Search Funds and the ‘Silver Tsunami’ in Collision Repair
It’s no secret that the collision repair business—much like most other trade industries—is aging. Baby Boomers are retiring or nearing retirement. In fact, tens of thousands of Boomers are retiring every day. This is creating what many in the investment community refer to as “the great wealth transfer,” in which the retiring generation is set to pass along, sell, or otherwise transfer somewhere between $30 trillion and $70 trillion worth of business assets.
So how will this “silver tsunami” impact business owners in the collision repair space?
To start, the collision repair M&A marketplace continues to be robust. The silver tsunami, depending on outside market conditions and the continued evolution of the collision repair industry, is expected to increase the pace of consolidation even more. Currently, the market for single shop and micro-multiple site operator (MSO) owners looking to sell is largely MSO-centric. In other words, consolidators—be they national or regional—are the ones buying up smaller collision repair operations. Once a collision repairer turns into a regional MSO, their buyer pool typically increases significantly, as it includes private equity and other investment vehicles.
Searching for value
But a new type of buyer has entered the picture. The silver tsunami has led to increased M&A activity in the small-to-medium business (SMB) world through the increased popularity of search funds. Search funds are investment vehicles that function as a micro private equity fund, with the primary difference being that the search fund owners—often called “searchers”—are typically focused on making just one acquisition and operating it upon the closing of the deal.
Searchers are typically recent MBA graduates, but as the model has grown in popularity, searcher backgrounds have become more diverse. The thesis of a searcher is, generally, that the quickest path to wealth is by owning an SMB. Search funds typically target smaller companies than their private equity counterparts, opening the potential acquisition pool significantly. Search funds have already entered the collision repair market, and that activity is only likely to increase.
Why would collision repair be interesting for a search fund or other micro private equity groups? Lots of reasons! Search funds typically look for small businesses that have the potential to grow and generate a return on investment. These businesses may be in a wide range of industries, including manufacturing, retail, services, health care, technology, and yes, even collision repair.
What search funds want
How can you make your collision repair business attractive to a search fund? In general, search funds tend to look for businesses that meet the following criteria:
- A proven track record of profitability. Search funds typically look for businesses that have a history of profitability, as this demonstrates the company's ability to generate revenue and cover its expenses.
- A clear path to growth. Search funds are typically focused on businesses that have the potential to grow, either through expanding into new markets or by increasing their customer base. Collision repair, naturally, checks this box.
- A strong management team. Search funds often seek businesses that have a capable and experienced management team in place, as this can be a key factor in the company's future success. Building a business that can survive without the owner/founder is key.
- A scalable business model. Search funds typically look for businesses that have a business model that can be easily replicated or scaled up, as this can be a key factor in driving growth. The path to growth lends itself well toward scalability, but make sure processes are in place for a strong foundation to allow for growth.
In short, search funds are looking for businesses that have the potential to grow, generate a return on investment for their investors, and have an attractive market for when the time comes to sell. Collision repair, or at least the strongest businesses out there, seem to check many of the boxes on the searcher wish list.
In closing, the impending silver tsunami will likely only accelerate the trend of an active M&A marketplace for collision repairers. While the market is currently ripe, those owners willing to wait another five or 10 years to exit should be fine, as long as they’re willing to invest in their people and the technology needed for today’s—and tomorrow’s—vehicle repairs.
Keep in mind, however, that the next wave of buyers may not view your collision business the same way as today’s consolidators. They’ll view it as a standalone business, requiring strong financial performance and business fundamentals, more than they will view it as a grab for national market penetration, where the business requirements may be less stringent.
Cole Strandberg is a Principal in FOCUS Investment Banking’s Automotive Group. Contact Cole at Cole.Standberg@focusbankers.com.