes my decisions. Maybe it changes opportunities – there may be more body shop owners that want to get out that are tired of dealing with this, that might push some people over the edge, but I’m not sure. We haven’t changed any of strategies or philosophies because of it. If COVID gets worse or becomes endemic, I don’t think that would change what we’re trying to accomplish.
Scott Leffler & Vartan Jerian, VIVE Collision – 10 Locations in the North East
Q: What aspects do you consider in your key criteria for deciding whether to buy or pass?
The biggest factors we consider when assessing an opportunity are: (i) evaluating the team/infrastructure that is in place; as a People-First organization, we are extremely focused on ensuring we can work collaboratively with the team to support their continued growth; and (ii) understanding the financial history of the business; we appreciate that running a business doesn’t mean things move in a straight line and work closely with potential shop partners to understand their operating history thoughtfully. (Scott Leffler)
Q: What is the best preparation a seller can make?
The first step is being mentally prepared to pursue a transaction. Shop owners that are indecisive about what they are looking to accomplish with a transaction can make the process challenging. That’s why working with deal professionals like Focus Advisors, that help owners flush out what they’re looking to achieve, typically makes the transaction process more efficient. Our organization is different because we can provide owners with a menu of transaction solutions that best fits their needs. Most importantly, if an owner is not ready to transact or doesn’t know what he or she wants, trying to put a square peg in a round hole simply doesn’t work – and it doesn’t result in a good outcome for all parties involved.
The second step is information preparedness. If an owner wants a transaction to move seamlessly, which means a faster closing and lower deal costs, having the right information at their fingertips, and in a way that a buyer can digest efficiently, is essential. That’s not just having financial information, that’s also legal information, insurance-related information, property information, among others. We realize the transaction process is time consuming for owners who are also trying to run their businesses; our organization has built a proprietary transaction playbook to streamline the transaction process for shop owners. (Scott Leffler)
Q: Does shifting market share among insurers affect your appetite for expansion?
No, it does not. Our primary focus is supporting and growing our local relationships in the communities where we operate. These relationships take the form of our local customers, local businesses, insurance agents, fleet service providers, dealerships and OEMs, among others. (Vartan Jerian)
Q: Does the industry really need 30,000 shops?
That’s a challenging and fluid question to answer; that said, we believe a strong independent collision repair channel is critical for the long-term success of the collision repair industry. As today’s modern vehicle becomes increasingly complex, the need for a vibrant ecosystem of well-capitalized collision repair operators has never been more important. We welcome independent operators looking for support to join our modern collision repair family to navigate through the technological revolution that is taking place across the industry. For our organization, we don’t really focus on how many shops are out there. We’re continuously focused on the three pillars of our organization: People, Process and Passion. We believe if we focus on these three pillars, we will produce a best-in-class service for our customers and partners delivered by a Team passionate about moving the industry forward for the better. (Vartan Jerian)
Q: How does the technician shortage affect your growth plans?
The technician shortage makes our growth plan – and expanding our operations – that much more important. With scale, we can offer more robust benefits and training opportunities to attract and retain talent.
As a People-First organization, we take a hands-on approach to attracting and developing our Team. We are working at the grass-roots level across our organization, developing relationships and apprenticeship programs with local trade schools in the markets in which we operate. We believe developing these relationships at the grass roots level allows our organization to develop a more personal relationship with candidates, which ultimately leads to a higher quality experience (and higher retention rates) for teammates that join our platform.
We are also developing proprietary, in-house training programs alongside external partners to position our teammates for long-term success in the industry. Continuous improvement and infinite-mindedness are the backbones of our organization; we believe through the implementation of robust, in-house training programs we are empowering our teammates to strive for continuous improvement.
To develop a deeper technician candidate pool, the industry needs to take an active, hands-on approach at these grass roots levels as well as strengthen their technician training programs to attract new participants to the industry, in our perspective. (Vartan Jerian)
Q: What are the most alarming and reassuring trends you saw or experienced in the collision repair space during COVID?
The most reassuring trend is that the industry has proven to be exceptionally resilient. This is a service that has not just proven to be essential, (as deemed by regulators) but is clearly essential as evidenced in the sharp recovery in volumes as well as miles driven across the country. There have been no shortage of challenges operating in a COVID-19 environment the past 2 years, but the positive feedback we continue to receive from our teammates and customers makes me optimistic about the long-term prospects of the industry and impact we are making within our local communities.
What has given me some discomfort, and I’m sure other operators are navigating similar challenges, is COVID-19 has accelerated the challenges in the labor force. The COVID-19 environment pushed many that were considering retirement into retirement, some technicians have pivoted into other industries as job opportunities have become more fluid. Many larger operators also made significant changes to their labor force throughout COVID-19 vs. making long-term commitments and investments in their teams; these actions by various larger operators drove many in the industry to seek alternative employment opportunities in other industries. So, I think the COVID-19 environment has really exacerbated the labor shortage issue and it’s placing even more of a spotlight on the industry to work together to implement creative strategies to build a deeper technician candidate pool. (Vartan Jerian)
Jacob Tilzer, CEO, Kaizen Collision – 40+ Locations
Q: What aspects do you consider in your key criteria for deciding whether to buy or pass?
Probably why we’ve grown so fast (and I know we’re not very big at all compared to the stuff going on out there} is I don’t start with the income statement. I don’t go right into somebody’s numbers and say, “hey, this is great, this is buyable cashflow.” I start with the leaders of the organization and that gives me a sense of how they lead the people that we’re going to be acquiring. I don’t view acquisitions as just acquiring locations and EBITDA – we acquire great people and operators.
The first box to check for me is whether the leader is a good person and if have they been good to their people. And I ask, “is this going to be an easier integration for our culture?” Because when we didn’t have two sticks to rub together or capital to grow with, we had a great culture and that’s honestly what has got us into the phases we’ve grown into.
Geography is another big piece. It just so happens to be that when the leader was a great person to his people, operator of his/her business and the culture is right, the cash flow also ends up being right.
Q: Are some operators too small, do you have a minimum EBITDA or revenue?
I don’t ever treat anybody like that, I love conversing and meeting everyone who is involved or passionate about this business. I have our “buy box” where our sweet spot would be – 10-20 thousand square foot shops with $2-4mm in revenue, but this doesn’t mean we don’t do deals higher and lower than this. We like picking, in my opinion, what I consider to be good culture companies. I’m not on a 2-year timeline here or planning to pump and dump this ship to the next guy. I am playing a long-term game here. We’re building a foundation that will last for the next 20-30 years.
Q: What is the best preparation a seller can make?
You can bifurcate preparation into a couple of different sections. As I tell some people who aren’t ready, if you’re going to go through it at some point, you’ve got to clean some things up no matter what – whether you’re going to raise capital or sell your company. I also enjoy helping people through this part. If it’s a little messy or behind I always tell people, let me help you whether you do a deal with us or not this is how it should look, and based on that this is what you can expect. It doesn’t have to be perfect to get started.
Clean financials is obviously super important to running a clean process. Make sure that your ducks are in a row with financials first so that you don’t get caught off guard and it turns more into a defensive play. If you’re going to sell your business or raise capital, you want to do it on the offense with the ball in your court versus “Hey, we found this and this and it just doesn’t line up, so this is what it’s now going to look like with some adjustments.” Maybe accounting wasn’t accrual or there was some blended basis of cash and accrual.
The biggest piece for us making sure that the culture is in line, too. Consolidation, as I’m sure you guys know, has a really bad reputation in our industry. Guys come in, you know, suits, from Chicago in black Tahoes and they’re just all about the numbers and they’re going to make changes and this and that. We’re more collision guys. If we end up deploying capital with a company, we don’t plan on making too many structural changes, unless there’s a big value add like some paint synergy or something similar – but not to the point where we redo someone’s entire model. We bring the things I feel are value add on our part, and take the things from them that they have value add on.
If I spend money on a company, I do it from a non-cost-cutting basis. One of my checkboxes is, I don’t want to have to come in and fire people to get a seller to the number they want. I actually do not like to acquire and grow this way to grow and acquire. There is some accounting and material synergies, but if I have to come into a business and let 7 people go to make it work, then it’s going to be very hard to bring them into our culture. So, I would say, having financials in line and having a good view of what the culture is going to be like post-closing. The more honest someone is with me the better we can transition.
Q: Does shifting market share among insurers affect your appetite for expansion?
I don’t follow market share. I don’t really care for it. I have full stores, whatever that equates to percentage wise, if I have full stores and happy staff – what that equates to in the market is what it equates to. I have certain partners we choose to work with and ones we do not work with on a large scale. It goes against the bigger MSO theory that states the more DRPs the better. But for me, I’ve always tried to practice a very low DRP profile. One of the interesting things about Kaizen is that our platform is only 35% DRP and the DRPs we do have truly care about the customer experience and want to fix the car correctly. We have 10 locations now that are nearly 100% retail. There are other ways to drive business to stores.
I ran a retail shop for the first 5 years of our company, not one DRP. From pure customer acquisition, to how to do a good job and take care of somebody and fix a car correctly. I tell my stores that if I remove the DRPs from the location, are you still going to get customers? That’s when I think you have a really good business. If you shut the DRPs off and everything stops, that’s a big problem and you have to have a high-risk tolerance. I am not saying all DRPs are bad we obviously haves DRP partners but we try to focus on a quality few DRP partners at the locations we do have them so we can keep everyone happy our employees, customers, and partners. Through COVID, we were one of the only MSOs that weren’t down and I feel that is in part because of our model.
Q: Does the industry really need 30,000 shops?
I don’t think the industry needs more of the same type of shops. I don’t find value in going in, buying somebody’s business, converting the contacts it has, and putting your sign on the building a success, in all honesty that is extremely easy to achieve, and I don’t pat myself on the back for it.
There is a lot of bad that is going on in the industry right now. People are just so focused on this tear of growth that it’s always created a bad taste out there for employees of an acquired location. We have been guilty of this in the past, but I have refocused our commitment to having the best model in the industry that will sustain without the corporate tyranny terror behind it.
I don’t believe the industry needs more of the same templated shops. What’s going on right now is that we’re losing the good shops where owners really took care of people and focused on people. I’ve always said that the second you put profits ahead of people, they’re going to feel that and it’s going to change the vibe and trajectory. I’ve always happened to put people first and that’s driven profit within the business. Kaizen is a company right now because I focus more on preserving what I view as the really good companies left in the market and giving them a new breath of life into the future. Not by kicking the old owners out on week one or pulling their signs down the same day and changing out the paint banks right away. I’m really trying to preserve what I feel are some of the best people for culture and the business because those are the people that are going to win the race in my opinion.
All of this consolidation that’s going on, when the industry becomes a little bit less fragmented, it’s going to drive prices up even more and it’s going to change the industry even more. We have to be in front of that change. Several other large mergers are going to happen a major consolidation of another major consolidator. There’s probably going to be 3 groups less at the end of this that are holding the largest part of what was consolidated. While most of it is financially fueled if it was used to create a new direction and change that would be better for this industry as a whole.
I do think the industry needs a lot of good shops because I’ll just be quite frank, we might have the capital to invest and do all of these things, but the owner that’s still in the shop, wiping the compound out of the headlight for Ms. Jones that he’s known for 20 years, I can never compete against that guy. That is one guy that has given his heart and soul to the customer base and the business he’s built. And I’ve bought a lot of those shops from those people, with a promise to take care of their people. This is why I would say, when you have other consolidation groups behind us or in front of us offering many millions more than what we’re going to pay, we’re not beating them on price, but we are winning on the value of being the collision guys not the board room guys. There are a lot of good shops out there and the reputation is that one just went to the dark side and it’s going to get ruined in a month or two. That’s just somebody’s perspective, but in our industry, perspective is reality for most people and that’s not what we try to do.
We haven’t been perfect by any means, and we have a lot of process to roll out and systems to get online but we never sacrifice how we treat people. A lot of us growing rapidly in collision challenges and breaks our infostructure and many people get so hooked on the growth that they ignore the inefficiencies behind them, I hear stories from all of us in the top 10 and they are all extremely similar in what we struggle with managing this rapid growth. I do want to do something different and break away from this mold or a traditional large MSO. I am not doing this for the money I could have lived a great life with 1 store, I could have been done at 10 stores. I had offers for more money than I would have been able to spend, I am doing this to make a difference in the collision space and I must honor my word that I gave to people who took a chance on me.
Now that we have scale and large capital partners backing the company we can work on dialing in process and working on becoming more efficient in our process from the CSR desk all the way back to the accounting office. We have had our growth pains when we grew from 7 stores to 40 in 12 months. I am not proud of some of the strain I have put on our people or some of our stores and I am dead set on dialing it in. We can double the company right now again if I choose – scaling collision is not hard, doing it financially responsible and keeping your culture together is the real task and that’s what we are focused on. Through the growth, I have really learned the resilience of our team, the people who were 110% on board would go through the fire with us thick and thin, and I love breaking things with stress to see where our flaws are. Kaizen means to continuously improve, and we are doing that every day.
So, I don’t think the industry needs more of the same cookie-cutter shops. While the industry might have some good large consolidator the B and C level providers, they’re never going to outclass Mr. Jones who’s been taking care of his community for 40 years. He’s working in the shop, he’s throwing birthday parties for his employees, letting his employees’ grandkids run around the office and eat their cookies. You can do a lot of things for your employees at a very large corporate level that touch on a lot of these areas, but you just can’t get a feel that it’s the same. We had a deal recently that had 3 owners. 3 of the best guys that I have ever met in my life – they would give you the shirt off their back or were willing to stick around as long as I needed, didn’t ask for any extra compensation, many of his employees cried thinking he was going to get kicked out, like a transition they were apart of at another company – they’re just really good people, and I feel that our brand is preservation for those types of companies.
While our strategy will take a bit extra to work out and run a model different than what is going on in the consolidation world, it is going to work because it is right and better for the industry. I love promoting the average Joes, you don’t need a cape to work here and feel that you’re either the best of the best or you’re not welcome. The environment where everyone claims to be the best of the best spend most of their days proving that to the people they work with, it’s the Enron model if you’re not the best of the best don’t even come over here.
I love our people, and the people we are growing are being taught the difference between right and wrong and how to fix a car right. Because of that, we will win the long-term race – I promise that. These other groups have a different goal, bolt as many of these shops together as possible at all costs, and put a pretty little bow and tie on it and sell it to the next guy. I am not sure I would be able to sleep at night living that way. I understand private equity but to have such a short timeline to focus purely on just driving EBITDA at all costs, you give up innovation, and you don’t have time to focus on the safety and structural repair process on a car. I don’t think some of the private equity in our industry right now is moving the needle in the right direction for the industry. You can’t put financial motivation in front of fixing a car correctly. The foundation has to start with fixing the car correctly at all costs and everything else in the process has to be built around that.
There is the traditional model that is currently going on and it isn’t any better for the industry. It’s not a repair-plan type model, it’s not a CSR model, it’s not an innovative type of model – it’s traditional. Managers, standalone technicians, paint technicians, detailers, everybody is on a commission structure to where everyone is out for themselves and it tedious cradle to grave work and it really promotes inefficiency and burn out, and it’s not a model I think the industry needs more of. While we have many of these stores ourselves, we are working on culture and bringing everyone together as a team, so they understand where we are going with this and why this model is going to be different.
Q: How does the technician shortage affect your growth plans?
I don’t know what you know about my background, but I was a technician. I speak the technician language – I was a technician for 10 years. Even though I’m only 33, I was a heavy structural technician that ran a team of 5 guys and pretty much all the production for our shop. That was before I learned the paperwork side and then jumped out and started Kaizen. I would say that it’s one of the strategic advantages that Kaizen has. There are a lot of operators and a lot of spreadsheet guys that don’t speak the technician language. When we start to open up some conversation, they know they’re dealing with people that understand their world for its technicality not based on this spread sheet this is how to squeeze more money out of a location by doing x, y, z.
You can just throw more money at people but that has never fit our financial models in collision; you can’t promise crazy vacation – like a lot of these companies are doing right now, but it’s not sustainable. I remind our office staff that our technicians make the money that we all get paid on the admin side and we second to the front-line dollars produced we have to remain financially smart with our decisions. I always start with the techs. When I go into my shops, I don’t start by walking through my office, I usually start by walking the back of my shops. I typically know what’s going on at that store before I even get to the office. There’s a very good pulse and heartbeat that comes from the back end and not from the front.
Q: So what are you doing to combat the technician shortage?
There is no people shortage right now, the daily population increases by 7,000 people per day how is there a people shortage? There might be an attraction to this industry issue or a not so great career path vision for some people in it. Us shop owners have to be the ones to help make this change. I am seeing some of it right now getting back to career path and ground up training so I do feel good about that part of the industry. I don’t mean this in an arrogant way at all. I’m not an arrogant guy. We have never really had a shortage of technicians. I’ve always had the strongest connection with my technicians. I think the best thing that you can do to combat what’s going on right now is to listen to the little things. A lot of technicians speak up about concerns, and a lot of people on the admin side brush it off because they’re so busy pushing cars out and trying to close the end of the month.
If there is a technician issue, they usually speak up in small amounts first. Sometimes they’re afraid to make a big scene about something right out of the gate before it becomes a pent-up animosity, so I try to encourage my team to listen to the small things and always encourage our staff to speak up. I’m always terrified when someone comes up to me and says, “hey, this person put their notice in.” There’s a really intuitive part about this business and our people that if somebody says they put their notice in and you didn’t see it coming, then you don’t have your pulse on the business. There are always warning signs. There are always little things that come up or are brought up. Sometimes it’s the smallest comments that drive people away.
Fortunately for us, from the technician side, I feel the strongest bond with our technicians. It’s not been a major issue for us. I’m not saying we haven’t had pockets where we’ve been down a technician or two or that we can’t use another one, I’ve just never adopted the technician shortage mindset. If you believe that it’s real, you’ll also bring it to life. It just so happens that I’ve never believed in it and I’ve got some great technicians and fully staffed stores.
There is quiet of a bit of crazy unsustainable offers being thrown out there right now to try to acquire talent, it’s absolutely not sustainable and it’s a super short-term plan to create movement and when things settle down after these same companies will be restructuring those pay plans and the trust will be broken with the newly acquired staff members. Everybody is worth right now what the other guy says they are worth and to someone who is extremely short staffed people are yielding a high call, after they get a quarter of their financials under their belt, they will be thinking twice about the offers they made to people. I understand it’s a vicious market out there but watching some of these recruiters creep into peoples LinkedIn, Facebook and Instagram DMs, it’s just not decent. I have always viewed this as a hole is our culture, if someone is able to recruit someone away from us by a Facebook message we probably failed that person culturally and that is my fault. However watching people leave for 2$ an hour more because the same recruiter or regional is promising roses and butterflies at a time of transition and vulnerability its honestly pathetic and these guys don’t have much of a moral compass.
We’ve been running the same financials since the inception of the business, can you increase cost that much without giving up your bottom line without major rate increases, the answer is no, and most of the stores making these crazy offers are trying to plug holes because what’s better than a hemorrhage is a small gash and in turn can be restructured later. We have a national parts shortage that is something I won’t deny, but it’s the best thing that could have happened to this industry because its forcing innovation and exposed a really bad system we were dependent on.
Look at Tesla everyone told us to stay away from them they can’t get parts they are terrible but what I saw in those early days was a great infrastructure. They were developing and innovating a new supply chain model and when the boats stopped in the bays with our parts and we weren’t getting parts from the regular OEMs, we were getting parts faster for Tesla than any other brand because they did it differently, built right here on our homeland. We need to bring more of this back to our home turf. We will come out of this supply chain contraction stronger and better than before, and the traditional model will be just the traditional model with higher costs and smaller bottom line. We will and have been innovating over here and are extremely excited for this time in the collision space.
Q: In your stores, do most people work in teams?
We’ve got a little bit of personality in each location, so we have some teams and a lot of standalone. I’m a team-minded guy myself, so this is the way I plan to take the company, but I want the buy-in of my team and for them to feel comfortable with it versus an imposed transition. In the cradle to grave burn out model everyone is expected to do so many tasks tied to the repair process we have to shift more toward segmented specialization. A team concept is the way to do this however you have to have all the right pieces, talent, pay plan, and mindset to make it work.
Q: What are the most alarming and reassuring trends you saw or experienced in the collision repair space during COVID?
If one person got COVID, then there were likely at least two people to get it. If one person popped up with it, then we went on high alert at that store.
We saw a common trend amongst our facilities. When there was a spike in revenue, then there was likely some good news that had been published beforehand that made people feel more comfortable when going out. As soon as the news would release something or there was something covering a spike in cases, or something that instilled fear in people, we would see fewer claims the following weeks. Those are some of the trends we did see. Claim count almost always followed the news in our market.
I’ll end on a note sharing a bit of my view point I had adopted a theory from a great leader many years ago when I started the business that we take care of our business in this order, we first take care of our employees, then we take care of our customer, then we take care of our communities in this exact order. If you take care of your employees, they will be open to changing with you and they will take care of your customers and will lead to a great customer experience, if you take care of your customers they will promote your business, if you take care of your community you’re a great contributor to society. We follow this exact order things and now that we are getting more community involved things are starting to get even more exciting.
Vincent Romans, CEO, The Romans Group
Q: How will shifting leadership among insurers affect expansion by the consolidators and regionals?
Insurance leadership has principally evolved to where most of the top 15 insurers support using consolidators and smaller regionals verses smaller one shop operators. The ability to manage and track repair operators is more efficient and streamlined when utilizing various sized MSOs versus a broader network of repairers across regions and the U.S depending on the insurer size and market reach. While smaller one shop operators will be utilized, the amount of business they will receive will continue to diminish over time and the harder it will be to have reach into the right regional and corporate insurer decision making personnel.
Q: Does the industry really need 30,000 shops?
My estimate for the relevant collision repair shops for 2020 is 31,400, which represents both independent and dealership body shops. This number has steadily decreased since 2000, even though the rate of decline has softened and leveled off in the past 7 years. CCC, with its 85% market share for estimating software for collision repair shops, claims to have 26,000 repairers using its estimating software. These shops will be considered by insurers but by no means all of them at any given time. It is my estimate that eventually the number of relevant and utilized collision repair facilities in the U.S. will move more closely to between 22,000 and 25,000 sometime closer to 2030.
Q: How does the technician shortage affect growth plans for large consolidators and regional MSOs?
In today’s post COVID government supported unemployment subsidies to businesses, coupled with an aging technician supply, growth plans are not necessarily impacted to any great degree. However, technician shortage does prevent consolidators from optimizing their organic growth and acquired growth throughput until they have built up their technician staff at locations.
Q: Do you expect to see consolidators focus more on greenfield developments or acquisitions in the next couple years? What about the regional and local MSOs?
Acquisitions will continue in the near and moderate term future, both by national and the growing list of regional consolidators. The use of greenfield and brownfield location development can best be seen as part of a local market expansion and shoring up of local market coverage based on insurer and consumer demand, where an MSOs market is mature but needs filler locations to supplement and build out the market.
Q: What are the most alarming and reassuring trends you saw or experienced in the collision repair space during COVID?
- All metrics that supported one of the healthiest collision repair markets ever in 2019, and during the first two months of 2020, collapsed during March 2020 and persisted into the second and third quarters of 2021.
- Repairable claims decreased between 22 and 25% across the U.S. and as much as 50% in Canada for full year 2020. This decrease was magnified due to the drastic reduction in vehicle miles driven, the new work from home model and the delay in reporting claims due to concerns around COVID 19 infections.
- The requirement to avoid no contact through social distancing helped skyrocket the use of virtual/photo estimating/touchless contact for appraisals/estimating.
- Many shops reduced their staff to accommodate the decrease in business. Many of these technicians are either not interested in returning to work or have delayed re-entry into the market due to continued government unemployment financial support.
- COVID motivated insurers to further work with MSOs rather than a large list of individual collision repair providers due to the elimination of field appraisers and the need to streamline claimant contact and claims processing.
David Roberts, Managing Director, Focus Advisors Automotive M&A
Q: How will shifting leadership among insurers affect expansion by the consolidators and regionals?
There is an inexorable movement toward concentration in nearly every industry. Auto insurance is no exception. Growth has been occurring both by changing market share and by the acquisition of smaller insurance companies. State Farm’s share is slightly eroding while GEICO and Progressive have been taking market share from almost everyone. We expect that to continue.
Fewer insurers making decisions about where vehicles will be repaired means that access to DRPs for these insurers is critical for growth. Large insurers simply do not have the staff and systems to be able to continue allocating repairs to shops that cannot meet their pricing and standard requirements. That means that consolidators and the large regional players will continue to benefit thus incentivizing them to grow their total shop count and capacity within existing shops
Q: Does the industry really need 30,000 shops?
Collision repair has been a pathway to financial success for so many hard-working entrepreneurs. It is difficult to observe the decline in shops that employ and support hundreds of thousands of employees and families. However, the continuing complexity, costs, technician shortage, and access to repairable vehicles place a premium on businesses that have scale. Half of the 30,000 shops remaining in the industry generate less than $2 million a year in revenue. In most markets, that level of revenue does not support the continued investments required. We expect to see continuing declines in the total number of shops.
Q: How does the technician shortage affect growth plans for large consolidators and regional MSOs?
For the past 5 to eight years, the shortage of technicians has been a limiting factor in the growth of every consolidator and multi-shop operator. Almost without exception, the lack of technicians limits growth. Five years ago, some of the consolidators were paying up to $25,000 in some markets to attract technicians away from competitors. Such a bounty system has limitations. The only long-term solution is increasing the supply by enhancing training, compensation during training, and providing a secure and steady income stream to technicians. Large-scale operators have the capabilities to accomplish this – at the cost of profitability.
Q: Do you expect to see consolidators focus more on greenfield developments or acquisitions in the next couple of years? What about the regional and local MSOs?
I expect that brownfield and greenfield developments will increase as a proportion of additional shops among every growing consolidator and MSO. In older, more urban areas, the timeline required for greenfield and brownfield shops is lengthy. In many southern and midwestern areas where development is more easily accomplished, the timelines are shorter. The constraint on these developments is staffing them once they are opened. For large operators, their internal pipeline of available staff is critical.
Q: What are the most alarming and reassuring trends you saw or experienced in the collision repair space during COVID?
During and since COVID, we have seen an increasingly large number of owners who have decided to throw in the towel. PPP loans kept shops from going under, but many owners are reluctant to try and push the rock up the hill one more time. As one multi-shop operator in the Midwest told us just last week, “I just got penalized for exceeding my length of rental KPI. The insurer didn’t care about the lack of parts that prevented the completion of the repair. That was the straw that broke the camel’s back for me. Every day something similar happens and I’m just done period.”
On the other hand, some operators came out of COVID with the wind at their backs as they began to gain market share in their regions and as they successfully acquired smaller shops at reasonable values. We expect to see many 10-20 shop MSOs appear as they expand regionally.
Focus Advisors is the industry’s go-to M&A firm. Over the past 7 years, Managing Director, David Roberts has led more than 40 transactions totaling more than $500 million and more than 300 collision repair shops. For a confidential discussion about your plans, contact David Roberts at [email protected] or call 510-444-1173.
Investment banking and securities offered through Independent Investment Bankers, member SIPC/FINRA. Focus Advisors and Independent Investment Bankers are not affiliated.
