Two advisory firms report that while the collision repair industry is normalizing to pre-COVID conditions, vehicle repairs continue to be more complex and expensive as MSOs and private equity firms continue to sweep the market.

Focus Advisors Founder and Managing Director David Roberts recently reported that work in process (WIP) has decreased and labor rate increases are normalizing.

Revenues are flat or down for many shops, most dramatically within single shops. As in previous years, more and more single shops are closing, this year by an estimated 800, according to an overview of Roberts’ findings this year. Consolidators and MSO businesses grow due to a focus by larger shops on advanced repair technologies and operational efficiencies, which most often come from scale, according to Roberts.

“Independent MSOs with four to six shops — and especially those with seven or more — are not just surviving; they’re thriving,” Roberts said.

Roberts also found that independent MSOs with seven or more shops now number 48 with a total of 542 shops adding up to nearly 800 and generating more than $8 billion in revenue, which matches Caliber Collision’s total revenues.

“The collision repair industry remains highly attractive to private equity investors due to its strong existing returns and the tailwinds PE firms see in the collision industry,” the report states.

Focus Advisors has received interest from more than 50 private equity firms interested in the space, according to the report.

“PE-backed consolidators are using acquisition strategies and operational improvements to achieve the end goal of significant EBITDA growth and higher EBITDA multiples,” Roberts concluded.

He also noted investment risks:

• • “Acquisitions cost more than expected;
  • “Key management leaves;
  • “Increases in labor costs and parts costs push down margins;
  • “Industry revenues slow down; and
  • “Insurance companies apply downward pressures on margins.”

Based on his case studies and statistics, Roberts says there are multiple paths for independent MSOs to compete against national consolidators or PE-backed “sharks.”

“By focusing on a specialized strategic playbook and their economies of scale, these independents can grow their market share and EBITDA margin. And with the increased interest by existing buyers and PE firms hoping to enter the industry, that higher EBITDA commands a higher EBITDA multiple — whether an owner of an independent MSO seeks growth capital or an exit. Roberts concluded his presentation by providing some predictions for the collision repair industry.”

In the near term, Roberts predicts:

• • “Insurance companies will raise rates and deductibles and squeeze collision repair providers;
  • “Vehicles will grow in complexity;
  • “OEMs will raise certification standards, training, and equipment requirements and they will limit access to parts;
  • “Consolidators will invest more in highly certified repair facilitators; and
  • “Competition for highly trained technicians will become more fierce.”

“The best repairers will need to be super-efficient,” Roberts said. “Consolidators and independent regional MSOs with a focus on the most advanced skill sets and certifications will dominate.”

Romans Group found similar trends in its research, detailed in its annual whitepaper on the U.S. and Canadian collision repair markets.

Throughout 2023, a more aggressive group of mid-size private-equity-funded consolidators accelerated their single and multiple-location acquisitions and geographic diversity, according to the report.

“Investor confidence in the collision repair industry has been boosted by what some see as the outsized industry financial performance,” a press release from Romans states. “The collision repair space continues to deliver its long-term proposition of proven economics and growth supported by insurance industry-driven demand dynamics that create cash flow stability and profitability for many of the best operators.

“Over the past decade, because of this value proposition, we have seen the continued influence of private equity’s investment growth strategy targeting both larger and now smaller independent MLOs [multiple locations operators].”

According to Romans, over the last year, the collision repair industry has experienced:

• • “Aggressive MLO consolidators such as VIVE, Open Road, CollisionRight, and Quality Collision Group, building their regional and super-regional platforms to compete with larger legacy consolidator MLOs like Caliber, Boyd/Gerber, Crash Champions, Classic Collision, and Joe Hudson.
  • “Favorable year-over-year, non-cyclical sustainable cash flow, recession resistance, and growing market due to a consistent number of repairable vehicles and rising severity.
  • “Long-term proposition of proven economics and growth supported by insurance-industry-driven demand dynamics that create cash flow stability and profitability for many of the best operators.
  • Rising average repair costs “due to greater repair complexity, higher inflation-based labor expenses, more parts, and higher parts costs coupled with supply chain issues, diagnostic scans and calibrations, and new costly materials such as aluminum and carbon fiber.”

Romans says the segment in which the top three consolidators — Caliber, Boyd/Gerber, and Crash Champions — fall with at least $20 million in revenues, continues to steadily grow, “underpinning the long-term collision repair consolidation trend.”

“With capital continuing to flow to larger MLOs and consolidators, single location and smaller MLOs that are not able to expand and establish a reasonable degree of market scale will continue to find it increasingly difficult to compete,” the report states.

“We expect that by 2028, the top three consolidators will grow from their 2023 market share of over 24% to up to 37%.”

Romans wrote that the segment’s “marketplace leadership” continues due to:

• • “Increasing levels of regional and national network scale;
  • “Organic revenue growth based on market scale, brand recognition, and network performance;
  • “Insurer DRP and OEM certification relationships;
  • “Customer acquisition segmentation;
  • “Multiple-location platform acquisitions;
  • “A steady number of strategically placed geographic single-location acquisitions coupled with greenfield and brownfield development;
  • “Ability to integrate acquisitions and implement operational and performance improvement; and
  • “Ability to leverage capital expenditures for future growth and development.”

However, Romans says some high-performing regional MLOs are opting out of some insurer DRP programs to avoid constraints and perceived roadblocks they encounter during repairs to DRP standards versus OEM-recommended standards.

The U.S. and Canadian auto insurance markets remain highly consolidated with the top 10 private carriers controlling the majority share of premiums written and commanding most claims processed and settled, according to the report.

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