When Minnesota-based consolidator CARA Collision & Glass announced Chapter 7 bankruptcy in June, it raised many questions for people in this industry:
- Will more consolidators merge or close?
- What does this mean to the industry and other consolidators?
- What happens to the employees of the closed operations?
- What about the shop owners who sold their shops to a consolidator and received mostly stock as payment? Do they go back to work at another shop or start over from scratch?
- Can something be learned from this closing?
- What’s the future of consolidation in this country?
For answers, I turned to long-time friends and fellow shop owners who’ve sold to and/or currently work for consolidators still in business. I took pages of notes as each person shared valid and important answers. The people I interviewed are some of the smartest and most successful people in our industry, and their answers teach lessons that every shop — consolidated or independent — can benefit from in the future.
Will more consolidators merge or close?
The answer is yes. But who and when depends on many things, not the least of which is available capital and time. If investors make the money available and allow the time necessary to make things work, it may be the saving grace for any consolidator. Some consolidators may be on shaky financial ground, but you can’t put all consolidators in one basket — they’re not all the same! You can ask the same question about shops, and the answer is some will fail and some will succeed.
Last year, I attended a meeting where one of my friends who sold to a consolidator told me he fully expects the consolidation movement to end up with three or four major players. He still maintains this will happen. He may be right. In fact, we’re just now seeing the results from a frenzy of buying and the mistakes that some made.
With the number of current consolidators in this country, it’s only a matter of time until you see another bankruptcy, merger or failure. Meanwhile, you’ll see others grow stronger, smarter and more successful.
What does this mean to the industry and other consolidators?
For starters, any bankruptcy points out what didn’t work in that case. For instance, you can’t make promises you can’t keep, and you can’t give away too much of anything. You need systems for everything — and I mean everything! You also need guidelines, backups and training. You need detailed job descriptions for everyone in the shop or organization, and you have to have written procedures for everything you do. You also need written procedures for dealing with insurers, consumers and anyone else involved in the day-to-day business of collision repair. This means investors who get into consolidation to make a quick buck aren’t going to be happy. But those with long-term vision and planning will probably do well.
A Chapter 7 bankruptcy only buys a little time, but it isn’t a nice experience for anyone — not for shops, consumers, bankers, investors or employees. The employees have to be involved and valued, and keeping employees becomes a key element of any successful shop — independent or consolidated.
One glaring mistake made early on by some consolidators was the corporate mentality to "dumb down" the process — removing the thought process of employees and trying to "over control" everything. An ever-changing process in any shop will cause turmoil and confuse employees about how and why certain things need to be done. You must involve the employees to a greater extent if you want to keep them, and you can’t have inconsistent operating models. You need procedures and systems that become models, can be duplicated and involve everyone in the organization. Most importantly, you have to make a profit.
What does this mean to the employees of the closed operations?
Everyone answered this question the same way: Unfortunately, the employees are out of luck. Hopefully, they had notice and time to get their tools out of the shops. They also have to look for new jobs, or as one person told me, "Get your tools and run!"
In CARA’s case, it was reported by an industry source that the approximately 150 employees were owed two weeks wages when word of the closing came. They lost those wages, which can hurt any family who doesn’t budget or have something set aside.
The only positive for employees is the shortage of quality techs in this industry, which means jobs should be relatively easy to find in other shops. Someone is going to have to finish all those cars locked inside when the shops closed, and the inconvenience for consumers won’t be easy to solve. Many employees of the failed shops are highly trained and skilled people, and other shops and consolidators should contact these employees as soon as possible to offer employment and job opportunities. I predict that all of the employees displaced in any bankruptcy or closing will find new employment within a month. Other smart consolidators were making job offers to some the same week the bankruptcy occurred, with one on the following Monday.
What about the shop owners who sold to a consolidator and took mostly stock as payment?
As far as those who took mostly stock, if a bankruptcy occurs, then some of that stock is just paper and not worth anything. Some will lose everything invested and have only what they set aside.
While many former shop owners may appear beaten when something like this occurs, remember that they became successful long before they sold, and they know how to do it again.
Hopefully, the shop owner was smart enough or able to keep the property (including the building) and only leased it to the consolidator. In that case, the property should be re-leased within a short time period if the owner desires to re-open and operate a business there. The courts will most likely try to get their business done quickly to protect the property owner.
I predict that most of the affected shop owners will rebound and recover in time. One owner told me that he wouldn’t start another body shop on his property. He now invests for a living, and the property is in a location that could have many other uses. Others told me the best use for their property would be another shop. But any shop re-opening in an existing location will have to rebuild consumer trust and business, and that takes time and effort.
All of this is a good reason to keep personal and business assets separate — which applies to people in any field.
You also have to know who you’re doing business with — know your partners. What you think you know changes when money is involved and you work daily with people. Before you sell to a consolidator, spend some time with tax accountants and attorneys who specialize in structuring deals. It may cost some serious money, but it’s a wise investment.
Can something be learned from a failure or bankruptcy?
The answer to this question is a resounding yes. One main lesson learned is that it’s not likely any consolidator can make it using its own money or a single bank or source for everything. It takes time and money to make anything new work. Collision industry people understand this business much better than bankers or outside investors, and realistic percentages and goals need to be in place. The consolidator has to have percentage goals that make more money available when goals are reached, level by level. Lack of capital will close anyone down.
Another lesson is that paint companies that try to buy their way into consolidators or shops with interest-free loans over a period of years can end up with nothing when a bankruptcy occurs. Buying business has never been a good practice for anyone. You’d think this fact would discourage paint companies from fronting money, but I don’t see that happening as several are spending lots of dollars trying to secure future paint business.
I’m aware of one consolidator that would probably be facing failure now if it weren’t for paint company dollars that have been invested recently. But while that may pump up positive cash flow for the short term, it won’t do a lot of good until they fix the problems they have now and get things working consistently.
In addition, when personal touch with employees is lost, the result is simple: Employees leave. Those who find a way to involve and appreciate employees will do better than those who don’t.
It’s not uncommon for employees of consolidated shops to talk with each other, which means they have common knowledge of the mistakes each consolidator has made. Remember, most of these shop owners were friends long before consolidation was possible.
Consolidation isn’t new anymore, so there’s no buying frenzy taking place. In the beginning, mistakes were made, and those mistakes are now being solved. When consolidators first started, they tried to buy some name recognition by purchasing successful businesses nationwide. Rather than concentrate on larger population areas and key markets, some consolidators bought shops over a geographical area or across various remote areas. Many mistakes were made, and now everyone can see those mistakes and efforts are being made to correct them.
What’s the future of consolidation in our industry?
This question brought me the most enlightening answers.
Consolidators aren’t a threat to independent shops in most areas right now. Instead, they’re testing grounds for what works and what doesn’t. In a sense, they’re the guinea pigs for the industry. When something fails, they take the hit and we all learn from the mistake.
The thing is, when consolidators learn that something doesn’t work, it’s not so easy for them to change directions. Try to imagine that your shop is like a speedboat and that you, the owner, can turn on a moment’s notice and make any needed changes instantly. But as your shop expands into two or more shops, you become more like a cabin cruiser — you can still make turns, but they take more distance and time. Consolidators, on the other hand, are more like the Queen Mary — because of their size, they can’t make adjustments or do anything quickly.
Rather than fear consolidators, learn from them. They’ve tried different models and learned from each experiment. In some cases, consolidators have watched owners step aside and leave the shops they sold, then asked them to come back to try to make things work better. Now, the knowledge has accumulated and an effort to cookie cut the models will take place.
If you were a young shop owner about to invest millions of dollars in the collision repair industry, wouldn’t it be great if you could gather 10, 20 or 30 of the smartest and most successful shop owners of all time in one room and work with them to design your shop, your operating procedures, your job descriptions, your marketing and your financial matters? You’d have a complete plan right down to every minor detail. Wouldn’t it be great if they’d spend every day for a year or two helping you make your operation successful? You’d gain more than a century’s worth of what works.
That’s exactly what consolidators have done and are now doing. They’re very close to having the knowledge and experience to build new shops that work, make a profit, and attract and keep key employees. The unknown is whether the return on investment will be good enough to attract long-term investors.
Some consolidators have learned enough to follow the path similar to Wal-Mart. They’ve learned to pick the correct markets, empower employees and offer incentives that will still provide needed profits. They’ve invested time in the research and development. They’re reaching the point where they’ll train employees and management from scratch, build new stores in carefully selected markets with the population to support growth and then slowly expand from there. But it all hinges on whether or not investors will allow the time and capital to make it all work. Just like in football, everyone has to know the play. One player can keep any team from winning, but if everyone is working together, good things will happen.
And consolidation isn’t all bad for independent shops. Twenty years ago, it was hard to sell a shop for what it was really worth. Now successful shop owners have an avenue that makes them attractive targets for a consolidator. A lifetime’s work and efforts can be rewarded with financial rewards beyond what anyone would’ve dreamed just a few years ago. A successful, well-managed and well-run shop is worth more today than ever in the history of our industry.
Consolidation also helps spread liabilities from your shoulders to many shoulders, so all the pressure isn’t on you. It allows for faster business growth and employee opportunities for growth and promotion.
What the consolidators have determined works we should copy. What doesn’t work we should avoid.
The story of consolidation is always changing and will continue to supply us with useful knowledge. Take this article for example. Though it’s just one chapter of the consolidation story, you can use it to better yourself, your shop and the future for you and your employees.
Contributing Editor Bobby Johnson and his wife, Judi, own B&J Collision, Inc. in Jefferson, Texas. Bobby has been involved in many areas of this industry for more than 26 years and was BodyShop Business’ 1989 Collision Repair Shop Executive of the Year.
Just the Facts