Recently, it seems there have been announcements of dealership acquisitions on an almost daily basis. All of this activity has led many dealers to ask the question: Should I be considering an acquisition? The simple, off-the-cuff answer is “yes.” However, buying another business is a complex transaction that can have significant downsides if it is not done correctly. In this article, I will outline the benefits and potential mistakes that can be made when doing an acquisition.
Let’s begin with a look at why there has been so much activity. In my opinion, it is driven by three key factors. The first is the fact that the industry has been stagnant. Growth is very difficult to come by in a stagnant market. To grow organically, you must take customers away from competitors one at a time. This is a slow and difficult process, as most customers tend to stay with their current vendors. By acquiring a business, you can achieve overnight growth.
The second factor is the availability of “cheap” money. The combination of low interest rates and more readily available money from banks and private equity firms has made acquisitions possible to those who do not have the necessary cash sitting in an account waiting. Just a few years ago, getting a loan was like pulling teeth.
The third factor is the sheer number of baby-boomer dealership owners. These folks are looking for exit strategies, and selling their dealerships is often the best option.
So, what are the benefits of buying another dealership? As mentioned above, you can achieve an increase in revenue overnight. Many dealers have attempted to grow their businesses by opening offices in new territories. While this can grow revenue, it is a slow and expensive process. The overhead starts on day one with rent, utilities, payroll, etc. However, the revenue does not come in at the same pace. New customers are acquired one at a time. It is quite common for a startup branch to lose money for a year or two before the revenue catches up to the expenses and, in some cases, it never catches up. In general, increased revenue benefits a dealership by making it easier to achieve manufacturer quotas and rebates; it allows additional staff to be hired and, if handled correctly, increases the bottom line.
This leads us into the second benefit. A successful acquisition can add significant profit to the bottom line. In many cases, there are expenses that can be eliminated from the acquired company (or your company) as there will, undoubtedly, be overlapping functions. These economies of scale create a situation where the revenue you bring over is more profitable for you than it was for the seller.
I could write an entire article on the potential savings, but will outline just a few. Very often, admin functions can be brought together, eliminating the need for admin personnel and resources. Software licenses can typically be scaled back. Marketing and advertising can be consolidated. Insurance can be consolidated or eliminated. Websites will be consolidated, and so on. If the company you buy is in the same geographic territory, the opportunities for savings are even greater as occupancy costs can likely be eliminated as well.
Another benefit of acquiring the right business is the potential for bringing in new talent. Every company has its key people. It is common for a strong employee to be underutilized in a small dealership. When buying another company, you could very well be bringing in your next vice president or general manager. It is also common to bring over one or more strong salespeople or service technicians. I have seen many situations where employees brought over in an acquisition have quickly transitioned into the most valuable people in a large company.
One benefit that is often overlooked is the elimination of a competitor. If you are buying a company that competes in your market, especially one that sells the same product line(s), there is hidden value. When we ask sales reps why they lose deals, the most frequent answer is price. While I do not buy this in all cases, it is true that going head-to-head with a competitor can often erode margins. If you buy a competitor that you have been competing against, you may have an easier time holding your margins. The potential profit here is 100-percent speculative, so it is difficult to quantify, yet it will be there.
The last benefit that I will touch on, though certainly not the last potential benefit available, is diversification. There are two sides to this: diversifying within the same industry with a different vendor and diversifying with different products all together. If you buy a dealership that represents a different manufacturer, you can quickly provide the protection that comes from having options. You can leverage the manufacturers off each other. Bringing on a second manufacturer without any installed base is an expensive proposition. You will need to train your sales and service teams, stock equipment and parts, etc., all without any additional revenue to offset the costs. Bringing on a second line through acquisition allows a transition without additional costs and brings revenue with it.
Acquisition can also be a good tool for diversifying into new offerings. Many business systems resellers have used acquisition as a quick entry into the IT and managed services world.
Now that we have considered the benefits, what are the potential mistakes that can be made? As with the benefits, there are more than can be listed in an article, but I will outline a few of the more important pitfalls to avoid.
The first is buying a company that is not a good fit. For an acquisition to deliver positive results, it must be a good fit for all parties involved. This includes the buyer, the seller, key vendors, all employees, etc. The process of buying an- other company is long and involved. Both sides learn much along the way. If you are going to be successful, you must consider all of the information and data honestly and without bias.
Too many dealers have made the mistake of going forward with an acquisition even though they learned through the process that it was not a good fit. In essence, they talked themselves into it and saw the process through simply because they started it. Do not be afraid to walk away mid-process if things do not look or feel right. Forcing a square peg into a round hole creates a situation where everyone loses.
Another mistake I have seen too often is folks looking to only buy companies they can get for a huge discount or a fire-sale price. Keep in mind, if the business is being sold below market value, there is a reason.
It is much easier to make a fast return on your investment when buying a strong company and paying a fair price for it. In fact, I would rather pay above market value for a strong, profitable company than half of the market value for a poorly producing company. Look at it like you would when hiring salespeople. Would you hire a rep who has a horrible track record, low sales, lots of jobs and poor communication skills just because you could get him (or her) for half the salary of a good rep? If you are going to buy a distressed company, be sure to go in with your eyes wide open and be prepared to handle the problem areas that will come up.
Handling the acquisition process incorrectly is a mistake that leads to many problems. Most people who have not bought a company before underestimate the amount of time, effort and expertise that goes into successfully closing a sale. If things are handled poorly, it can end up costing time and money, and could be the difference between getting a deal done or not.
Common mistakes that people make are: not having an independent valuation done; telling employees too early; telling vendors too early; agreeing to things that they should not have (e.g., “we’ll keep all of your employees”); using an attorney who is not familiar with mergers and acquisitions; not planning for the tax implications in advance; and many more.
The due diligence process is another area where mistakes can be made. When buying a business, you will be given an opportunity to conduct a thorough inspection. The purchase agreement will state that the buyer has conducted its own due diligence and is satisfied with the outcome. By agreeing to this, you lose the ability to come back later and claim you did not know something. Your only future claims can be against things that were misrepresented. Because of this, you must conduct a thorough due diligence to uncover any potential issues.
The last mistake we will cover is the post-purchase integration process. Because the process of finding a business, evaluating it, negotiating an offer, going through due diligence, negotiating legal documents and closing can be long and arduous, many acquirers look to take a breather after the close. This can be a very costly move.
In order to get a return on your investment, you need to hit the ground running. Many decisions need to be made and actions taken post-close. Here are just a few questions to consider: How
will you integrate accounting and CRM systems? How will new employees be onboarded? Where will new employees be based? How are you handling A/R and collections?
However, shoring up the customer base is the most important post-close item. This should start on day one. Get out and see all of the customers as quickly as possible, starting with the highest priority customers first and working methodically through the list. They need to hear about the acquisition from you and the leaders of the company you have acquired, not your competitors. To make the most of an acquisition, you will want to have an integration plan worked out and you will want to follow it closely.
As I mentioned in the opening, the level of acquisition activity seems to be at an all-time high. A perfect storm of conditions has led us here. If done correctly, any dealership can improve its overall condition by acquiring another company or companies. If you keep the above ideas in mind, you will be able to build a plan that will lead to success.
Overnight Growth: Should You Consider Buying Another Dealership?
Prosperity Plus Management Consulting, Inc.
P.O. Box 85
Smithtown, NY 11787