KSI Auto Parts

more time. COVID really took it out of me.” Slow recovery seems to be a common thread: “I’m finally ramping up, but at this rate it will take me over a year to get back to where I was.”

COVID may be the straw that broke the camel’s back for some. Between pressures from insurance companies (including being dropped by State Farm or USAA), additional investments for certifications and new equipment, and the retirement of senior technicians, several operators have decided that it’s time to let somebody else take over the business.

For some of our clients, the hard decision to sell has already been made. Now they’re spending their time preparing their companies for a positive exit with a more defined future for their technicians and managers.

One operator who is still sitting on the fence is concerned an acquirer may not treat his employees as well as he does. Another is worried because his children have no interest in the business, the family name on the door will be lost forever. Another is uncertain about whether he will ever regain his pre-COVID profitability even though his revenues are coming back strongly.

For operators who are reengaging positively with their businesses, many have taken the opportunity during the pandemic to revamp their operations, restructure their teams, improve their training and upgrade their facilities. One of our clients improved his margins by two points during COVID. His comment was, “I finally got around to doing things I’d wanted to do for 15 years.”

Conclusions Coming Out of COVID

Undoubtedly, savvy operators are recognizing that staying in the industry will require more capital, more scale and better leadership. Some have very frankly recognized their own limitations and decided to add senior management with capabilities greater than their own. One of the questions we get is, “How should I compensate a senior leader with better management skills than me?”

Our response is to never be afraid to pay somebody really well if they are contributing more value to the business than you can do by yourself. A smart operator who intends to create equity value in the business to be harvested in the future can’t do it alone. So be prepared to pay a generous salary and benefits as well as some equity or stock appreciation rights to that new leader.

Another area where operators are finding increasing need is in finance. For those growing beyond the $20 million mark in revenue with six or more shops, really competent and experienced financial assistance is a necessity.

One option is to outsource contractors. Part-time CFOs are an alternative. A really well qualified controller or CFO can relieve the owners of many administrative and financial burdens in a rapidly growing organization.

Questions

Both expanding operators and those who are considering exiting the business are asking many of the same questions.

What about valuations? How much will my COVID numbers hurt me? Will I be judged valued on my 2019 numbers or my 2020 numbers?

In general, all acquirers look primarily at the trailing 12 months revenues and EBITDA. However, our firm has been successful in helping acquirers understand that full year 2019 and first quarter 2021 are fairly indicative of the capability and health of the business. In looking ahead to 2021, business performance in 2019 is a fairly reliable indication of where the business will likely return or exceed. However, as 2019 falls farther back in the rearview mirror, we think valuations will be more based on 2021 results and their progression.

How do acquirers look at EBITDA during the PPP loan period?

PPP loans can be challenging for acquirers to analyze. Their impact on the business is admittedly hard to tease out. Highlighting excess labor that was retained during COVID in accordance with the PPP loans has been a successful way for our clients to engage with acquirers. However, we have also been successful treating PPP (and EIDL) loans as grants, and thus income, which tend to more than offset the extra costs imposed by their forgiveness criteria.

Is it a good idea to grow right now?

Yes. We think there are opportunities in just about every market to find and acquire other operators who are struggling or who just want to exit. By acquiring another operator, you get immediate cash flow and (hopefully) EBITDA, a trained staff and an operating business.

Fixing an underperforming business isn’t simple but if the core staff and relationships are there, it’s a more immediate return than starting from scratch. A brown or greenfield startup is lots of fun and challenging with infrastructure costs, hiring staff, obtaining licenses and establishing new DRP relationships, but EBITDA is slow in developing.

For those operators who are acquiring, we’ve also seen creative methods for financing the purchase, including seller financing and SBA loans that wrap both the business and the real estate into one loan.

What have we seen among acquirers during the COVID period?

Almost every large acquirer paused briefly to reassess their own acquisition criteria and to stabilize their operations.

Caliber, which has slowed its pace of acquisitions over the last year and a half, temporarily suspended rent payments to a number of its landlords. It also paused or eliminated some internal and external initiatives. However, Caliber restored both back rent and current payments to landlords in the midst of the pandemic and has not wavered since.

Several of the more seasoned super-regional acquirers, such as Crash Champions and Classic Collision, hardly slowed at all. And new entrants, Quality Collision and CollisionRight, launched in the midst of the pandemic.

CARSTAR and FIXAUTO USA continued to add new franchisees although at a slower pace than pre-COVID. Smaller operators such as Mitchco, now up to four locations in Florida, G&C with 19 locations in Northern California, and several

See Two Responses to COVID, Page 18