An acquisition — even one of the size of Driven Brands-Fix Auto USA — during an economic collapse might not be as counterintuitive as it seems, according to a financial advisor who participated in this week’s megadeal.
Driven Brands announced Thursday it had purchased the Fix Auto USA network of nearly 150 franchise shops and 10 Auto Center Auto Body locations for an undisclosed amount.
“This was a very strategic acquisition by a firm owned by a very strategic private equity firm,” Focus Advisors managing partner David Roberts said in an interview Thursday. “They have a point of view about the long-term direction of the automotive aftermarket. They have a really deep knowledge of what it means to be a successful franchisor.”
Roberts said he felt franchising also carried a significantly different risk profile than doing business as an operating company.
Despite the uncertain environment, companies with confidence in their long-term view can continue with their strategy, according to Roberts. Those “trying to make a quick buck” probably couldn’t, he said.
“They’re probably pulling back,” he said.
Roberts also noted that Fix Auto USA co-founders Erick and Shelley Bickett had done business amid economic downturns before in their 40 years in the industry, including probably three instances in which the industry was down 30 percent.
“They have a playbook,” Roberts said.
Fix Auto USA CEO Paul Gange, who will remain as the company’s president, has around 20 years in the industry, Roberts said.
“They didn’t just fall off the turnip truck,” Roberts said. They were making adjustments in real-time, offering confidence to a purchaser that they’re buying a quality company with quality leadership.
“That’s hard to find sometimes,” he said.
“For years, we’ve contemplated how independent operators could continue to do what they do best and still have the opportunity to access capital and exit their businesses when they were ready,” Bickett said in a statement Thursday. “We have worked with Dave Roberts over many years to help craft our strategy and ultimately represent us in our own exit event. The current climate made the combination more challenging but we are pleased to cement this vital partnership with Driven.”
We asked about funding such a deal or securing financing during an economic slump. Roberts said private equity firms have “lots and lots of cash”; financing posed the “big issue.” However, Driven Brands owner Roark Capital Partners isn’t as highly leveraged as other private equity companies, he said.
Securing capital will be very difficult for smaller collision companies, Roberts said, calling the COVID-19 coronavirus a “gut punch.” However, he also noted that traditional banks “were never really a great source of capital” for the industry anyway.
The paint companies used to be a source of capital for shops, and might still be, he said.
A successful business who socked away money had a better chance of finding capital and surviving in general than a leveraged one, according to Roberts.
Roberts also noted that the major regional players — he cited Joe Hudson, Crash Champions, ProCare andClassic Collision — “haven’t levered up a lot. I think they have lots of resources.”
A $200 million company trying to grow to a $1 billion collision repairer can take advantage of the opportunity to buy at the bottom of the market and see the acquired shops increase in value, Roberts said. But a firm that’s already borrowed a significant amount will have a more difficult time.
Despite the downturn and major MSOs announcing a halt to purchases, Roberts predicted that the industry would still see more acquisitions in the next few quarters, certainly by year’s end.
A “smart buyer” would step up their pace now, and a “smart seller” would be ready to go to market, according to Roberts. “People are still buying,” Roberts said. “This industry will recover.”
Roberts also offered a reality check at the end of our interview. When compared to the impact of the COVID-19 coronavirus on the industry, “these are not the most important things,” he said. It’s people’s lives.
Driven Brands, April 23, 2020
Focus Advisors, April 2, 2020
Featured image: M&A activity might still make sense during a COVID-19-related economic downturn. (Dmitrii_Guzhanin/iStock)