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Midyear Updates cently hired Chris Abraham, former CEO of Service King, and a team of acquisition professionals with expectations of growing substantially. Oklahoma-based Collision Works added eight shops with a large acquisition last year, and now operates 33 locations in Oklahoma and Kansas. The Collision Works team is sized to add more capital and acquisitions. Franchise and Affiliation Opportunities Accelerate Franchisors and banner networks are finding increasing success as operators seek multiple ways to increase partnerships and revenues. Driven Brands’ portfolio of franchisors—CARSTAR, ABRA, MAACO and FIX USA—is continuing to add franchisees, as well as expand its portfolio of other automotive industry participants. Driven’s April acquisition of FIX USA and its largest franchisee, Auto Center Auto Body, reinforced its hold on most of the “waterfront” franchise opportunities. (Full disclosure: Focus Advisors represented FIX USA.) Two banner groups, CCG and 1 Collision are growing as well. 1 Collision, which has now merged with Canada-based CSN, is expecting to rapidly add new affiliates to its current U.S. network of 50 shops. Together, the combined companies have more than 280 shops. California-based Certified Collision Group now claims more than 450 shops with $2 billion in gross revenues across the U.S. With some of the country’s largest independent MSOs in the fold, CCG is focused on helping them gain additional DRP and vendor relationships. Our Expectations Our best estimate is that 2020 will end with revenues annualizing at
80% of 2019 revenues. A realistic expectation for 2021 is that shop revenues will return to 2019 revenues. Miles driven will continue to be negatively impacted by a slowly returning economy, but positively impacted by people’s willingness and need to travel more securely without exposure to potential infections. With many more vacation and business trips being taken, miles driven should be positively impacted. The Federal Reserve has been cautioning that damage to the entire economy is profound, deep and expected to impact us all for years ahead. So, while we are inclined to be optimistic, we believe caution is more realistic. When there is a widely available and distributed COVID-19 vaccine, revenues will accelerate rapidly as confidence in normal economic activity returns and overall economic growth begins to accelerate. What is the net result for the collision repair industry? Continued uncertainty, but not widespread disaster. Questions we answer every day: Should I sell now or should I wait two years until the economy and my revenues improve? For some folks, their age and their lack of a successor dictates they sell now. Others with a succession plan—or, even better, a growth plan—have the best of both worlds. Acquirers are still looking favorably on targets today. In two years they may be less aggressive because they will have already bought their key platforms and may only looking for smaller fold-in acquisitions. For sub-regionals determined to grow into super regionals, accessing capital today is likely to be easier than in two years because of strong PE interest. Values are always suppressed when there are many sellers and a limited number of buyers. If everybody is heading for the exits at the same time, there is a danger some
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deals just won’t get done and that acquirers will use that opportunity to reduce valuations. Everything else being equal, savvy sellers prefer to go into the market when there are more buyers and fewer sellers. For many owners, it’s a balancing act between the growth they expect in the years ahead versus the opportunity to sell when there are multiple buyers willing to make them fair offers. With trillions and trillions of dollars being spent by the government to prevent the collapse of the economy, there will come a time, sooner rather than later, where taxes will rise to begin reducing the debt. Our expectation is that capital gains taxes are likely to rise first. Closing a transaction in 2020 may avoid a significantly greater tax hit in 2021. What kind deal structure is possible today? Acquisition deals are likely to be structured differently than in the past. We expect less cash up front and more earned out by achieving performance hurdles over time. Sellers may also be asked to finance
part of the acquisition price. On the plus side, many of the private equity investors are creating vehicles in which sellers can roll over a portion of their sale proceeds into equity ownership positions. Will these new investors actually close on the offers they have extended? Most professional buyers that issue Letters of Intent have an established track record of honoring their purchase commitments. Even in the time of COVID, deals negotiated before the pandemic hit were largely fulfilled, although some had structural and hurdle requirements added. Inexperienced or first-time buyers may have a harder time holding the pricing of their offers as their private equity sponsors have fewer transactions under their belts. And if there is a long-term recession of incredible depth, that would be a material change that would impact valuations and closings. We thank Focus Advisors for reprint permission.
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