CRA Business News – USA
David Roberts, managing director of Focus Advisors, a full-service FINRA-registered M&A advisory firm serving collision repair entrepreneurs, has recently offered commentary on how the coronavirus pandemic is affecting the collision industry and tips on how shops can weather the storm.
Collision Week published a survey they completed mid-March indicating a U.S. average sales decline of 40%, with California and New York at 50% to 75%.
Roberts says his California clients are seeing declines of 50% or more, but surprisingly – perhaps due to three weeks of sheltering in place – some California shops are seeing assignments stabilizing. A Los Angeles Times article published traffic statistics gathered by the California Highway Patrol that showed a 60% reduction in traffic and 50% reduction in collisions.
However, Roberts states, California and New York are probably leading indicators of the impact of the crisis and downturn for the rest of the country.
- Many operators have drawn down their lines of credit and slowed down or cancelled all investment spending.
- For those who own their own real estate with minimal debt service requirements, the breakeven on sales is considerably less than those who lease.
- Everyone Focus Advisors talks with is looking to borrow additional funds through the SBA’s PPP loan facility described below.
- MSOs are reducing costs by closing some shops or only doing intake with load leveling cars to their other locations.
- Common expense reductions include temporary suspensions of 401k contributions, allowing staff to take PTO and voluntary furloughs, and not replacing staff that depart. The caveat to reducing staffing levels is that the forgivable portion of the SBA PPP loan is proportional to the staff levels maintained through the first eight weeks of the loan.
- All are suspending “nice-to-have” and personal expenses being run through the business.
Caliber has announced huge layoffs primarily in their support services at the corporate level. They have unilaterally announced they will adjust rents by 40% and that they will extend accounts payable terms to some vendors to 90 days. Some of Focus Advisors’ clients are Caliber lessors with little choice but to accept the temporary adjustment, realizing they wouldn’t be able to get a better tenant when the market returns anyway.
Roberts states that when a business is owned by a large private equity (PE) firm, there is a sense of urgency for each investment to align its expected revenues with expenses. Caliber is owned by one of the largest and most experienced PE firms in the nation, so, according to Roberts, when Caliber is looking at huge reductions in revenues, they aren’t going to “wait and see” – they will act.
Gerber, although a public company, is on much of the same footing, Roberts states. During the week of March 30, Gerber announced it was seeing a 40% to 50% reduction in system sales and trimming of corporate costs, including an unspecified reduction in staff. A few weeks earlier, it announced they were temporarily suspending all acquisitions. According to Roberts, they had not yet notified landlords of arbitrary rent reductions.
Roberts states that prior to the crisis, Service King had reportedly laid off hundreds of employees, created a centralized adjustment facility and made other deep cost-cutting measures. With the crises and subsequent declines in system revenues, Service King, Roberts states, is expected to have difficulty meeting its current debt obligations.
Regional MSOs large and small have, according to Roberts, trimmed their costs, some even closing shops temporarily. The larger PE-backed regional MSOs continue to complete pending acquisitions, with some looking to explore new acquisitions opportunistically.
Advice from Focus Advisors
- Hunker down and wait it out. Close your slow shops and load level the cars to your bigger and most effectively staffed locations. Insurers are unlikely to object. On the other side of this crisis, the industry will return, probably slowly and probably with many competitors gone. It will be sad for many folks who have put their whole professional lives into their businesses.
- Cash is king. Get as much as you can and hang on to as much of it for as long as you can. If you have current lines of credit, draw them down so you have funds in case your lender decides to change the terms of your line.
- Take care of your people. Help them access government assistance – from the stimulus money to healthcare access to unemployment, if that time comes. Keep your techs; you will need them when the market returns.
- Take good care of your referral relationships, whether insurance companies or dealers. When this is over, these partners will be critical to regaining volume.
- Apply for federal funding immediately. The PPP loan is inexpensive, forgivable and keeps funding your people for two months. There may be follow-on programs with similar provisions in the next several months. Speak with your bank or any bank that services SBA loans ASAP.
- Adjust staffing and other expenses immediately to reduce cash losses (see caveat to reducing staffing levels above).
- Consider negotiating suspensions or deferral of rent and mortgage payments. Evictions are suspended in some jurisdictions, and some banks are allowing mortgage payment deferment.
- The CAREs Act introduces a Paycheck Protection Program (PPP) Loan administered through current SBA loan servicing banks. This rapid, simple qualification loan will cover 2.5 times your monthly average payroll and benefits expenses, eight weeks of which can be forgiven (including other expenses like rent and utilities, subject to some limitations).
- Economic Injury Disaster Loans (EIDL) available directly through the SBA: Up to $2mm to cover payroll, rent and mortgage, and other obligations that have been impacted by COVID sales declines.
- Current loans supported by the SBA can be deferred for up to one year.
- SBA Loan Assistance Options: Click here.
- SBA Paycheck Protection Program (PPP) overview, apply through a SBA-approved bank: Click here.
Preparing for a sale is still an option, says Roberts. There ARE buyers, some of whom will consider your 2019 performance when valuing your business. But if you have been contemplating a sale for some time, it’s prudent to be ready when the buyers re-engage. A well-prepared business will be at the front of the pipeline when the market returns.
Focus Advisors is a full-service FINRA-registered M&A advisory firm serving collision repair entrepreneurs looking for advice about their future possibilities. Focus is one of the most successful M&A advisory firms in the automotive aftermarket, having completed more than 20 collision and paint distribution transactions in the last five years including selling large MSOs such as Price’s Collision in Nashville, Herb’s Body and Paint in Dallas and Keenan’s Auto Body in Pennsylvania.
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