Consolidation is significantly changing the landscape of the collision industry. But it is not just the collision industry that is consolidating rapidly. Throughout the entire automotive aftermarket there are examples of consolidating industries. Paint distribution, first consolidated in the late ‘80s and early ‘90s is undergoing a second round of consolidation. LKQ and aftermarket parts distribution, consolidated once already by LKQ is in the very early stages of a second round of significant consolidation. Aftermarket mechanical parts distribution already dominated by behemoths such as NAPA (Genuine Parts Co.), O’Reilly and AutoZone, and are seeing continued consolidation activity. Even automotive retail and new car dealership industry, once a paragon of the family-held small business, is undergoing consolidation at the hands of AutoNation, Sonic, and Warrant Buffett’s Berkshire Hathaway Automotive Group. It begs the question, why is consolidation such a popular business strategy?
New Clients, More Revenues
One of the most often cited reasons for considering an acquisition of another company is to rapidly acquire new clients. Strategically acquiring another business can give the purchaser immediate access to significant additional revenues and new sources of referral accounts. Often acquisitions involve entering new geographies as well. The benefit of acquiring an existing company in a new region is that the purchaser also acquires the brand and reputation of the business and can bypass months or even years of marketing building a brand presence. Of course this can be a double edged sword if appropriate due diligence is not completed to thoroughly assess the customer and vendor relationships of the business. But buying a business often provides a purchaser with a cash flow positive business from day one rather than months of negative cash flow building a business over time. Building a business may be cheaper in the long run but buying a business can generate immediate cash flow.
Improved Margins through Scale
Scale is a business term that describes a company’s ability to increase overall profitability by reducing the overall input costs for products and services by spreading fixed costs across a wider base of sales. Every business has certain overhead expenses that are relatively fixed and do not vary as the business grows, or do not grow at the same rate as revenues. In the collision industry, at the corporate level, examples of these costs would be regional management expenses, IT and computing expenses, and other corporate management and administrative expenses like HR, marketing, finance, and legal functions. At the individual location level, fixed costs include plant and equipment (i.e. frame racks, paint booths, computer systems, tooling, fixtures, etc.) and other facility specific expenses like general liability insurance, security and maintenance, and rent or leases. Continue reading.
