Collision Repair: Private Equity, Consolidation, Implications

Collision Repair: Private Equity, Consolida7on, Implica7ons Presentation for:
San Antonio May 2015 David Roberts, Managing Director
FOCUS LLC
1133 20th Street NW
Suite 200
Washington, DC 20036
Disclaimer
§ 
This presentation was prepared by FOCUS Investment Banking LLC exclusively for the
benefit and internal use of the Company, as herein defined, in order to discuss, on a
preliminary basis, the feasibility of a possible transaction or transactions. This presentation is
incomplete without reference to, and should be viewed solely in conjunction with, the oral
briefing provided by FOCUS. The presentation is proprietary to FOCUS and may not be
disclosed to any third party, other than the Company’s advisors, or used for any other
purpose without the prior written consent of FOCUS.
§ 
The information in this presentation is based upon management forecasts and reflects
prevailing conditions and our views as of this date, which are accordingly subject to change.
In preparing this presentation, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information available from public sources
or which was provided to us by or on behalf of the Company or which was otherwise
reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the
assets, stock or business of the Company. Even when this presentation contains a kind of
appraisal, it should be considered preliminary, suitable only for the purpose described herein
and not be disclosed or otherwise used without the prior written consent of FOCUS.
§ 
Securities transactions conducted by FOCUS Securities, LLC, an affiliated company,
registered Broker Dealer and member FINRA/SIPC.
Who We Are
• Middle market investment bank since 1982
• Specializing in transactions between $5 and $300 million
• Serving sellers, buyers, and investors
• Delivering a balanced mix of sell side and buy side M&A and
corporate finance
• Team includes 24 bankers, 19 senior advisors, three
research analysts, five support—total staff of 51
• Offices—Washington DC HQ, Atlanta, and Los Angeles
• Securities transactions conducted by FOCUS Securities
LLC, an affiliated company, registered broker/dealer, and
member FINRA/SIPC
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David Roberts
•  David Roberts and his partner, Matthew Ohrnstein, created the idea,
the business plan and raised the first $120 million of capital for Caliber
Collision beginning in 1995. Originally an attorney, largest franchisee of
Chuck E. Cheese’s, securities analyst and money manager and
investment banker.
•  Investment banker for 11 years with FOCUS.
•  Lead a team of seven bankers focused on Automotive Services,
leading with collision repairers but also mechanical providers, quicklube, paint jobbers, parts distributors, equipment and allied firms
•  Graduate of Duke, MBA and JD from University of California, Berkeley
•  Domiciled in SF Bay Area
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Agenda
•  Consolidation
•  Private Equity
•  Implications
Focus Investment Banking LLC 5
News Flash from 1995!
6
Collision Repair Ecosystem
• External
–  Uncertainty of the current macroeconomic conditions
•  Interest rates, China’s economy, Ebola
–  US economy recovery uneven
•  Consumers have relatively less money to spend than
investors
–  Technology is accelerating change in vehicles, insurance,
marketing, communications, processes
–  Globalization of vendors, manufacturers, technology
–  Private equity investment in every sector of industry
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Collision Repair Ecosystem
•  Industry Conditions
–  Continued declines in accident frequency and number of
repairable claims
– 
– 
– 
– 
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Average severity growing less than inflation
Fleet is older and need replacing which increases total losses
DRP share of repairs is increasing
Changes in marketing relationships with insurance companies
Increasing complexity in repairs, increasing investment
required
–  Increasing management skills required
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Concentration Among Insurers
2013 2009 2005 1999 % change Source: Na7onal Assn. of Insurance Commissioners; SNL 9
Auto Physical Damage Market
•  Largest insurers gain market share
•  Top 5 control more than 50%
•  Changes from 1999 to 2013
–  The top 10 insurance companies increased combined market
share by 10 points
–  Top 67% of market has 6 fewer insurers
–  State Farm and Allstate, while down slightly during this time,
still command over 28% of the market
–  BUT GEICO has now surpassed Allstate’s market share
–  Progressive has more than tripled its share
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$31 Billion Industry Today
•  Consolidators
–  ABRA, Caliber, Gerber,
Service King
•  Other MSOs
–  48 MSOs >$20 mm
–  73 MSOs > $10-20 mm
–  90-120 MSOs - $5-10 mm
•  Dealers
–  22 Multishop Dealers
(MSDs)> $20 million
–  61 Multishop dealers $10-20 mm
–  5,706 single dealer shops
•  4 Multi Location Networks (MLNs)
–  CARSTAR, FixAuto, MAACO,
ABRA franchisees
•  Rest of industry
–  22,000 independent nondealer shops
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34,000 Total Shops
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5,000 Important Shops
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1,475 MSD and MSO Shops
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930 Consolidator Shops
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Industry is Contracting
• 52,000 shops have disappeared since 1980 • 19,000 shops have disappeared since 1998 • There are fewer than 34,000 shops today • Another 20,000 may disappear by 2030 • Shops owners are uncertain and afraid • How many shops does industry really need? 16
Best Shops Today
• Larger
• More productive
• Better managers
• Better systems
• Higher margins
• Organized around systems
• Part of an MSO or Consolidator
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Consolidation
•  Aggressive acquisition and organic growth by the consolidators and
MSOs
•  Larger MSOs improving execution on decreased cycle time, average
cost of repair, LOR, loss adjustment expense (LAE) and customer
satisfaction/KPI scores
•  MSOs are differentiating themselves through initiatives such as selfmanagement, electronic auditing, call centers, capacity utilization
management, and geographic coverage
•  Aggressive MSO selling, marketing and branding of their competitive
value propositions and performance
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Accelerating Acquisitions
•  Large acquisitions completed in 2014 (all revenues are estimated)
–  ABRA
•  Wilburn, CCA – 38 shops, $95+ million in revenue
•  True Quality – 13 shops, $25+ million in revenue
•  Collision Center of America – 22 shops, $45+ million in revenue
–  Caliber
•  Haddocks – 5 shops, $26+ million in revenue
•  Pohanka, Craftsman – 25 shops, $90+ million in revenue
–  Service King
•  Sterling – 62 shops, $215+ million in revenue
•  Marco’s – 7 shops, $27+ million in revenue
•  Car West – 6 shops, $45+ million in revenue
•  Kirmac – 12 shops, $34+ million in revenue
–  Gerber
•  Collision Revision -24 shops, $50+ million in revenue
•  Collex – 22 shops, $46+ million in revenue
•  Champs – 7 shops, $37+ million in revenue
•  $800 million of revenue – 2.5% of entire industry!
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Consolidator Growth 2013-2014
Year
Consolidator
End
(US only Shops) 2012 Year
End
2013 2013
Additional
Shops 2013 %
growth 2014
Year End
Additional
2014 shops 2014 %
growth ABRA 81 132 51 63% 205 73 55% Boyd 180 220 40 22% 282 62 28% 112 158 46 41% 232 74 47% 63 104 41 65% 211 107 103% 436 614 178 41% 930 316 Caliber Service King Total 51% 20
Markets are Rapidly Consolidating
•  Consolidators are focused on covering top 125 markets in US
•  Market by market
–  Unconsolidated markets
•  New York
•  Boston
–  Consolidating markets
•  Chicago, IL
•  Charlotte, NC
–  Consolidated markets
•  Denver, CO
•  Phoenix, AZ
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Denver Market
• $220-250 million: Denver MSA Collision Repair Volume
–  $120 million+: Current capacity of these 33 Consolidator
shops and one remaining smaller 4 shop MSO
–  100% of Denver MSA is within 20 minutes drive time of these
37 MSO shops
22
260 Shops in Denver Market
Source: IDSI 23
Denver Market
13 Caliber shops Source: IDSI 24
Denver Market
9 ABRA shops Source: IDSI 2 Service King Shops 25
Denver Market
9 Gerber shops
Source: IDSI 4 shops in last remaining MSO
37 total MSO shops 26
How a Consolidator Builds A Market
•  Start by buying a platform
–  Market leading volume, locations
–  Management capable of leading market
–  Very strong EBITDA %
•  Additional strong MSOs as “bolt-ons” or “tuck-ins”
–  Significant volume, EBITDA margins, management
•  Add individual shops with desirable characteristics
–  Location, management, extra capacity
•  Add underperforming individual shops that expand geographic
coverage or capacity
•  Develop “Brownfields” – lease and build out former shop or
warehouse
•  Build “Greenfields” – work with developer to lease and build
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Insurers Reward MSOs
–  Insurers with larger market shares are concentrating
repairs with MSOs
–  Best DRP networks utilize MSOs that have proven
their capabilities across entire markets
–  MSOs are expanding to meet insurers desires for
market coverage/capacity
28
State Farm DRP Map
Source: IDSI 29
GEICO ARX Map
Source: IDSI 30
Private Equity Described
•  Investment management vehicles that raise large pools
of money invested by pension funds and other
institutions and wealthy individuals
•  Less regulated than mutual funds or investment advisors
•  Similar to but not the same as:
–  Family offices
–  Venture capital firms
•  Largest is more than $75 billion
•  Small ones can be $25 million
•  More than 2000 of them
•  Most focus on specific industries or types of investments
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Private Equity Described
•  Big firms focus on big deals in large variety of industries $500 million and up
–  Examples: Blackstone, Carlyle and
Hellman&Friedman
•  Smaller firms like niche industries
–  Example: Roark Capital invests almost exclusively in
multi-location businesses
•  Firms often team up to buy businesses
•  Most firms have finites lives – form partnerships that
have to get all $ invested, grown and harvested in 7-10
years
•  Some firms have an infinite life and tend to invest for
returns over longer periods
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PE Deal Structures
•  Investment Process
–  Identify an industry
–  Find many prospects
–  Kiss a lot of frogs, finally invest in one
•  Usually buy 100% but sometimes less
•  Cash out management but give/require key managers
opportunity to co-invest
•  Borrow money against earning capacity of acquired
business
–  Often 3:1 or more multiple of equity
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Growth Process
•  Use borrowed money to invest in:
–  Better systems, training, managers, marketing
–  Acquire additional firms that complement or leverage
existing investments
•  Goals: Increase the EBITDA of the entity
•  Refinance loans at lower rates
•  Continue growing revenues, market share, margins
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Liquidity
• 
• 
• 
• 
• 
• 
• 
Harvesting the Profits
Dividend out excess cash not needed for growth
Sell to another private equity fund
Sell to a strategic investor, public or private
Take entity public in an IPO
Gradually liquidate position
Return profits to investors and managers
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Implications for Jobbers
• 
• 
• 
• 
Water and other things flow downhill
Consolidation in collision repair helps drive jobber consolidation
Private equity and public companies drive jobber consolidation
Multiple impacts
–  Shrinking margins
–  Consolidators pay just service fees
–  Shrinking base of customers
–  Remaining customers need – and demand – more from jobber
•  Opportunities for growth
•  Opportunities for exiting industry
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Jobber Alternatives
• 
• 
• 
• 
• 
Grow and thrive
Grow and sell
Sell
Stay the course
Run-off the business
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Value Added Services
•  Process improvement
–  Lean process
–  Teams
–  KPI measurement and compliance
–  New technologies
•  Information clearinghouse – Who’s looking to exit, grow?
Job placements, consolidator activity, etc.
•  Consultant to shops with manufacturers’ programs
–  Analysis of discounts vs pre-bates
•  Assist with financing
–  Banks, SBA, credit extension?
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Key Assets
• 
• 
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• 
Strong financial base
Great accounting system
Know where your margins come from
Sufficient working capital to optimize gross margin
Diversification
Focus Investment Banking LLC 39
Thriving in a Consolidating Market
•  Scale is the game everyone is playing
•  International and national consolidators have huge scale
–  Spread their costs over hundreds of locations,
constantly learning, improving, creating deeper and
deeper relationships, building efficient and data rich
systems
•  Regional jobber MSOs have multi-market scale, across
multiple MSAs
•  Large single market jobbers
•  Smaller single market jobbers
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Growth Alternatives
• 
• 
• 
• 
Acquire volume
Merge with a competitor
Develop new locations
Diversify
–  Ancillary product lines
–  Ancillary industry lines
•  But you need a PLAN – a
written plan with
measurable financial goals
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Then
•  Execute
–  Even with a good plan, things go wrong
–  Expect hiccups
–  Resilience in face of adversity is mark of good
management
•  Evaluate
•  Revise
•  Repeat
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Mergers
• 
• 
• 
• 
• 
Finding a partner
Negotiating the relative values
Management
Equity issues
Debt issues
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Selling
• 
• 
• 
• 
• 
Get organized
Have a Plan
Use an Intermediary
Put together a Team
Conduct an Auction Process
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Preparing to Sell
•  Evaluate
•  Prepare
–  Evaluate your market
–  Get your house in order
–  Realistically assess your
–  Write up the specific plan
resources
–  Put together a team
–  Articulate your goals
–  Establish a timetable
–  Consider your alternatives •  Process
–  Assess the risks of each
–  Run a professional process
•  Decide
–  Use an intermediary
–  Choose the alternative that
–  Bring more than one buyer
best balances your tolerance
to the table
for risk and your desire for
rewards
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Putting Your House in Order
• 
• 
• 
Structure
–  S Corp or LLC, not C Corp
because of tax issues
• 
–  Control of entity
Finances
–  Everything on the books
–  Audited or reviewed statements
(GAAP compliant)
–  CPA who is knowledgeable and • 
responsive
Management
–  Identify and prepare succession
managers who will be able to
run the business for the buyer
–  Create a culture and processes
that look like the potential
buyer’s culture and processes
HR
–  Squeaky clean and organized
–  No outstanding HR issues (back
pay, vacation pay, unresolved
WC claims, etc.)
Systems and certifications
–  Measuring, paint, management
systems up to date and staff
qualified
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The Sale Process
•  You have a team to run a process so you can run the business
•  The process brings multiple buyers to the table, that’s what
determines fair market value
•  Team tasks
–  Intermediary helps prepare blind summary, Confidential Investment
Memorandum and target list of prospective buyers
–  Contacts prospective buyers with blind summary
–  Obtains NDAs
–  Requests offers
–  Owner evaluates and choose preferred offer
–  Intermediary obtains Letter of Intent from preferred buyers
–  Preferred buyer conducts due diligence
–  Intermediary and owner negotiate final terms
–  Lawyers prepare a Purchase and Sale Agreement
–  Close the transaction
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Time is Critical
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• 
• 
Consolidation is happening more quickly than you think.
Engaging with prospective buyers is a process
Once you decide to move, everything takes longer than you think
And delay kills deals
75% of all businesses that are put up for sale are never sold. Why?
Seller couldn’t provide what buyer needed
Seller couldn’t negotiate a satisfactory price
Seller died before the closing
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MID ATLANTIC REGION
SOUTHEAST REGION
FOCUS Investment Banking LLC
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1133 20th St. NW
Suite 200
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202.785.9413 (fax) FOCUS Investment Banking LLC
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Suite 2450
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Securities transactions conducted by FOCUS Securities LLC, an affiliated company, registered Broker Dealer member FINRA/SPIC
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