Technology may present acquisition opportunities

LAS VEGAS — New vehicle technology may weed out many small family-owned auto service shops that can't keep up with the investment needed in the near future to be a "shop of tomorrow."

That was the assessment of an auto service panel held during the Automotive Aftermarket Products Expo in Las Vegas last November.

The Service Pro Panel predicted the automotive aftermarket will continue to consolidate through mergers and acquisitions as many shop owners look to retire in the next five years.

For those willing to continue in the business, they must invest in their shops.

"I think being willing to invest in good software to run your company is going to be important because it's going to be about bay efficiency and technician efficiency. That's definitely important moving forward," said panel participant Greg Bunch, owner of Colorado Springs, Colo.-based Aspen Auto Clinic.

Panelist Rick Schwartz, co-founder and CEO of Schwartz Advisors L.L.C., a mergers and acquisitions advisor, noted that shops of tomorrow will need to focus on the people element of the business, as well.

"You really need to think who we're competing against, and it's not just the other shops. What's it like to go to Starbucks? It's very predictable. It's cozy. So some places are putting in WiFi and bringing in a Keurig coffee maker.

"You have to decide what is right for you and your clientèle and what they're expecting," he said, adding, "You need to start thinking about your facility as where customers are going to feel comfortable."

He suggested shop owners determine what type of customers they attract, or want to attract — such as NASCAR fans or soccer moms — and design the shop's interior and amenities to make that type of customer feel comfortable.

Mr. Schwartz also stressed the importance of an updated business website.

"You've got to have a website that has a good experience. It works. It's something I can open on my tablet or on my cellphone. It's so easy to get a simple but effective website," he said, adding that shops should strive to earn good ratings on such consumer websites as Yelp.com.

"So just think outside the box and think about how are you're shopping for things when you're shopping. That's what people are looking for in a shop to get their car fixed."

Regarding Advanced Driver Assistance Systems (ADAS), panelist Jason Rainey, general manager of NAPA Autocare, said there are resources and education available for shop owners and technicians to learn about what technology will be included in vehicles in the next several years.

"But I think that is something we really have to get serious about. … This is always going to change, it always has. Now we're seeing change coming at us at a pace we haven't seen before, but I think in a lot of businesses, we just really need to embrace and get on with it."

Mr. Schwartz said private investors view profitable auto service shops as a good return on their investment and that's why the aftermarket sees an uptick in acquisitions: the number of light vehicles in operation in the U.S. is close to 280 million, the average vehicle age is reaching 12 years old, and (prior to when stay-at-home orders were enacted) vehicle miles traveled is rising.

"All these factors in play are all very attractive to investors," he said.

Mr. Bunch cited a 2015 study that predicted that by 2050 more than half of small auto service shop owners will want to exit the business, whether by turning the reins over to the next generation, selling the shop or shutting it down.

"The reasons are: the financial investment as they continue to make less and less money each year; employees are harder and harder to find; hiring and training and keeping those folks; and technology is passing them up. So there are people that have what I call a mom-and-pop shop, has three to four employees, they have a prime location, they just don't have the financial wherewithal to keep up with what needs to be kept up with in this industry. And they're tired. They're aging out," Mr. Bunch said.

For shop owners envisioning retirement in the near future: "You don't have to think about a specific exit, but think about running your business well so you have options. And that's always a better outcome," Mr. Schwartz said.

The panel advised shop owners who plan to eventually sell their businesses, to create a plan now to make the business a desirable investment.

Some points to consider, include:

• If the shop is in a bad location, "save up your money and try to get to a better location," Mr. Bunch advised. "Too many shop owners are thankful they have such low rent when really that's not what they need. They need to be looking at location, location, location, if their plan is to sell."
• If a shop owner owns the real estate the shop sits on, consider only selling the assets and retain the real estate to establish an income stream. "What we've seen is a lot of business owners, shop owners, made that decision to go from being an operator of an ongoing business to being a landlord," Mr. Schwartz said.
• Establish a management team that can successfully operate the business without the owner present. Mr. Bunch noted that too many shop owners are too involved in the daily business operations.

"If I (as a buyer) take that person out, what happens to the business? I have to have somebody that I can plug into that role, that can be very successful and is strong and has leadership, management and technical skills. ... And that's going to be a challenge for me as a buyer of that shop and I may look for a better deal," Mr. Bunch said.

"If a shop is running well, has a manager that knows what's going on and they want to stay in that business and become part of something bigger, that's the shop I'm going to pay more money for because it's worth it. I know I don't have as much work to do to get that (shop) in the fold ...," he said.

"So if you're selling your business, the more you can do to make the business ready to stand on its own without you, the more a buyer might be able to pay for it," Mr. Schwartz added.

In addition to stepping back from the day-today operations, Mr. Bunch suggested owners should make sure their shops have good equipment (They don't necessarily need to buy new equipment); have technicians that are willing to stay under new ownership; and have a growing customer base, along with positive consumer reviews and a good reputation in the community.

On the other hand, if a business wants to expand via acquiring other shops, research and evaluation of the opportunities are vital.

One of dangers is if the buyer doesn't know what it wants in an acquisition, Mr. Bunch warned.

"You really have to understand what you're buying, why you're doing it and how you intend to use that to help your business," he said.

An acquisition opportunity might look enticing if it's a poorly run shop the buyer thinks can be salvaged. But it can turn into a bad deal if the buyer doesn't evaluate the difficulty of integrating a struggling shop into its operations. Also, acquiring a shop that may be ideally located near a buyer's other shops can be a bad idea if the buyer doesn't first examine the traffic patterns of the desired location, he said.

"Sometimes the best deal is the one that you don't do. But if you're going to do it, it doesn't matter if you're in the service (business) or in any industry, you really have to have a very clear idea and disciplined approach to what you're doing," Mr. Bunch said.

A buyer needs to evaluate how an acquisition is going to help his/her business, he added.

"If you have one good successful shop, that does not mean you can just go out and duplicate that. There's other layers of knowledge, information, leadership you need to have in place to make that successful."

The more people who are aging out and getting out of the business, the more desperation-type opportunities are going to be available, he said.

"How do you evaluate that? (By determining) is this really going to fit into my portfolio or not? And not letting emotions get involved, not falling in love with that opportunity or feeling sorry for somebody, but doing a strategic evaluation — Is this the best business decision for me?"

Mr. Schwartz also encouraged potential buyers to evaluate a seller's financials, including the shop's profitability and how sustainable it has been, how much inventory and fixed assets it has, and its strategic value.

"I still think it's a buyers market because I think there are so many people that are going to want to sell, that the people that are buyers are going to have a good choice of what they want over the next five to 10 years," Mr. Bunch said.