CAWA 2016: How You Can Benefit from Aftermarket Consolidation
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Transcript of CAWA 2016: How You Can Benefit from Aftermarket Consolidation
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FEBRUARY 4, 2016
Driving Smarter Mergers & Acquisitions
© 2016 Marx Group Advisors, LLC
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Driving Smarter Mergers & Acquisitions
© 2016 Marx Group Advisors, LLC
PRESENTERS:
Devin Hart President
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Tom Marx CEO
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© 2016 Marx Group Advisors, LLC 3
How You Can Benefit from Aftermarket Consolidation
Part 1: Market Dynamics
CAWA MEMBERS
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Consolidation • Larger companies acquire smaller companies using affordable capital to grow
o Economies of scale – Provides goods/services relatively more efficient and at lower cost
o Consolidators will continue to acquire for two main reasons
– Furthers their competitive advantage – More transactions = better processes = lessens cost of acquisition
Source: Brad Mewes, Sep 2015
Consolidation will continue because it is a virtuous cycle
MARKET DYNAMICS
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MARKET DYNAMICS Four Stages of Consolidation
• Stage 1: Fragmentation o Acquisitions are often “one off” in nature and tend to be opportunistic
• Stage 2: Acquisitions o Frequent and rapid at this stage -- scalability becomes key!
• Stage 3: Expansion o Less frequent but more focused -- core competency with the process
• Stage 4: Maturity o Acquisitions trickle to a standstill
Source: Brad Mewes, Sep 2015
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Aftermarket now at high level of consolidation and this results in a changing competitive landscape
• Creating opportunity and risk for your business
MARKET DYNAMICS MARKET DYNAMICS
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MARKET DYNAMICS
What’s driving the strong M&A activity level? • Supply vs Demand • Strong revenues across value chain • Inexpensive Cost of Capital More recently • Smaller M&A transactions have become more attractive
- Acquirers seek to strengthen infrastructure positions within key aftermarket segments
• Low gas prices add to activity levels -- positive effect on discretionary spending - Increase in miles driven = more automotive maintenance
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Supply Side • Number of service, repair, and maintenance facilities across the US has
decreased by 9% over 10 yr. period
• Jobber store averaging 0.4% decline year over year for past 10 yr. period o Only 1/3 of stores are in the west
– Stores count declining at a faster rate in the west (0.5%)
• Continued consolidation at all levels within supply chain o The pool of highly valued acquisition targets diminish with each M&A
transaction completed Source: Lang Report
MARKET DYNAMICS
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MARKET DYNAMICS
Demand Side • Structural shift in favor of DIFM segment
• Industry financials solid and improving
• Inexpensive cost of capital
• Increased competition from offshore companies interested in US aftermarket
presence o China example
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Example of Offshore Company Activities
MARKET DYNAMICS
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Demand Producing Macro Factors
MARKET DYNAMICS
Number of Vehicles in Operation
Average Age of Vehicles Driven
Miles Driven Per Vehicle
Overall State of the Economy
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Financials Improving
Source: SRR research
MARKET DYNAMICS
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What is all the activity doing to sales price multiples? (Industry Wide)
MARKET DYNAMICS
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What is all the activity doing to sales price multiples? (Mid – Large Cap)
Source: Capital IQ
MARKET DYNAMICS
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MARKET DYNAMICS
What multiples are we seeing now for Small Cap? • Wholesale/Retail distribution companies
o 5 to 9X (typical)
• Suppliers/Manufacturers o 4 to 7X (typical)
• Multiples depend on many factors
o Financial vs Strategic buyers o Company Performance and Trends o Attributes Unique to the Business o Deal Terms and Financing
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Overall Aftermarket Assessment
Prices up… “ITS GOOD TO BE A SELLER” Abundant low cost capital… “ITS GOOD TO BE A BUYER” 2015 to reach the Highest level of M&A activity ever!
Source: PwC
MARKET DYNAMICS
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How You Can Benefit from Aftermarket Consolidation
Part 2: Making it Personal
CAWA MEMBERS
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What type of businesses are buying and selling?
MARKET DYNAMICS
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What type of business owners are most actively selling?
MARKET DYNAMICS
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What type buyers are most active?
MARKET ACTIVITY
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BUYER
Join the bandwagon! • Interest rates at 3-5%
• Pervasive ‘Grow or Fail’ mentality • Generational shift
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BUYER
• Private Equity (PE) buyers have deep pockets and must expand faster than economy to satisfy Return on Investment (ROI) demands from their equity partners
Source: Federal Reserve Bank of Chicago
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BUYER
• Low unemployment (5%) adds pressure to inorganic growth • Wages and benefit costs increase at a slow pace
Source: Federal Reserve Bank of Chicago
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BUYER
• Low inflation supports acquisitive strategies – real growth is fundamental to valuation
Source: Federal Reserve Bank of Chicago
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SELLER
Cash out! • It’s a Sellers market
• Boom expected to continue into 2017 • “As good as its going to get”
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SELLER
• Unique value proposition • Instill and follow best practices -- Efficiency • 12-15% adjusted EBITDA (you must ‘bite the bullet’) • PE firms (financial buyers) threshold size
o $1M EBITDA small firms (= $7M - $10M revenue) o $5M EBITDA medium firms (= $35M - $50M revenue) o $10M EBITDA larger firms (= $70M - $100M revenue)
• Higher EBITDA with documented growth = Higher valuations
What increases multiples—and therefore sale price?
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SELLER
• Perform better than industry standards • Key managers and succession plan – so the business can thrive without you • Clean up facility and obsolete inventory • Have the right inventory -- stop giving away the sale • High performing field sales and counter people • Invest in technology, especially accounting and CRM • Survey for customer satisfaction and make improvements
Prepare your business for sale
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MUST FIND WAYS TO GROW ORGANICALLY
• Training: sales, customer service, product – and train your DIFM customers • Expand front of counter and merchandise – DIFM and DIY incremental sales
will follow – up to 10%+ • eCommerce – or give it away to Amazon, EBay Motors and others • Improve web presence, SEO (Search Engine Optimization) • Marketing: Build community awareness with sponsorships, associations,
scholarships and interns
Prepare your business for sale
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COMBINATION
Divest and Reinvest! • Organic and non-organic growth together
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COMBINATION
• Annual growth can reach 8-10% or even greater • Keep 10-25% equity and get repaid for your life’s work • Larger companies produce higher EBITDA and multiples • Attract high performing team members (Millennials!!)
Organic + Inorganic = winning formula
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GET THE SUPPORT YOU NEED
• Determine market valuation and design steps needed to improve • Understand market dynamics • Learn where your business lags or exceeds standards • Often allow 2-3 years • Avoid ‘for sale by owner’ strategy
The right moves to make
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THE M&A JOURNEY – IT’S A PROCESS
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BUY-SIDE PROCESS
Determine Target Profile 1 Leverage
Networks 2 Maintain Confidentiality 3
Deliver Candidates 4 Provide
Due Diligence
5 Finalize Transaction 6
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SELL-SIDE PROCESS
Valuation/ Due Diligence 1 Offering
Package 2 Seek Qualified Buyers 3
Maintain Confidentiality 4 Negotiations Finalize
Transaction 6 5
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Helping companies thrive in consolidating markets
AFTERMARKET EXPERTS
AUTOMOTIVE PERFORMANCE SPECIALTY PRODUCTS
MOTORSPORTS COMMERCIAL VEHICLES & HEAVY DUTY
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San Rafael, CA - Headquarters
• CHIP CARLSON: DETROIT and MEXICO – President of Cima International, former General Director of Corteco de Mexico
• DENISE RONDINI: CHICAGO – President of Rondini Communications, a company specializing in researching and writing about the medium- and heavy duty industry
• HOWARD KESTEN: NEW YORK – Executive Recruiter • JON DEHNE: MINNEAPOLIS – Consultant; former SVP
Market Availability at Advance Auto Parts, Managing Director Automotive Parts Platform at Solera Holdings Inc.
• LOU MERZ: FLORIDA/ILLINOIS – Former President of Borg Warner, VP at Delphi P&SS, former Chairman of AAIA, President of Automotive Sales Council
• JOHN NODSON: FLORIDA – MGA VP of Research; former
Director of Marketing at Standard Motor Products
• RICK ROLLINS: FLORIDA – Former Chairman of SEMA; operates Rollins Performance Marketing and Filter Solutions Technologies
ADVISORY BOARD
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PROFESSIONAL NETWORK
BUY SELL
MERGE
INTEGRATION PLANNING
BUSINESS CONSULTING
ADVISOR TO PE FIRMS
RESEARCH DEAL ANALYSIS ACCOUNTING
LEGAL
SUCCESSION PLANNING
EXECUTIVE RECRUITING MARKETING
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EXPERIENCE. KNOWLEDGE. EXPERTISE.
Driving Smarter Mergers & Acquisitions
© 2015 Marx Group Advisors, LLC