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The Demystification of M&A – Part 3 TAKES TWO TO TANGO

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Our last article focused on the numerous motivations from a buyer’s perspective; we learned that sellers are wise to discern each potential buyer’s motivation as they enter into negotiations and prepare for due diligence.

Now it’s time to look at the seller’s side of an M&A transaction. Every deal requires a willing seller and a willing buyer (yes, occasionally we see unwilling sellers, but we’ll leave distressed and bankrupt sellers out to the equation for now). Seasoned buyers understand that timing is critical and the only way to buy a strong, well-run business on the buyer’s timing – other than luck – is to overpay. Everybody has a price.

Of course, serial buyers don’t call a disciplined process of continuously nurturing a healthy deal pipeline “luck”. And they shouldn’t. If your goal is to buy a stable business at a fair price, you often have to cast a lot of lines into the water, check on them regularly to ensure the bait still is good, and wait for a nibble. If you want to acquire several businesses, add a corporate development executive to your team whose job is to ensure every strategically-viable acquisition target is called upon regularly. As they say, make your own luck.

[Buyers also can wait for investment bankers and business brokers to send them unsolicited acquisition opportunities, but why wait? A proactive search process tends to yield better results than playing the waiting game and then competing with your peers after everyone gets the offering memorandum.]

The Nibble. When a seller shows some interest, a critical next step is to determine why the business is available. While it may seem counterintuitive, often a seller’s reason for exiting isn’t just to “monetize” the business. Let’s explore some scenarios:

1. Frailty. I can count on four hands how many deals I’ve been involved in that were heavily influenced by a health issue. Despite being a data-driven, analytical type, I have not tracked the different maladies. That said, owners suffering heart attacks (or near misses) likely have been the primary motivator, followed by a spouse’s serious sickness. Why is this notable? Beyond knowing that the seller may have a sense of urgency, there may be ways to sweeten a deal that makes it more attractive than others. In this situation, consider offering an employment position that allows the seller to maintain health insurance while reducing some of the stressors that may have led to the health issue.

2. Fear. In industries experiencing consolidation or obsolescence, sellers tend to be less rational. When a buyer suspects that a deal may be driven by fear, that should be a giant warning sign prompting detailed due diligence. Is the suspected “fear” something that would negatively impact the buyer? Perhaps the fear isn’t so obvious to a buyer. Could it be that the seller knows that eminent domain will be gobbling up a big chuck of the site, or a major lawsuit is looming, or a major customer is likely to go away because it is being sold to a company that won’t work with the seller, or the seller expects a key employee to be moving away. Think of a major risk in your business and then examine the seller’s propensity to suffer from the same situation. The scenarios are almost endless.

3. Fatigue. Health reasons and fear, particularly when combined, can result in significant fatigue for a business owner. When you sit down for an exploratory conversation with a potential seller over coffee and all that you hear is that he’s tired or that she’s not sleeping well, try to quickly discern between the fatiguing influences that would affect you as a buyer versus those that may be unique to the seller. If the seller is tired because, for example, he/she can’t find quality employees and is having to work double time, be sure to have a proven plan in place to eliminate this challenge (or acknowledge it and wisely walk away).

4. (In)frequent. Occasionally, a bored business owner becomes a rational seller. This is particularly common in owners who have started and sold multiple businesses. These “serial entrepreneurs” live for the start & build, but don’t get too emotionally attached to a business. Their objectivity in a deal tends to yield balanced outcomes. Conversely, another occasional motivator is situations with multiple partners having conflicting interests. Buyers should tread lightly in these situations in the event acrimony amongst the sellers leads one to make choices and take actions that potentially damages the blue sky that is appealing to the buyer.

5. Financial. Most success doesn’t occur by happenstance. Rather, business owners who have a clear vision, set goals and then direct their resources and energy towards achieving them, often have “that number”. That’s right – as soon as their business reaches a certain value, they’re a seller. They can be in the 30’s or their 60’s. Even the most experience buyers can’t recognize these sellers until they self identify, which often sounds like: “I need X”. Like the bored or serial entrepreneur, they tend to be more objective – hit their number and the rest of the deal will likely go smoothly.

6. Finally. More than any other reason, the desire to depart is driven by a date. Whether it’s the owner’s 50th, 60th or 65th birthday, often the calendar is the final arbiter. The seller has had a successful career, built a healthy business and now it’s time to rebalance the retirement portfolio’s assets from a risky business to cash. Why should buyers care? Often sellers in this category don’t have a significant sense of urgency, or so they want you to believe. If you’ve been around the deal block a couple of times, you know to not count that big chicken before it’s hatched. Savvy sellers will continue to invest in their businesses during negotiations and due diligence to not only create a sense of nonchalance about the deal, but also to be ready in the event it potential breaks down. They’re good at “playing chicken” about “counting their chickens” (sorry – I couldn’t resist!).

What’s the message here? It may not be just dollars driving a deal. Savvy buyers dig deep to understand their deal counterpart’s motivations and will structure deal terms to match their goals or allay their fears. Meanwhile, successful sellers are careful to project objectivity and artfully use perception to improve their outcomes. A key to successfully negotiating and structuring a deal is to know what drives the other side.

Comments / questions / criticisms? Are you contemplating a deal that might fit into one of these categories and you want to ensure you’re making a sound decision? Feel free to e-mail me: john.walcher@veritasadvisorsinc.com – I’m happy to explore the circumstances with you. Our next article will explore the anatomy of a deal. Until then, happy dealing!

 

Road to Green: The Generation in Our Industry Who Are Frustrated – Why?

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Many younger HD shop “owners”, managers, coupled with many HD parts distributors, WD, and Manufacturer corporate/division managers/staff within our industry, want to change their business processes. They have taken the time to study the HD industry, their market and go to classes and learn what is necessary to start changing today to secure the business for tomorrow. They truly understand that, with technology moving so rapidly at all levels of the aftermarket and other details that are taking place, change is not an option. The problem is they do not have the power to implement the changes required, because the “real authority” from the previous generation, or hierarchy, (who did not attend those classes) is still active, and “knows how to run this business”.

Consider this analogy of five monkeys: Start with a large cage containing five monkeys. Inside the cage, hang a banana on a string and place a set of stairs under it. Before long a monkey will go to the stairs and start to climb towards the banana. As soon as he touches the stairs, spray all of the other monkeys with cold water.

After a while, another monkey makes an attempt with the same result — all the other monkeys are sprayed with cold water. Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.

Now, put away the cold water. Remove one monkey from the cage and replace it with a new one. The new monkey sees the banana and wants to climb the stairs. To his surprise, and horror, all the other monkeys attack him. After another attempt, and attack, he knows that if he tries to climb the stairs, he will be assaulted.

Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm!

Likewise, replace a third original monkey with a new one, then a fourth, then a fifth. Every time the newest monkey takes to the stairs, he is attacked. Most of the monkeys that are beating him have no idea why they were not permitted to climb the stairs, or why they are participating in the beating of the newest monkey.

After replacing all the original monkeys, none of the remaining monkeys have ever been sprayed with cold water. Nevertheless, no monkey ever again approaches the stairs to try for the banana. Why not? Because as far as they know, that’s the way it’s always been done around here.

Is this analogy similar in your heavy duty shop, or company? Is it holding your business/company back today? The previous generation, the current “real authorities”, won’t change, or keep up to date, with new understandings in our ever-so rapid changing industry. In their minds, they have “been there, done that, only have another 3 to 5 years, and then I’m out of here”. They continue to stay with the standard, old thinking, old routines, in their day-to-day motions, yet profits keep dropping. It is time to come to grips with this. It is time to address this. It is time to move away from this attitude. “Vision with clear understanding”, is required to begin securing our future. It is time to go for the banana!

Consider sharing this article with the “real authority” and be ready for the fireworks because no one likes gut wrenching change. Be prepared with your notes containing clear and documented facts so you can constructively talk things out. There are many within the HD aftermarket that must get out of the “dark ages”, the “rut”, and allow vitality, and enthusiasm to enter and get on with what is necessary. If we wait those 3 to 5 years that they want for their own self-serving interests, that is 3 to 5 years of progressive/development/constructive time lost forever. It is valuable time we need today, to insure we are here 7 years from now.

Are we thinking and talking today, within our business walls, about the potential HD electric vehicle, the HD autonomous vehicle, vehicle software platforms, the competitions strategy, the changing commercial business, the type of education and training we all need to do on a continuous basis so we are at the top of OUR game? Today’s “real authority” must be properly challenged with the facts in front of them, and if they refuse take action, invest in what is necessary, then you know where your own future is if you stay there. Tough talk yes, but we as an industry must start having tough discussions and back those discussions with solid solutions coupled with a proper time-line action plan because too many aftermarket lives and families are being affected with inertia, out of touch management.

Old management loves to blame the workforce or what they perceive is not available in the marketplace and how they don’t want to work or do anything anymore. Please wake up management; they want leadership with a clear vision that they want to BELIEVE in and be part of. When a workforce believes in the company and believes truly where it is going, productivity soars and results happen. People outside of the company looking for great companies hear about you, your vision, your culture and applications start to come in. Right now too many in the real workforce are struggling to find companies that have that leadership, vision and culture. To all “Real Authorities”, look in the mirror and your problem will be in front of you.

How is your 2019 going to develop? It is time to go for the bananas. The stairs must be climbed by everyone and if someone doesn’t want to climb those stairs including the “authority”, it is time to open that door and kick them out of the cage.

The HD Repair Forum Secures Date and Location for 2nd Annual Heavy-Duty Collision Repair Conference

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The HD Repair Forum announces it will host its second annual conference for the heavy-duty collision repair industry on April 2-3, 2019 in Fort Worth, Texas at the historic Hilton Fort Worth.

“The inaugural HD Repair Forum was a success. Our goal was to bring the decision makers and influencers of the industry together with the hope of helping drive improvement for all industry stakeholders. As evidenced by the list of attendees and the level of engagement, the Forum clearly fills the need. Attendees were able to share, learn and network with the leadership in the heavy-duty collision repair industry,” explains Brian Nessen, co-founder of the HD Repair Forum.

The 2018 conference featured technical and management training from some of the most well respected companies and trainers in the industry. In addition, executives from Navistar and Peterbilt, discussed their new vehicle technology and the challenges repairers will face in the future. Several co-located meetings, such as AkzoNobel’s 20 group, were held during the week that brought in some of the best repairers in the United States and Canada. The vendor expo brought high visibility to supporting organizations that are committed to serving the industry.

“Our goal is simple,” states Nessen. “Provide heavy-duty collision repairers with an avenue to collaborate with the key influencers in their business. Vehicle manufacturers, insurers, independent appraisers, information providers, tool & equipment suppliers, paint manufacturers, and paint body & equipment suppliers are welcome.”

The HD Repair Forum expects its second conference to bring additional OEM participation, to continue the discussion on industry repair standards, as well as provide relevant training and education for shop owners and managers.

For more information on the HD Repair Forum and its second annual conference check www.hdrepairforum.com for evolving updates.

To sign up for the monthly newsletter and get event updates straight to your inbox, go to: www.hdrepairforum.com/contact-us

For sponsorship opportunities, or inquiries on collaborative development please contact Jennie Lenk at 281-819-2332.

 

PPG Releases Commercial Training Schedule For Fall 2018

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PPG has announced its Commercial Coatings training schedule for the fourth quarter of 2018. Classes cover a wide variety of subjects and are designed to ensure that paint technicians stay up to date with their commercial refinish certification and knowledge of PPG commercial coatings products, processes and technological advances.

Led by expert PPG trainers, the commercial coatings training classes are held at PPG Business Development Centers and numerous field locations across the U.S. and Canada. The courses take one to two days and provide extensive classroom instruction along with hands-on work in the spray booth. Technicians are given generous opportunities for informal discussions and Q&A sessions with the trainers.

Commercial training courses cover PPG premium brands including the DELFLEET ESSENTIAL®, DELFLEET® Evolution and PPG commercial performance coatings (CPC) product lines, with certification and recertification offered for the Delfleet family of products. Programs encompass a comprehensive range of topics from product selection, equipment and color tools to surface preparation and paint application best practices. Classes are also offered for PPG’s ADJUSTRITE® commercial estimating system. Classes are available in Spanish and French in some locations.

PPG refinish technicians must be certified and then recertified every two years to make certain they stay current with ever-evolving industry developments. When PPG paint technicians and their respective collision centers are certified, the centers may offer the PPG Commercial Vehicle Paint Performance Warranty to their customers, providing a valued edge over the competition. Technicians must maintain their PPG certification in the Delfleet Essential or Delfleet Evolution paint line for the collision repair center to continue participating in the PPG commercial warranty program.

Course descriptions with October, November and December dates, locations and registration instructions can be found at us.ppgrefinish.com/training.

For more information about PPG refinish products, visit www.ppgrefinish.com or call
(800) 647-6050.

Road to Green: Is Your Heavy Duty Shop Addressing the Reality That is Now Here?

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There is no doubt about it that changing times are here. That is an obvious statement yet I see many HD shops carrying on their business “as usual” thinking as long as we are busy, life is good.

I wish it was that simple, but unfortunately it is not.

Consider answering these few questions about your own operation and don’t get caught in the trap of saying “that does not apply to us”. In reality they all apply to every HD shop out there. Take the time and really think about the depth of the questions and how they affect your business.

1.         The future is here. We face increased competition and shrinking margins. What will be the long-term effect on the business? What should we measure now to catch our business trend lines and what should we do about the facts we find out about in our business?

2.         We need to understand our target heavy duty commercial clients better. Who are they, and what do they really want?

3.         Finding and retaining top staff is a challenge. What must we do daily in our business to attract and retain the best of the best in our total team development? How can we afford a proper benefit package and what should we cover in benefits to have a positive impact on the team and the business?

4.         We must deliver compelling client value and experiences that attract A-List clients. What should be our game plan to differentiate ourselves from our real competition and build long-lasting relationships?

5.         We need to do more business with our existing clients. Are we measuring billed hours per client accurately? Where should we be with this number as an average per RO? Do we have a strategy to increase our average billed hours per RO?

6.         Some of our current and target clients may not be aware of all the “value” we offer. What do we need to bring to their attention?

7.         We don’t charge as much as we should. Do we lack confidence in the value we bring? Is there some other obstacle that prevents us from charging properly? How are we going to fix that?

8.         We need to develop an effective communication strategy. Are we telling our value story effectively? How can we break through the commercial confusion and apathy in a HD world that is overloaded with communication?

9.          We face regulatory pressures and environmental restrictions that make operating our business a challenge. How do we build additional costs into the business to overcome things we can’t control?

10.         We need to increase bottom-line profitability. What is our target percentage increase? What must become our key focus to achieve that result?

These are just a few questions addressing the new reality that is here.

Are you taking the time to think things through to address the future of the business and properly document a game plan to insure your HD shop is going to move forward?

When was the last time you attended a HD Business Management class that addresses these issues?

Perhaps it is now time to truly learn “how” to become a CEO of your own business. In reality, that is your position in your company and your entire team is looking at you for the solutions to ensure the business remains prosperous and dealing with all the challenges ahead.

The Demystification of M&A – Part 2 – The Urge to Merge

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Part 2

The Urge To Merge

There are myriad reasons why companies acquire other companies. After over 20 years of doing M&A deals, I think I’ve heard them all. Despite significant research that suggests the average acquisition fails to deliver the expected returns, decision makers large and small aren’t letting up on the M&A throttle.

While the underlying motive of deals usually is generalized as “growth”, oftentimes, the strategy behind an acquisition is complex and multifaceted. The motivations may be different for public corporations versus privately-held or private-equity funded companies. Many deals are rationalized in several ways. Let’s examine some of the primary reasons companies succumb to “merger mania”:

  1. Synergy: If you’re an M&A junkie like me, you will have heard this motivation more than any other. Simply put, synergy is described by the nonsensical mathematical equation: 1 + 1 > 2. Synergies may be found by “cross-selling” (e.g., leveraging a marketing team to sell related or complimentary products or services) or via “economies of scale” (e.g., fully utilizing an asset, such as finding additional customers/sales to run factories more hours in a day, or combing two companies in the same industry and reducing redundant overhead costs). Disciplined acquirers know that projected synergies should always be quantified and captured in their valuation models. Decision makers should be concerned when the main cheerleader for an acquisition describes the synergies in qualitative, nebulous terms. If you can’t put numbers to them, don’t use them to justify a deal!
  2. U-PICK-IT”: While synergies may be the most referenced reason deals are justified in press releases and earnings calls, the true motivation behind the plurality of deals by publicly-traded companies is the next quarter. The prices of publicly-traded shares, and the careers of the CEOs of the companies that issued such stock, are highly dependent upon their next quarter’s “numbers” – did they deliver the same percentage increase in earnings as they did for the previous quarter? When companies are small, it’s easy to deliver remarkable growth. Taking a HD repairer from $2 Million in Sales to $3 Million is much easier than growing a paint company such as Axalta from $4 Billion to $6 Billion – yet both would be 50% increases. As companies grow, it gets harder for them to deliver consistent earnings trends. Yet, Wall Street rewards certainty and consistency. As a result, public-company CEOs will use acquisitions to find the earnings growth they need to keep their stock prices moving in the desired northeasterly direction. These CEOs will mention all sorts of motivations to justify these deals and mask their true intentions; so, you get to pick the strategy the next time you read of a public company pursuing an acquisition that doesn’t seem rational.
  3. Diversification: The objective of diversification is to lower risk. Portfolio theory teaches us that a basket (a.k.a. portfolio) of multiple equities usually is less risky than holding just one company’s stock. [Note to Self: Ensure my 401(k) has a balanced, diversified selection of assets.] Similarly, companies large and small are less risky when they are diversified. This could come through having multiple locations or multiple service/product offerings or minimal customer concentration. Acquisitions are used to diversify regularly.
  4. D-Fence!: While often not cited publicly for fear of anti-trust laws, many deals are defensive. Defensive deals usually are meant to keep a competitor out of a market or away from a new opportunity. Occasionally, CEOs that get into bidding wars to keep competitors from winning deals find that they may win the battle but lose the war. If you find yourself considering a defensive deal, be sure you stay honest to your targeted returns and maintain deal discipline. It’s easy to overpay when fear influences strategy.
  5. D-Fence v2.0: Another form of defensive deals is when a company buys a competitor. While it’s challenging to think of many reasons to not acquire a competitor, it is easy to see how the buyer could overpay by believing that if a competitor is taken out, that buyer will have better pricing power. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 is one arrow in the government’s quiver to ensure companies don’t get too much pricing power.
  6. Speed to Market: Deals occasionally are the result of a corporate initiative to pursue a new product, service or process, and management determines that it’s faster to acquire it versus taking the time to develop it internally. Multiple shop operators face this choice regularly when they want to expand their operations to a new zip code. Greenfielding/brownfielding may result a lower overall investment because they’re not having to pay for goodwill (a.k.a. blue sky – a topic we’ll visit in detail in a future article), but the time it takes to get to profitability can wipe out the savings.
  7. Taxes: This shouldn’t be surprising. Business of all sizes make decisions daily in part due to their tax consequences. The deal world is no different. It may be to capture some tax credits or to relocate a business to a different, more tax-efficient jurisdiction. Having been involved in numerous cross-border deals during my career, I can attest to the impact taxes have on the decision-making process when a US-based company buys another in a foreign country.
  8. Excess Cash: As corporations evolve from start-up to cash cows, they tend to reach the stage of generating more cash than is necessary to maintain the status quo. Obviously, shareholders like this stage because they hope to receive dividends; CFOs may advocate using the extra cash to buy their own company’s shares, or to invest in new equipment. While the question of how to deploy excess cash can lead to big battles in the boardroom and premature retirements, all stakeholders agree that the excess cash shouldn’t be simply sitting in a bank account earning next to nothing. Having excess cash on the balance sheet has led to many deals that strategically may have been underdeveloped. A parallel to this reasoning is the low interest rate environment. When corporations can buy a company that cash flows 15%, using money that only costs 3%, it’s easy to see how a lot over the past decade have been justified.
  9. Black Friday Prices: This of course is a reference to the day after Thanksgiving, which traditionally was the cheapest day of the year to shop – everything was on sale! The internet has disrupted this, but the principle still applies. The collective “we”, whether we’re individuals or corporations, tend to buy things when we perceive a good bargain. Put simply, some deals happen simply because the buyer believes the target company is undervalued. Buy low. Sell high.
  10. New Markets: Deals of this nature tend to be made by companies acquiring peers or large players seeking accelerated growth, such as when an East Coast-based operator of mechanical service shops acquires a West Coast operator of mechanical service shops.
    “Consolidators” constantly need to enter new markets in order to maintain their growth trajectories. Consolidators are companies seeking a plurality or majority market share in an industry – think: CVS & Walgreens; Staples & Office Depot; Lowes & Home Depot.
  11. New Customers: As discussed above, a company looking to diversify its customer base may seek to acquire a peer (or a competitor) in its existing market that has different customers (such as a retail repair chain that wants to add fleet accounts so it’s not too dependent upon its advertising success). Similarly, companies will acquire others with a different customer base with the hope that the buyer can subsequently offer its other services or products to the new-acquired customer base.
  12. New Employees: Service-based companies and corporations with valuations weighted heavily on their intangible assets often credit their workforces for their value creation. Thus, deals often are motivated by the opportunity to get access to industry “thought leaders”, high quality / well-trained workers and/or those employees who maintain strong relationships with their employers’ customers. When the target is a very small consulting firm, the deal often is referred to as an “acqui-hire”.
  13. Old Employees: Huh?!? That doesn’t make any sense. Well, not so fast… Not chronologically old, but the current employees of the buyer. Many business owners will acquire peers or competitors with the hope that the larger organization will yield better or more opportunities for their existing employees. Growing companies add layers of management and expand corporate functions – these are opportunities that retain good employees. Employees get to grow professionally as the business grows.
  14. New Products / Services: Companies such as Bloomin’ Brands have acquired multiple restaurant chains (e.g., Outback Steakhouse and Carrabba’s Italian Grill). Despite having numerous locations located next to each other, it works because they know their customers occasionally will want lasagna instead of a steak. Similarly, a dealership knows that its customers occasionally will need collision work, or PDR, or a new windshield, etc. Companies will acquire others to get access to a unique service or patented product. Clearly, they believe it’s easier to buy than to reverse engineer and build; a less obvious consideration is that in certain circumstances, acquisition costs go straight to the balance sheet, which means the all-important earning per share measurement is unaffected (unlike the costs of building a new division that reduce profits / EPS).
  15. “Multiple Arbitrage”: I’ve intentionally saved the most interesting for last. This term seems both technical and sophisticated. In reality, the motivation is easily understood, albeit difficult to implement, and is the reason behind a lot of the deals happening throughout the automotive aftermarket.   Throughout the economy, regardless of industry, there tends to be a “size premium” – an increase in relative valuation that larger companies enjoy over smaller companies. In other words, with all other things being equal, each dollar of sales usually is worth more if it is earned by a large corporation than if it’s earned by a small business. This is true for both publicly held and private companies, and is due to the notion that larger companies tend to be less risky and more likely to continue to grow than small companies. [NOTE: I have not found credible research to support the widely-held belief that 90% of small companies fail. However, there is limited academic research that shows the failure rate for small businesses exceeds that of larger businesses.] Portfolio theory can explain this belief best: if I hold in my 401(k) shares in 10 different businesses, I have a lower chance of losing all of my money than had I invested the same money into only one business. Similarly, if I own and operate 10 tire installation shops that collectively generate $10 Million of sales, those sales are less likely to all disappear than if I owned one tire installation shop that has $10 Million of sales.

Thus, Multiple Arbitrage has led to hundreds of deals in the automotive industry over the years as companies borrow money to acquire other companies in the same industry at relatively lower valuations. These acquired companies are then integrated into the buyer and eventually the shareholders of this large, acquisitive company sell it. A common term used to describe this investment strategy is Buy & Build: buy multiple companies at 3x-7x EBITDA, build a corporate infrastructure and meld the companies together, and then sell the amalgamation for 12x-15x EBITDA. If they are able to use borrowed money to fund the acquisitions, then the return on their invested capital is significantly enhanced. This is a page out of many private equity playbooks.

Comments / questions / criticisms? Are you contemplating a deal that might fit into one of these categories and you want to ensure you’re making a sound decision? Feel free to e-mail me: john.walcher@veritasadvisorsinc.com. Our next article will examine the buying process from the seller’s perspective, along with breaking down the stages of a deal. Until then, happy dealing!