There is a lot of opportunity for entrepreneurial business owners at present. We have seen a strong seller’s market for the past three years. We continue to see a strong seller’s market at present. But looking ahead, we also see some headwinds that can change the market dynamics. As quickly as prices rise they can also drop.
Build Up or Ship Out?
If you have a timeline of at least 10 to 15 years, this is a great opportunity to reinforce or build up your business and generate lots of cash. We know that the industry is changing and shops will require ongoing investments. But while relative valuations will likely decline over that period (M&A tends to move in cycles), the benefits of building and strengthening a business over that time period will likely surpass the short and medium term pricing risk. Of course, this may not hold true for everyone as some shop owners in highly competitive markets will likely find that competition may increase faster than they can keep pace. Sure, there are technological changes on the horizon, but there is also plenty of time to adapt your business model to take advantage of the yet-to-be-seen opportunities present in technological disruption.
The Big Risk
The big risk I see is the “wait and see” approach on a short timeline (less than 10 years). There are a lot of business owners who I talk to whose businesses are doing well and generating a very comfortable living for them. Many of these businesses are operating very successfully in markets that already have at least one consolidator, if not multiple. Some of these businesses are also early adopters of new technology, embracing the change that is sweeping the industry.
Good Time to Be a Seller
But these business owners also generally acknowledge that now is a good time to be a seller. Many of these business owners lived through a previous cycle of consolidation in the late 90s and early 2000s and recognize that prices are better now than they were a decade ago. But they have also seen their peers sell their businesses in this wave of consolidation for handsome sums to become property investors, earning nearly as much cash annually (sometimes more) from their real estate investments and long-term lease agreements.
As humans, we are generally bad at predicting the future. We have a bias that assumes the way things are now will be the way things will be. But we all know things change. The big risk here is not that the industry will implode around you, but that small changes in buy/sell activity can have big impacts on the ultimate value you realize in your business. At the most basic level, a business’ value is determined by two things: risk and future cash flow.
Required returns shift in industries over time. They are different company to company, depending on the risk tolerance of the owners and/or management. Industries can become more risky and more volatile, increasing the return investors demand to own businesses in those industries (i.e., the cost of equity). In collision repair, volatility will come in the form of increased borrowing costs, technological changes, decreasing severity, fewer claims, increasing vehicle complexity. All of these impact future cash flows. And while no one isolated issue will cause a big shift, numerous small changes can have big impacts on the price of your business.
What Is an Owner to Do?
If you’re not sure what the next best step is to take in your business, ask yourself, “What is my timeline” and “What is my walk-away number?” This will help you answer the question of what to do with your business. The answers to these questions help provide an outside perspective. There is no one-size-fits-all answer. Generally, the longer your timeline, the greater your options to invest in your business to maintain or increase value (often, but not always). Growth for growth’s sake can be destructive.