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Opening a New Auto Collision Repair Shop

Starting a collision repair business requires a complete, written business plan.

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Hank Nunn is a 35-year collision industry veteran. He is now retired.

There are many reasons you may contemplate opening your own collision repair business. Perhaps you’ve worked in a collision center for years and are tired of working for someone else and think you can do it better. Maybe you see an opportunity in your market and think you can build a successful business. Or, you’ve been overcome by a case of “entrepreneurial spirit” and just want to run your own company.

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The desire to start and run your own business is not unusual. In fact, small business is the engine that drives our economy. There’s a good chance you can indeed start and run a successful collision repair business. But then again, there’s a good chance that you can fail and lose everything you have reaching for that dream!

Bad Numbers

There are plenty of bad numbers to discourage people from starting a small business. Do an Internet search for “percentage of small business failure” and you’ll see page after page of bad news. While there is a lot of data out there, much of it contradictory, you’ll see that roughly 33 percent of new businesses will close by the end of their second year. Of the remaining 67 percent, half will close by the end of their fifth year.

So let’s say that 100 new collision centers opened today. Five years from now, only 33 will be in business! Less than half of those will enjoy reasonable profits. With those odds, you would be better off taking out a second or third mortgage on your house, emptying your bank account and placing all of your money on a roulette wheel. Pick black. Your odds are better than winning in a small business!

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There is nothing wrong with wanting to own a collision repair facility, but it’s important to understand that opening any new business is tough. You’ll work longer and harder than you’ve ever worked – often for no monetary compensation. New business ownership is not an 8-to-5 job! But the reward for building a functioning and profitable enterprise is huge. It may not always be financially huge, but building a healthy business provides substantial emotional satisfaction.

Plan to Win

Do everything you can to be one of those 33 winners! Plan to win.

Before going into business, ask yourself, “Do I really want to do this?” You may be a great technician, estimator or manager, but those skills are not the skills required to be a successful business owner. How are your leadership skills? Have you taken a class or read a book on management, marketing or accounting? How do you feel about risk? I suggest you get a copy of Michael Gerber’s “The E Myth” and read it cover to cover before you decide to go into business.

Small business “winners” share some interesting characteristics. They have a positive attitude and are willing to sacrifice time, energy and money in the start-up phase. They’re willing to accept reasonable risk. More than anything else, winners plan their business. Planning is the key to success! The old saying, “Failure to plan is planning to fail” certainly applies to opening a new collision repair center.

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The Business Plan
I recently met with a new entrepreneur who’s having trouble in the first year of his business – a sports bar. He mortgaged his home to come up with the money to open it, he hasn’t taken a paycheck in six months and his wife had to take a job to cover home expenses. The place is slowly growing, but the pace is painful and he has had to borrow money from family to make payroll.

I asked to see his business plan, and he told me he’s working on it now “to get an SBA loan” and that’s why he wanted my help. Like many, he made the decision to open his business without adequate planning. His decision to create a plan was made to support a loan request. Had he created a complete business plan to open his business, he would have seen many of his current problems before they arose.

My friend says he had always wanted to own a sports bar. He felt that he had researched his decision and jumped in with everything he had. In fact, that’s how most businesses start – and why so many fail. We need to properly plan for any business.

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“Planning” means the creation of a complete, written business plan. Before you decide to venture into any new business, a thorough business plan should be created.  Usually, we think of creating a business plan as a tool to run a business. But creating a business plan will help you decide if you should open a business, then guide you as you run the company into the future.

Many business owners talk about business plans, but few ever generate a complete one. Usually, business plans are written to support a loan request, like the sports bar example, then are filed away. Business plans are much more than part of a loan application package. A business plan defines where your business is, where you want it to go, how it will get there, what it will cost and how you’ll measure your progress toward the goal.

Let’s look at each section of a business plan:

Executive Summary.
This is a short, one-page, condensed goal of the plan. While it’s generally the first page, write it last. Do all of the homework, build the financials and truly analyze the business prospect before you summarize. Many generate the summary in the beginning (because it’s the first page), then spend the rest of their time and energy justifying the Executive Summary.

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Market Analysis. This is a look at the market potential for the prospective business. In the case of a collision center, you’re looking for the number, age and types of vehicles, insurance companies and a competitive analysis.

Company Description.
It’s just that. What type of company do you intend to build? Are you planning a “Class A” full-service collision center? Will you focus on insurance-directed business or customer-driven repairs? Are you looking for a “niche” such as Corvettes or British sports cars? This section forces you to really define your prospective business.

Organization and Management.
This will describe how the company will be organized. Will this be a partnership, a corporation, limited liability company or sole proprietorship? This should also include the resumes of all owners and officers.

Marketing and Sales.
This module is supposed to answer the question, “Where will the work come from?” Really, where will you get the business? The marketing and sales module will compose 60 percent of your business plan for a new business. If you’re buying an existing business, this section will specify where current business is created and how you intend to improve sales.

Service or Product.
This section of the SBA plan defines your product. Pretend you’re writing your plan for someone who knows nothing about collision repair. Define what you plan to do and how your product will be different from your competition.

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Funding. This module spells out where the money for the new company will be generated. If the business plan is being created for a loan request, this section is where that request will go. This also requires you to define where your initial funding will come from.

Financials. This section answers the questions about where revenue is generated, where it’s being spent, how loans will be repaid and what profits will be generated. The best and toughest of the financials is the Pro Forma Cash Flow statement. Generally created for three years, this financial statement tells you up front when you will need to borrow and how you will repay. A good cashflow forecast will tell, for example, that sales are off in July because you’re paying for employee vacations and the employees aren’t there to sell. This is the section that will spell out what’s being purchased and for how much. What is the company’s breakeven point? When will it be achieved? Don’t forget to include the impact of employer-paid taxes and benefits.  Many business plans have labor cost calculated at the going flat rate for techs. When the impact of payroll taxes and benefits are added, the cost of labor increases by 33 percent or more!

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The importance of creating a business plan cannot be overstated. A good plan can help negotiate a more favorable lease, credit line, vendor agreements and loan rates. Risking all without a complete business plan is a gamble, not a business venture.

Get Help
Many of us get intimidated looking at business plans. You see the samples with charts, graphs and spreadsheets and mutter to yourself, “I’m comfortable working on cars, but I can’t do this stuff!” Don’t do it alone. Create a team of people to assist in building your plan. Later on, they can help execute the plan.

Obtain the help of an accountant, or at least someone who’s familiar with accounting and can work with you building profit and loss statements, balance sheets and other financial statements.
You’ll  probably need the help of an attorney when deciding on the structural formation of the company. Partnership, sole proprietor, corporation or LLC? All have advantages and disadvantages. Find an attorney who specializes in business structure.

Most paint companies have business development consultants who may be able to help you complete a business plan. They frequently have access to marketing data as well. Equipment vendors are usually up to date on permits required for booths and other pieces of equipment.  They may also offer assistance with layout and design issues.

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Bankers live in the world of business plans. Find one to review and critique yours. By the way, their help is usually free!

Collision centers require special licenses and permits. Most states, counties and cities have small business assistance centers that can help you. Use them! They can walk you through the maze of permits covering everything from digging a pit for a spraybooth to EPA and Hazmat training requirements. Work those licenses and permits into your business plan.

Specialized help from proven business professionals is available through SCORE. SCORE is primarily composed of retired business executives who donate their time to help small businesses. Supported primarily by the SBA, this is a wonderful source for one-on-one assistance from a seasoned veteran, at little or no cost. SCORE can be found through the SBA website or at http://www.score.org.

Creating a business plan is work, but planning is the key to creating a business that will prosper. Hopefully, your business plan will show you and anyone you plan to do business with just how good an investment you’re making. Then again, you may find that going through the process demonstrates that your idea just doesn’t pan out. But your time still won’t be wasted. Much of your research can be used again and again as you look for a location or acquisition that works.

Pointers

Okay, so far you’ve read this and are disappointed because all I gave you was business stuff, not tips geared specifically toward opening your own collision repair facility. Never fear! Here are some pointers:

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Location, location, location! Get the best you can afford. There are many stories of people who started out in small spaces in the back of industrial parks…but you don’t find many success stories of people who stayed there! Unless you’re opening a niche business, your facility needs to be easy for customers to find.

Greenfield or buy an existing shop…which is better? There are advantages to buying an existing shop. There is a customer base, equipment, and most licenses and permits go with the business. But there is always “baggage.” The equipment may be dated or worn out, the building may need substantial repairs or the reputation may be poor.

The “greenfield” option is nice, too. Shiny stuff, new building. Wow! But permits, improvements and lease rates may be high. How do you choose? Build business plans for both options. The plan will answer your question. By the way, there are a lot of shops for sale. They usually don’t have “for sale” signs out front, but check with vendors in the market for leads. The best purchases are poorly managed, good-looking facilities with good locations that currently don’t make money.

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Equipment. I’ve reviewed many business plans for many types of businesses and found that most understate the cost of equipment and materials inventories. You can save money going used, and there’s a lot of used equipment out there. Be sure that the equipment you’re purchasing is suitable to the vehicles you intend to repair. Don’t think you will get by repairing new European luxury sedans with floor pots, a pull post and a 10-year-old MIG welder.

To play it safe, always increase estimated equipment, material inventory and leasehold improvements by 33 percent when building your business plan. For example, if you estimate you need $100,000 in equipment, plan for $133,000 in equipment.

Business structure. Which business structure is best? Most start out as sole proprietorships or partnerships. The best form for collision repair centers is probably a form of corporation. Work with a business attorney and an accountant when deciding your business structure. You might as well start out with the proper structure. Be very careful with partnerships. They can work, but usually break up once one partner is satisfied and the other wants to keep growing. Partnership breakups are worse than divorces. Small corporations provide some legal protection, and share prices and buy/sell agreements can be created up front, making a future departure of a principal much easier than a partnership.

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Franchising. Franchises have a significantly lower failure rate than stand-alone new businesses. That’s because most franchise businesses have tried-and-true process manuals. There are franchise opportunities in collision repair just as in most other industries. Some are new business franchises, while others are “conversion” franchises through which existing businesses can “convert” to the franchise form of operation. With the growth of MSOs in the industry, the conversion franchise is an attractive alternative among many individual shop owners. Franchises are certainly worth a look, particularly with their greatly reduced failure percentages.

Marketing. Marketing for a new business should have the highest priority. Unfortunately, most new shop owners don’t spend much time on this until the shop is complete, and by then all of the money is gone. Marketing is everything you do to bring vehicles to your new shop. With no customers, you don’t have a business, just a lot of expensive stuff! Read the “Guerilla Marketing” books by Jay Conrad Levinson, or visit this website. In today’s world, the Internet is king, so make sure you have a functioning website – and be sure your site can be found! Mark Claypool’s great column on Internet marketing, “Web Presence Management,” can be found on www.bodyshopbusiness.com and in every issue of BodyShop Business.

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Money. Here comes the big question: “How much money will it take to open a new business, and where will it come from?” The answer to “How much?” will come from your business plan. Make sure there is money for operations once you’ve opened your door. You can’t just add up the equipment expenses, lease, signage, and business cards and jump in. You have to buy parts and materials and pay labor expenses to produce your product and get paid. Account for that!

The answer to the question “Where will it come from?” is not so simple.  Start with your business plan to figure how much cash is needed. If you’re buying an existing business, seller financing of 60 percent or more of the purchase price is common. If you’re going to create a new shop, you have to figure out how much of the required money will come from your resources and how much can be financed. SBA-insured loans are the most common place to go for seed money. Working with an SBA-approved banker on the creation of your business plan will make getting a loan or line of credit much easier. Also, work with the banker on any equipment leases you may consider. Frequently, your bank can beat lease interest rates with zero-down loans for the same pieces of equipment. Run different acquisition scenarios by your accountant as well to determine tax consequences of lease vs. buy decisions.

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Some first-time business owners take out second mortgages against their homes, like the sports bar owner did. Others borrow from family and friends. If you’ve decided on a corporate form of business organization, you can offer those family and friends shares in the business to be purchased back at pre-agreed pricing to keep things a little cleaner. Personally, I hate borrowing from family. If you have a good relationship with vendors (jobbers, paint companies), you may be able to find some vendor-supplied financing for your venture. Many acquisitions of existing businesses by MSOs are funded through vendor financing.

In reality, you’ll probably use a combination of all of the above, plus your personal savings, to get into business. If you have a solid business plan, your chances of success, and your ability to repay those loans, will be greatly enhanced.

Finding Success
You can find success by opening your own collision repair shop. One of the great things about our industry is that people can still start a new collision repair business and be successful. If you want to win and be one of those 33 who make it five years and beyond, build a team to help plan and run your business. Don’t just survive, thrive! Planning is the key to success.

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Business Plan Information

There is a lot of information out there on business planning. By far, the best business planning resource is the U.S. Small Business Administration (SBA) at www.sba.gov. The SBA business plan is required for any SBA guaranteed loan. Yes, there is software available to assist in building a business plan, but doing the work of generating an SBA-formatted business plan manually teaches you more about your prospective venture than the software. Plus, the SBA plan, format and instructions are free.

The SBA business plan is composed of eight sections:

• Executive Summary
• Market Analysis
• Company Description
• Organization and Management
• Marketing and Sales
• Service or Product
• Funding
• Financials

Instructions and samples are online at the SBA website.

Create a plan for any business opportunity. It really doesn’t matter if you’re buying an existing business or building a greenfield (new) collision repair center – do your homework and generate an SBA format business plan.


Attributes of Business “Winners”

1. Positive Attitude

2. Willingness to Sacrifice Time, Energy and Money

3. Willingess to Accept Risk

4. Committed to Planning


Hank Nunn is a 37-year industry veteran and president of H W Nunn & Associates Inc., a collision industry training and consulting company. He may be reached at [email protected].

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