How to get the financing needed to expand your business

July 1, 2016
A handful of MSO owners share their advice on how to get the financing needed to acquire or build new locations.

Fortunately for most MSOs, getting financing for growth doesn’t involve groveling before a greedy banker named “Mr. Potter” as George Bailey did in It’s a Wonderful Life. On the other hand, it’s also not as easy as yelling, “Show me the money,” into a phone as the title character did in the 1996 film Jerry Maguire.

So how do MSOs get the financing they need to acquire or build new locations and build their business? A handful of MSO owners shared their financing stories and advice.

Prepare before you approach the bank

Chad Smith of Smith Bros. Collision Centers, which opened the first of its three locations in Mississippi in 2000, said he sees three steps to getting financing for growth, all of which should be done well in advance of adding another shop. The first step, he said, is planning for growth.

“One of the biggest things you need to do is decide in advance if you’re going to expand to multiple locations, because if you don’t plan for it, it’s almost impossible,” he said.

The next thing, he said, is to be financially solvent and have accurate business financial records that reflect it.

“Take care of your books the correct way,” he said. “If you don’t have accurate financials and a good balance sheet that shows that you’re solvent and liquid, the bank is not going to spend any time with you. And don’t splurge on your cash so you have some reserves when the time comes or an opportunity to grow arises. You’ll want to have some cash to put toward any deal.”

Smith said his company relied on bank financing when it purchased a second location in 2004 and a third location just last fall. Those acquisitions required the third step needed well ahead of that growth: building a relationship with your bank.

“You want them to know you when you go in and say, ‘Look, I have this opportunity; you know me, and you know my numbers. What can you do?’” Smith said. “If you do those steps, you’ll have banks competing with one another for your business. We’ve seen that. We’ve had it come down to banks competing to try to get the opportunity to fund our expansions.”

Smith said he looked into Small Business Administration-backed loans, but found it too restrictive.

“It’s just better if you can keep it with your local bank,” he said. “I think banks now more so than ever, are real community-minded. They don’t want to see a business close and have vacant real estate sitting there. They know for a community that serves no purpose. So the more they can be involved to keep a business growing and thriving in the area, it’s a win-win for them as well.”

Explore all the options

Doug Keller of Nebraska-based Eustis Body Shop said he’s used just about every form of financing available to grow his business over 37 years: from refinancing his home, to loans from family, suppliers and the SBA, as well as contract-financing from the owners of businesses he’s acquired.

“I’ve done it all except private equity,” Keller said.

Keller’s grandfather helped him finance the first of his five shops back in 1979, a conversion of a 1913 Ford dealership that had more recently been used as a mechanical repair shop.

“I just paid him as I could, and in about 10 years I had him paid off,” Keller said.

Although business deals among family members carry some potential challenges, Keller said the flexibility with the loan payment that his grandfather’s loan offered was invaluable for a new business.

“He didn’t need the money, and there were times I couldn’t make the payments, and we’d talk about it and he was fine with it,” Keller said. “Even more than the other notes over the years, I think that loan was the most satisfying to actually pay off, just because it was my Grandpa.”

Keller said he suspects that today’s economy and demographics have resulted in a lot of retired people who, like his grandfather years ago, have money and might be interested in investing in a good local business.

“They might not like the stock market, and banks are only paying less than 1 percent of interest right now,” he said. “If they can get 3 to 5 percent from you, they’d be better off.”

Keller said that as his fledgling business began to build some credit history, he was able to finance additional equipment and projects through bank loans and financing from suppliers. The locations he added ­— some as far away as 100 miles from his first shop — were financed either by banks or the owners whose shops he was buying.

“I also refinanced my house twice to get down-payment money,” he said.

Even short-term seller-financing can be a great way to build up equity in a business or property before approaching a bank to fund paying off the seller. A seller may want a higher interest rate than other lenders, but there may be less upfront paperwork and fees. The seller also has a strong interest in your success, which can be beneficial if you have questions or need help making a go of the new acquisition.

“I didn’t really see any cons at all,” Keller said of the seller-financing he used for acquisitions. “It made it so it was affordable for me, and yet they received the money that they needed on an annual basis.”

For the company’s largest location, in Kearney, Neb., Keller got an SBA loan. The SBA works with banks to guarantee a hefty percentage of the loans it approves, giving the bank more incentive to make the loan. The process can take several months, and there’s plenty of paperwork you have to provide to both the SBA and the bank.

“The SBA was probably the most cumbersome situation,” Keller acknowledges. “But it seemed, in the end, to be the only way I could get it done. I’d exhausted every other possibility. But with the fees and upfront costs, it was sort of a costly way to go.”

Keller also acquired a mechanical repair shop along the way, a purchase he was able to make with cash on-hand.

“All along I had the goal in mind of being debt-free by the time I was 55,” he said. “Any time I acquired more debt, I made sure I knew I could pay it off by that time. It did work out that way. I’m debt-free, finally,” he said, laughing. “And that feels good.”

Consider ‘pre-bates’ carefully

An East Coast MSO who recently sold to one of the Big 4 consolidators in the industry said that agreement limits what he could say “on the record” about his company’s financing over the years. But he did have some advice for small and mid-sized MSOs, like the one he built and sold.

“First you need to establish a solid score with Dun & Bradstreet,” he said. “Open a savings account, then be disciplined and deposit money into the account at the end of every month. Create a vendor list and be loyal to it in order to establish monthly or quarterly rebates along with a track record of paying your bills on time.”

He said paint manufacturers and distributors can offer “pre-bates”— cash upfront to help your business in exchange for a lower purchase discount and a contract obligating you to purchase from them for a set period of time. Although it may be easier to obtain financing this way rather than a bank loan, the “loan” terms generally aren’t as favorable.

“And the real disadvantage if you take a pre-bate is that there are penalties if you want to get out of your paint deal before the contract ends,” he cautioned.

Self-fund when you can

Dan Dutra agrees. He and his business partner, Lance Bull, used a deal with a paint company to help finance the purchase of their first Sigs Body Shop in Hawaii. When they decided to switch paint brands, they got cash from that other paint company as well – but only enough to pay off what they owed the first paint company to get out of the agreement early. He said the terms of the second paint company deal will end soon, and although they’ve had offers from paint companies, they don’t think they will go that financing route again.

“At this point, a lot of shops are taking [paint purchase] discount as opposed to upfront money, and that’s what we’re going to do to enhance cash flow,” Dutra said.

Other than the vendor financing, Dutra and Bull have self-funded the acquisitions of their second and third shops.

'Family offices' may offer another option for smaller MSOs

The large private equity firms backing the largest MSOs in the collision industry are probably not a likely source of financing for smaller and mid-sized MSOs. But that doesn’t mean there isn’t outside investment money available.

John Walcher of the consulting firm Veritas Advisors, who has been working on shop mergers and acquisitions for more than 15 years, said “family offices,” which manage investments for wealthy families, have taken more of an interest in the collision repair industry as they see other private equity firms doing so.

Unlike private equity firms, however, family offices are more often looking for stability and cash flow rather than spectacular growth and returns. They often hold investments long-term, whereas private equity firms often hope to make their money and exit more quickly, often in five to seven years.

The downside to any such investment capital, however, is the degree to which the MSO owner gives up control; some outside investors will expect to play a larger role in business decisions than others. It also requires giving up some piece of the pie — in exchange for (hopefully) making the pie bigger, Walcher said.

He said many MSOs now are hearing from outside investors, but outside advisors can often help match MSOs to these sources of capital investment.

“Lance is the numbers guy, and he’s real adamant about not servicing debt,” Dutra said. “We’ve gone through some downturns, and it’s been a positive thing for the business not having to service debt when sales are down.”

As they consider the purchase of another shop this year, he said, they have run a bunch of scenarios on spreadsheets to understand the minimum sales they will need every month to self-fund it. But that doesn’t mean they don’t work to maintain other funding options as well.

“It’s nice to have the paint company as back-up,” Dutra said. “We also have banking relationships, and are going to lease some of the equipment. They are ready to give us money because we are debt-free. It’s amazing how many people will offer you support when your balance sheet looks good. So if we do get in a situation where sales drop or something happens, then we can fall back on one of those two options. That’s how we’ve done it so far, and we’re going to continue to do it that way if we can.”

Not always just about the money

Joe Amodei of The Collision Centers said growing to four locations in New York has led him to one conclusion: figuring out the funding is the easy part.

“The hardest part is sustaining growth,” he said. “So even before you seek out funding, think outside the box, come up with a great business plan, and then execute it, adjusting and making changes as needed.”

MSOs that do that, he said, will always find the financing they need to grow.

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