Mergers and Acquisitions

Next Article

DSP Insight

By

The importance of a strong balance sheet AND WHY A GOOD RELATIONSHIP WITH YOUR BANK IS MORE CRITICAL THAN EVER

Michael McGregor

In times like these, we learn the business lessons that stick with us for the rest of our lives. One lesson I think we’ll see is that the tire dealers who have kept all of their technicians and best sales people employed during the COVID-19 pandemic will recover faster than those who did not.

Another lesson is that the customer loyalty you earned by doing the right things over the years will tide you over during the rough times.

And the third lesson, from a financial perspective, is that having a strong balance sheet helps tire dealerships survive downturns better.

As of this writing, more than 40 million Americans, many of them already living paycheck to paycheck, have filed for unemployment. Stay-at-home orders have caused a huge drop in spending and travel.

With much of our economic growth driven by consumer spending, and with so many consumers now jobless and struggling, until they have money and breathing room, it’s going to be a slower climb out of this trough than any of us would like.

A prudent approach for tire dealers is to hope for the best but plan for a long slog.

Try to not get too far ahead of the consumer.

Conserving your cash and strengthening your balance sheet might be some good goals to set and hit in the near term.

Don’t be afraid to get back on that strategic growth plan if opportunities present themselves. But analyze the risk just a bit more thoroughly than you used to and make the decision with an eye towards the impact it will have on your financial strength.

We focus a lot on the P&L sheet in the tire business and not nearly enough on the balance sheet.

So what defines a strong balance sheet? Let’s run it down:

• First, a strong balance sheet means managing towards an adequate, smart and appropriate level of working capital (current assets minus current liabilities). How do you get to a smart level of working capital after business fully opens? Save more and spend less. Collect early and pay late. • Next on the balance sheet, you need to examine your assets. Are they incomeproducing and productive assets? This applies to inventory, equipment and lines of business. If those assets and lines of business are not contributing positively to income, think about dumping them.

If those assets and lines of business are not contributing positively to income, think about dumping them.

I once ran across a tire dealer who started as an exhaust system specialist before expanding into tires and undercar service. Fast forward a few years and he rarely sold exhaust service anymore. But every back room of every store was jammed with obsolete pipes and mufflers and no tires. I would have sold the pipes for scrap and made room for tires. • Lastly, a strong balance sheet employs a balanced capital structure. Having access to capital is one of the primary benefits of being a for-profit company. But access to capital options varies with the size of the business. The larger the business, the more capital options that are available. A balanced capital structure means having some equity and some long-term debt, but not so much debt that it puts your existence at risk. I’ve observed that some of the best-run tire dealerships have little or no long-term debt.

Also think about your relationship with your bank. Good banks will help you during a downturn and bad banks will cut and run. Having a good banking relationship is important even when you don’t need the money. It’s like having a safety valve. During the recent Paycheck Protection Program, some tire dealers had no bank to submit their application to.

Over the long run, tire dealers with strong balance sheets should win over those without.

To a certain extent, you take a gamble in business today. Take picking a new store location, for example. You can look at a new location’s demographics, map the competitive environment, analyze traffic counts and then take the leap of faith and make the investment.

Despite all of that analysis, sometimes the store is a dog from day one and will be a dog forever. You need to be able to withstand that hit, and a strong balance sheet helps with that.

To me, having a weak balance sheet is a little like going to Vegas and betting against the house with only a hundred bucks in your pocket. You might win in the short run, but if you stay at the tables too long, the house will clean you out. ■

Michael McGregor is a partner at Focus Investment Banking LLC (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket. For more information, contact him at michael.mcgregor@focusbankers.com.

Focus on Industry On the ground floor

TIRE BRANDS AMERICA HAS BIG PLANS FOR NEW LINE, NETWORK

By Mike Manges

You don’t often hear of a tire company touting its main product as a “super-economy brand.”

Yet that’s how tire industry veteran Steve Hutchinson describes his company’s flagship line.

The positioning of the brand is by design, he says.

Hutchinson’s new venture, Tire Brands America (TBA), is launching in the most difficult economic environment since the Great Recession.

Tire buyers are looking for affordable alternatives that don’t sacrifice quality or performance, according to Hutchinson, who is the Huntington, Calif.-based firm’s president and CEO.

And the same can be said for wholesale tire distributors, he claims, which TBA is targeting as it builds its sales network.

WHOLESALE PLANS

The goal of TBA, which opened its doors this past March, is to help “foreign-manufactured brands that have no U.S.-based sales team or are under served in terms of sales and marketing,” says Hutchinson.

TBA’s new Xcellent line is “brand-new for the United States market and is made for the needs of the U.S. market,” he notes.

The line is built by Crown Tyre, a Thailand-based manufacturer.

Hutchinson’s sales team — which consists of tire industry veterans Art Michalik, Joe Anzelmo, Jack Bidding, Dave Howe and Sean Brennan — is exclusively pursuing wholesale distributors.

“We want the distributor to have a steady, consistent supply from us, which means they have to order on a steady, consistent basis.”

TBA has no plans to establish its own U.S.-based warehouse.

Running a warehouse “would add 10% to 12% to our price,” he says.

Instead, the company is offering exclusive territories.

“We want our distributors to take ownership of the Xcellent brand. We want them to feel like they can set their own prices.” Hutchinson believes TBA can sign 10 to 15 wholesale distribution points within the next three months.

“We’re not focused as much on numbers as we are attaching ourselves to the right players. Whether we have 20 or 30 distributors on-board by the end of the year… that really doesn’t matter. It’s quality over quantity.

“We want our distributors to take ownership of the Xcellent brand,” says TBA President and CEO Steve Hutchinson.

“In every market, we’re looking to sign up one — not two or three. And we’re going to run with that. These companies will set their own margins.

“I think a lot of distributors, especially today, are looking for exclusivity. The approach that we are bringing to the market — protected sales territories, strong margins, not having to look over your shoulder — will be very well-received at a time when people are looking for solid partnerships,” he says.

LIGHT TRUCK FIRST

TBA’s decision to promote Xcellent as a “tier-three, super-economy brand” enables it to enter the U.S. market “without a lot of start-up costs.

“Crown has been selling tires into the U.S. market since the early-2000s,” he says. “They have a lot of experience designing and building tires to Department of Transportation specifications. Their history has been very strong in terms of quality.”

TBA introduced its first product in the Xcellent line, the Xcellent Roadbreaker A/T light truck tire, in early April. The tire is available in 24 sizes and fits 15- to 22-inch rims.

The next product, the Roadbreaker M/T, will be available in June and July in 12 sizes, ranging from 17 inches to 22 inches in diameter.

And another light truck tire, the Roadbreaker R/T, will be available this summer in 31, 17- to 22-inch sizes.

The company plans to roll out ultra-high performance and SUV tires under the Xcellent banner this fall. A radial medium truck tire line will follow in 2021.

TBA is deliberately targeting the growing light truck tire market for now. “It’s the hot market opportunity,” says Hutchinson. “And our sales advantage — in terms of having razor sharp pricing — is very strong in the light truck tire segment.

“These are well-designed products: a three-ply casing, very strong construction, and nice-looking. No shortcuts have been taken. It’s a simple sales pitch.”

LOOKING AHEAD

“We couldn’t have picked a worse time to get started,” says Hutchinson, referring to the current economy.

“But I’m a huge believer in the spirit of America and the spirit of Americans. COVID-19 will pass and I think things will be pretty much back to normal. They have to be.”

Customers have been “very accommodating and understanding,” he notes.

“I think they know that this (crisis) is temporary and they have to look forward, too.

“We’re looking to provide a steady supply to wholesale-distributors, consistent with their orders, that can be forecast more accurately over time.” ■