Among the many things we learned throughout the pandemic was the resiliency of many dealers in adapting to the business conditions, pivoting to ensure both employees and clients were adequately served and sustained, and in some cases, thriving despite the downward pressures created by the supply chain shortages, fleeing employees and clients seeking to reduce spending.
It can be said that for every punch we absorb, a mark is left behind—some of which are darker and require more time to heal, while others leave scars that are more permanent. As all dealers took the time to inspect their COVID wounds, the ones that proved more problematic need to be addressed, which could require a significant investment in the business’ infrastructure or diversification into a managed service or an ancillary offering to offset the red ink in the ledger.
But when a dealer absorbs punishing blows to its customer rolls and experiences a dramatic downturn in overall business, throwing money at the problem(s) is easier said than done. Especially for dealer executives who are older and lacking in leadership continuity. For them, selling the business to a more fortified interest may be the lone alternative.
As we continue with this month’s look at mergers and acquisitions, we asked some of the industry’s top dealmakers if they see any value and potential in pursuing a distressed company. Where does a prospective seller cross the line from having addressable shortcomings to being beyond redemption? Despite financials playing a large role in assessing the financial viability and potential of an M&A prospect, the answer is not a simple math equation.
Some dealer execs see this as a gray area, including Patrick Flesch, president and CEO of Gordon Flesch Company in Madison, Wisconsin. At the heart of many distressed companies, unfortunately, Flesch sees an unhappy customer base.
“This can be very challenging to turn around in the right direction,” he said. “We typically pass on opportunities where this appears to be the case.”
A Hard No
For some buyers, the distressed dealer is anathema to the very core of its M&A initiative. Included in this group is Novatech of Nashville, Tennessee, where CEO Dan Cooper’s ultimate motivation is to build upon the success already enjoyed by the sellers.
“Our acquisition model is built around discussions with financially stable companies. We do not seek out distressed dealerships,” Cooper said. “Our goal is to take a well-run dealership and help elevate their business and employees to the next level of success.”
Jim Sheffield can see the potential in a lot of dealerships. The CEO of UBEO Business Services in Austin, Texas, is not necessarily on the prowl for reclamation projects, but there could be circumstances where working closely with a seller’s executive team could remedy the situation from a management standpoint. But there are limits to how much time, money and effort UBEO would want to expend.
“If we didn’t think we could handle it, we would stay away,” Sheffield said. “We don’t want to spend a lot of time on fixer-uppers. Typically, distressed companies are on the smaller side and that’s not what we’re really seeking.”
Some buyers see great opportunities in taking on the challenge of a distressed company. It’s not that Doing Better Business (DBB) of Altoona, Pennsylvania, is bargain-shopping, but on a couple of occasions, it has onboarded acquisitions that weren’t on solid financial ground. In both cases, DBB was able to bolster the company’s profitability.
“It often comes down to why the company is distressed,” said COO Joe Dellaposta. “Is it because they gave everything away and all their service contracts are upside down? Service and aftermarket profitability is important. And they need to have an active sales team, especially if they’re in a territory that’s new to us.”
Profit Potential
When entering a new market, many dealers prefer a strong and established acquisition candidate. However, in certain situations, annexing an underperforming dealer that is in the buyer’s market can allow a company like RJ Young of Nashville, Tennessee, to shorten the runway to profitability, notes President AJ Baggott.
“That tends to happen when we are looking at competitors in our existing marketplace where we can immediately bring resources and reduce cost in a short time period resulting in a quicker path towards accretive earnings,” Baggott said.
In the Pacific Northwest, Kelley Connect targets companies that register $10 million or less in annual sales. CEO Aric Manion encounters sellers with common traits; they’re either not doing well or the owner is seeking a retirement transition. Having quality people and a solid customer base can make for an attractive seller. However, expectations can be a tad unrealistic when owners see the multiples that some sellers are netting in their transactions and apply it to their own valuation.
“It’s a matter of the seller being reasonable,” Manion said. “Some [sellers] end up going out of business instead of trying to work something out because they had a preset outcome in their head.”
