Financing the facts

"The aftermarket has undeniably good long-term trends. With the age of the vehicle population, number of vehicles on the road and do-it-for-me growth, those are well documented trends, and they're consistent," says Jason Schmidly, managing partner with Carousel Capital, a Charlotte-N.C.-based firm whose investor clients include current and former corporate CEOs. "It is a fundamental and growing industry. Aftermarket trends are so well tracked you don't have to guess at the growth drivers behind the sector. You can invest in the facts."

First introduced to the aftermarket by now-client Ken Walker, CEO of Driven Brands, Schmidly has been investing in the industry for several years, with a focus on the service side. He hunts for businesses that can deliver service, value and client satisfaction, all the keeys needed to create a business immune to recessions and financial instability — a perfect investment venture.

"You find a business that has demonstrated it is built on creating long-term customer relationships by providing an excellent service to the customer every visit, services the customer would be glad to have done again. Providing exceptional service creates customers for life, and this is one of the things that attracted us to the service side of the business," Schmidly says.

"There are plenty who perform business the wrong way. They don't give the customer confidence that they've gotten something of value with integrity. They think of it as a one-time opportunity to make a sale rather than build a relationship. We think it is a key to long-term success to engage the customer the right way."

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Another factor in evaluating investments in the sector is understanding variations on the way the aftermarket service business model is performed. The service mix and personnel for one company's units compared to another may be totally different, which can lead to variability in the characteristics from model to model while still falling into the broad category of the aftermarket. The key is making sure the business you invest in executes its business model and has built resources around making it work.

Despite this, the aftermarket's resiliency remains. The recession and its negative impact on many other industries is not an indicator of things to come in the aftermarket — which has been built upon a cultural reality in our society, Schmidly says.

“The aftermarket is based on the fundamental fact of life that we've got to take care of our cars. The U.S. relies on the automobile despite what happens in the credit and housing markets," he says. "We have gotten to witness what happens through economic disarray, and the aftermarket has distinguished itself as an industry that performs well."

The aftermarket is stable even as OEMs struggle — an observation Schmidly doesn't exactly characterize as coincidence.

"Some of the good things going on in the aftermarket are because people aren't buying cars. What is interesting right now is we have Washington telling everyone that we need to buy more fuel efficient cars. At the same time, that requires credit, people need to qualify, someone has to lend to that person, and in turn the consumer is asked to take on more debt. This isn't the most logical idea for most Americans," he says.

Instead, Washington should push the value and environmental benefits of regular vehicle and service maintenance.

"If we are talking about responsibility and the environment, we can achieve a lot of that by just taking care of our vehicles," Schmidly says.

But even without government programs, stellar car sales or a completely steady economy, the aftermarket is thriving and attracting more investment attention because of its proven and expected future durability.

"People may defer some car maintenance, but they are still doing what they need to do to keep their car on the road. Why wouldn't you want to take care of your biggest investment outside of your home?" Schmidly says. Overall, "we invest in these businesses for their ability to grow, create cash flow and ultimately return value to our investors."