In today’s world of rapid expansion by the consolidators, it seems as if we read about out-of-state acquisitions almost weekly. It sounds simple enough. Most of us as MSO operators have experienced shop acquisition or added shops through greenfield development. The first shop addition is, of course, the most daunting. After that, we develop knowledge and confidence; each new one becomes easier as we generally know what to expect and how to integrate the new shop with our others. If we have good processes, relationships, culture and available staff, it can go relatively smooth. In a few months, the new shop becomes one of the group and everything becomes relatively normalized. But how about when you go across state lines into another market? Or what about crossing a number of state borders and jumping part way across the country? What is different? What do we need to look at? What do we need to prepare for?
It can be difficult to get guidance. Those few MSO collision repair businesses that have expertise may not be likely to share their proprietary practices with you. There are not a lot of classes on the topic, nor are there many consultants who have expertise in this area. Paint companies can give some advice, but typically they have not had access to all aspects of the topic to develop guidelines for you.
As I spoke with people who had moved or added their business activities into another state, I found a common theme — research is the key to understanding what you will experience. Those who took for granted their abilities and resources were surprised, to the point of stating, “It was like starting over.” Let’s look at some areas that should be considered.
Insurance company relationships
If you have close relationships with insurers in your locale, don’t assume the same will apply in another area. I spoke to one MSO operator who moved across several state lines into a city in another region of the country. His old relationships meant nothing in his new area. He even suggested some claims people contact peers within their company in his old area as a reference. None bothered. “Be prepared to go from first to last,” he said.
If you have the opportunity to develop relationships at the insurance company corporate level, perhaps you can make some sort of arrangement to secure DRPs in your new area. If not, it is prudent to not assume they will come. Find out who the decision makers are in the new area and talk to them about the possibilities and their needs. Sometimes a trusted local insurer can help you locate contact information for the right people. They may even make an introduction. When you get to the right people, ask about their perspectives on the new market. There are those markets where most shops are not insurance friendly. Coming into a market with an insurance friendly model may make your business appealing. They may share perspectives on where there is a need for a new shop or what their observations are on an existing business that you may be considering purchasing. Ask about rates and estimating practices to better understand what is normally included or itemized and paid for separately. Ask about towing charges, salvage and sublet mark ups, rental referrals and costs, blending, spot refinishing, paint and material thresholds, and more.
Culture
If you are moving into an area that is not very far from your existing business, you may have a good idea on what to expect in the new area. If you are going a long distance, you may be shocked at many of the cultural differences. The MSO operator who moved into a city in a different region of the country said that the norm in his original area was that technician compensation equated to roughly 37.5 percent of the hourly labor rate. In his new area, the norm was 50 percent. He said the prevailing labor rate was about $10/hr less than in his old area. He found that common estimating practices were a little more liberal, but not enough to offset the significant labor rate difference. He found that most technicians were less educated and rarely certified in his new area. Many techs had poor repair practices, yet expected high compensation levels. To him, this was an unexpected phenomenon of the market. Despite being in a reasonably sized city, he concluded that aspects of the market were 20 years behind other parts of the country. He had to make significant changes in his business model to accommodate the cultural differences. One tool he used was to bring in some technicians from other parts of the country, 500-1,000 miles away. “It can be an uphill battle fighting the norm,” he said.
The obvious lesson here is to research culture in the area before making the decision to go into a specific area. Differences can include work ethic, staff loyalty, customer loyalty trends, differences in consumer response to different types of marketing, and more. Research is easier said than done. Spending a day or two in an area talking to a few people may not be adequate. Obviously the consequences can be significant. When possible, bring a few of your existing staff people into your new facility. Choose people who are trusted and understand your process and desired culture to help start if on the right foot. It’s easier to get your culture in place from the beginning than to change it later.
Gerber Collision is a fast growing consolidator with a great deal of experience in purchasing shops in many states. Tim O’Day, president and chief operating officer of Gerber Collision, kindly offered some input. “I strongly believe that it is important to retain the existing staff. They know the market and have good relationships. We will provide support from our centralized team and outside partners (paint, technology, other), and we have had many team members move to new markets, but this is done more because people have an interest in moving elsewhere in the country rather than a key part of our integration strategy,” he said.
“We expect to get our culture into any shop that becomes part of our group, so understanding this up front is very important. We also look to retain key leadership, especially in a multi-shop acquisition. This helps with the transition as the local teams have a history with their leadership and this makes the transition easier. One thing that we do see as different could be compensation plans, as these are sometimes driven by local market conditions. This could also be true with benefits, but this is less often a significant difference.”
Regulatory compliance
“Moving into another state requires that business owners be good issue spotters, It’s impossible to get an instant read on all the differences between operating in one state compared to another, but it is possible to recognize the minefields,” says Marcy Tieger, industry consultant with Symphony Advisors, LLC. For instance, understanding state labor laws, especially those pertaining to wage and hour matters, should be a top priority. Wise business owners should consult a human resources professional or an employment attorney with state-specific expertise, as well as the labor department, for the new state where they will be operating to get up to speed.”
When purchasing an existing business, consider the implications of a stock purchase verses an asset purchase. Stock purchases can come with all sorts of obligations, such as from inadequacies in the existing structure, particularly in the area of human resources.
“The overarching message is to put no name on anything that provides a road map to a lawsuit,” says Attorney Cory King, who specializes in the collision repair industry and often presents at CIC. He has seen a number of businesses from the Midwest come into California and impose their business model without getting local legal advice. They can quickly be confronted with a number of issues, especially if they did a stock purchase. New owners may be accustomed to how the Fair Labor Act works in other states. California has its own regulation that supersedes it, meaning that classifications on exempt and non-exempt employees are different. In California, the 7I exemption doesn’t apply to technicians. They have no overtime exemption. Flat rate pay plans behave differently in California. They are not illegal, but come with so many demanding requirements that they are practically impossible to have with legal documentation. California has a regulation that requires the original owners to give notice to the city and employees of the ending of their business, referred to as WARN. Of course, this means that employees know of the acquisition before it happens.
King suggests being proactive and going through a typical new hiring process with the existing employees. They should fill out an application, be interviewed, have a drug test and a background check. This is the best time to get rid of problem employees. Employee handbooks should be ready to go, and new employees should sign documents indicating receipt well before they start employment with new ownership. All employees should punch a time clock to accurately record work start and stop times. California has laws on meal and rest periods.
Of course California is more heavily regulated than other states, but the message here is that each state can be unique. Not understanding state and local regulation can lead to catastrophic consequences. This applies to not only HR regulation, but to all regulation including zoning taxation, waste disposal, permitting, safety regulation, business practices and more. Again, the best approach is to get advice from experts at the state and local level.
Marketing
The MSO operator who moved across several state borders reported having to basically “start over” has compelled him to market like never before. He is currently investing 5 percent of his sales. A common benchmark for marketing is 2 percent to 3 percent. If you have a business model that is built around DRP relationships and if you have the ability to get commitments from the insurers to add your new shops to their program you may not need to market as much. However, O’Day of Gerber, reports, “Because we are so heavily a business-to-business sales organization, we generally rely primarily on DRP relationships. As we get to scale in a market we will use electronic media, such as radio, outdoor and even TV. We also do web based advertising and participate in programs such as Recycled Rides.” Despite Gerber’s DRP relationships, they still choose to advertise, and in both traditional media and some grass roots efforts. Because of the current low frequency of collision losses, some MSOs feel that the traditional media is not effective. Reaching many consumers at a time when they are making a shop choice is an unlikely happening as some entities report that we are now at an average rate of one reported collision per driver every 10 years. Marketing a collision business can be like marketing a funeral home. Most consumers are not interested until they have a need. Those MSOs often gravitate more toward grass roots efforts such as Recycled Rides, sponsoring local sports teams, car shows and the like. Yet obviously some find value in the traditional media as evidenced by their activities. Effectiveness can also vary from one market to another. In some cases you simply have to try it and do your best to measure the results.
Conclusion
Mike LeVasseur, president of Keenan Auto Body Inc., described his experience of venturing out of Pennsylvania. “When we were going into Delaware, we first consulted with the larger insurers to confirm need and DRP availability. We then scouted the areas for the popular eateries and retail stores (McDonalds, Home Depot, etc.). Then we had our paint manufacturer run all of the demographics. When the results come back positive, you have confidence that the location will be successful. In this case, we were building a Greenfield so the marketing began at first sight of construction. As far as laws and codes, hire an engineering firm from the area that you are building or opening. For staff, we placed a few key employees from our other locations to kick it off and hit the ground running. Fortunately, applications were abundant, so we had no trouble filling positions. For the grand opening, we were lucky to get Jeff Gordon to attend and pulled out all of the stops for a great event. We joined the chamber of commerce (two chapters), did projects for the local schools (painting golf carts and trailers) and sponsored all of the surrounding little league teams.”
Obviously Mike did his homework, prepared, planned and well orchestrated his out-of-state acquisition and as a result, it was a positive experience. When done right, this does not have to be intimating. In fact, it can be intriguing to consider broadening one’s horizons and venturing out further than one may have considered in the past. Are you ready to go for it?
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