Last month we looked at several important considerations that matter to strategic and financial buyers when looking for an acquisition of a multi-unit tire and service retailer. They were revenue size, geography, the stores themselves, area demographics, and growth trajectory and future prospects.

Sophisticated buyers want to know everything about your business before acquiring it so they can be responsible to their shareholders and investors, as well as plan for an effective integration after the sale closes.

In this second of a three part series, I’m looking at my most recent transactions and highlighting important operational issues that seemed to matter most to acquirers. They are not listed in order of importance as every deal is different. What matters most to your buyer should be your primary concern.

People and management. In the tire and service business, experience at the store level counts. People who know how to profitably run stores with a proven customer service delivery system are the most valuable asset.

A good store manager can retain great salespeople, who, in turn, help keep experienced and efficient technicians productive, which makes loyal customers happy. It’s a virtuous circle. Break that circle by looking for “change agents” or by “shaking it up” with new ideas is best done slowly and after proven testing. It’s shocking how fast some established operations can slide after experienced people at multiple layers of management retire or are forced out. Turning that around can take many, many years.

I’ll get off my soapbox now and simply say that it’s a service business. It’s a relationship business. Store people matter. If you have long-term retention of experienced people at key positions in the stores, that’s a great thing.

Profitability, gross profit margins and sustainability. The level of profitability or recast EBITDA (earnings before interest, taxes, depreciation and amortization) is one of the two primary metrics used when valuing an ongoing profitable business. Recast EBITDA includes a lot of non-recurring and owner-related expenses that are usually stripped away under new ownership.

If your EBITDA as a percent of sales is less than 5%, you need to do better. A tire and service business at about 7.5% EBITDA is doing OK, I guess. But 10% is good and what I hope and expect to see; and anywhere close to 15% is great.

Some of this is determined by your mix of business. I recently encountered some tire-focused dealers who have overall higher EBITDA margins than some service-focused tire dealers. That was a surprise to me; I’m a service sales-focused guy who believed that improving service sales was the fastest route to profits. I can see now why that is not always the case, in part because their limited services, which focused on undercar and tire-related services, reduced labor costs and had a positive impact on their cost structure and top line.

A lot of EBITDA is determined by your gross profit margins, and that in turn is affected by your pricing strategy. If you have low margins, consider testing some price increases where you can. See if you can improve your purchasing strategies to get better prices, thus lowering your cost of goods sold.

Then look at your operating cost structure. In places where you can cut back without impacting customer service and customer retention, do it.

Buyers want to see growing, sustainable profits with plausible future upside.

Expect all of this to be analyzed by acquirers when they do a “sensitivity analysis” on the financial performance of your business.

Synergies and cost savings. One of the more touchy acquisition subjects I deal with is overlap: You have infrastructure, overhead and owner-related expenses that will be duplicative in an acquisition by a larger operation. When I ran a district of 18 tire stores in Los Angeles in the days before laptops, email and smartphones, there was me, my assistant district manager and an administrative assistant. Everything else to support the 18 stores we oversaw was handled by the regional or corporate office.

Look at your business from that perspective and you might be able to see how an acquirer can over time “lean up” your group of stores to increase the profitability for themselves. If you can do it first, you’ll reap the benefit of a higher valuation.

Business environment matters. Some acquirers view California as a foreign country and plan to never expand there. The regulatory environment, the Bureau of Automotive Repair, the high cost of everything, and a workforce people from other parts of the country sometimes describe as “flaky” makes California a tough market. But for better or worse, that “foreign country” is now the fifth largest economy in the world, and a whole bunch of car owners live there. Can the higher costs of doing business there be overcome with higher pricing? Yep. Can the cultural and business challenges be overcome with patience, good management, persistence and training? Yes, I’ve seen it.

Nevertheless, I have to say that Texas is preferred to California. And a more populous state like Ohio is probably preferred to North Dakota. It kind of all depends on the pain versus the opportunity.

Businesses are viewed through a variety of filters. Financial ones matter a lot but so do the people issues. In part three next month, we’ll look at quality of financial reporting; delayed investments; seller expectations of value; type of sale; environmental concerns; and other issues that matter to a potential buyer. ■

Michael McGregor is a veteran of the tire and service industry and a partner at FOCUS Investment Banking LLC (focusbankers.com/tire-and-service). He advises and assists multi-location tire dealers on mergers and acquisitions in the auto aftermarket. For more information contact him at [email protected].

See Part One here(Potential Buyers Expect EBITDA to be at Least 10% of Sales).

This article was previously published at Modern Tire Dealer.