Former MSO executives share insights into growing, selling a collision repair business

Pat James, the retired CEO of AutoBody America, said he used an insurance settlement after his wife’s car accident in 1981 as seed money to launch the business in Tennessee. Over the decades that followed, he sold the company twice, later buying it back, before finally selling what had grown to a 20-shop chain to Service King at the end of 2012.

“So I have a little background in both buying and selling,” James said.

During the company’s first real stint of growth, between 1998 and 2006, James’ financial partners at that time believed in locations with “the shiniest building with the highest retail traffic per day.”

“The problem is when you do that, you end up having so much money invested in real estate…that you just can’t make the numbers work,” he said. “Our rent factors were always in the 10 percent to 11 percent rage. You just couldn’t outrun the debt.”

So from 2009 to 2012, during which the company added more than a dozen shops, James worked to ensure the company’s locations each had EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) of 18 percent, including rents that were not more than 5 percent of sales.

The company used brownfields to grow in the markets where it had existing staff and business relationships, but acquisitions as it entered new markets (including in Mississippi and Arkansas) to take advantage of those companies’ employees and relationships. New shops were always within a 3-hour drive of either James or his business partner.

“So if something blew up on us, one of us could be there within three hours to make sure the wheels didn’t completely fall off,” he said.

James said starting in business at age 21 led him to learn quickly that he needed a lot of help. One mentor taught him, “Know what you know, and know what you don’t know.” That’s why within the business he focused on his passion as a former technician – namely, improving the production process ­­­­– while bringing in others to focus on the financial end.

“You should not feel threatened by finding people who are smarter than you are,” James recommended. “Find people who have complimentary skills that kind of cover up your soft spots. I had a lot of soft spots. We surrounded ourselves with very energetic, passionate high-performers.”

He said the company also worked to reward and retain those people.

“Once a location hit the 18 percent EBITDAR, we gave back to the store manager 7 percent of everything above that number,” James said, noting the managers could share that bonus among the locations’ staff how they best saw fit. “We knew we would be sustainable if we hit our 18 percent. We knew we could open the next store and the next store and we’d be putting cash back. So we wanted everybody within the organization to feel like owners.”

As a real estate developer, AJ Leone didn't ever expect to enter the collision repair industry, but over a dozen years acquired three brownfield locations for Charleston Collision in South Carolina, selling the business in 2015 to Caliber Collision. Always thinking about what future real estate investors would be looking for, Leone chose convenient, accessible locations on busy stretches of road.

His key piece of advice for MSO leaders: Have an exit plan.

“As entrepreneurs, you spend a lot of time putting your blood, sweat and tears into the business, and in my opinion, that’s only half of the equation,” he said. “Anyone who is in a for-profit entity needs at some point in time to think about the next step, the exit.”

Not doing so, he said, can lead you to get over-extended when you should be trying to shed debt. It also keeps your focus on maintaining “clean financials,” that aren’t “muddied or clouded with some other hobbies, shall we say.” Those records will not only help you make good financial decisions as you run the business, he said, but will be what bankers or any potential buyers will want to see as well.

That paid off for him in terms of a sale that went “quickly and smoothly,” he said. Over 18 months, he talked to three potential buyers and an investor group, but the final process with Caliber took less than three months, start to finish.

“It was not painful, and was very enjoyable, actually,” Leone said of the business sales process.

“I’ve been doing this for 20 years. I don’t think I’ve ever heard anybody say it was enjoyable to sell an MSO,” panel moderator John Walcher of Veritas Advisors, joked.

Leone said his only regret was not growing the business more to improve its value. He said he recommends that companies always look for growth.

“Sometimes staying static in your market, just sticking with your four locations or your 10 or 20, can lead to irrelevance in your market,” he said. “Other competitors, be they big or small, are moving all the time.”

After the sale, Leone returned to a focus on real estate investing and development, while James is enjoying a retirement of non-profit work and traveling with his family. Aaron Clark, on the other hand, remained in the collision repair business – as a vice president of Assured Performance – after selling his Indiana-based Collision Solutions company to ABRA Auto Body & Glass in 2012.

“I'm very happy not to be in your guys’ shoes today,” Clark said, drawing laughter from MSO executives at the symposium.

Clark and his brother were partners in a two-shop company in 2001, and their objective was to “grow the business strategically, looking for shops that filled out a footprint” in the Indianapolis, Ind., market.

“Having two stores was the worst spot I was ever in,” Clark said. “Having two was twice as bad as having one. I would never recommend for anybody to be in a two-store scenario. There’s just all kinds of challenges.”

A merger with another local shop owner and the purchase of one shop gave the company five shops at the time Clark sold.

Like James, Clark said he got stung at the time of sale by contracts his company had with vendors that had “problematic renewal clauses;” that can require some of the sales proceeds to go toward contract buy-outs.

“And that’s just not one contract,” James said. “For us, it’s one contract times 20 shops. It was a big number.”

Clark said there were “some bumps in the road” during his sale, which was a 8-month process talking to several “suitors.”

“I think that’s to be expected,” he said. “I didn’t expect it to be a simple process and easy to do. I poured my life into the business, so it was difficult to let go. I think that was one of the biggest pains, actually letting go when it was done.”

Looking back, Clark said he think he may have been able to get some more money out of the deal – though he recognizes there can be “opportunity costs” there ­­– but otherwise he has no sellers' remorse.

“I moved on in my life and don’t have any regrets,” he said.