Good Debt, Bad Debt: Distinguishing Healthy Leverage from Financial Risk [THA 460]
Remarkable Results Radio Podcast
Good Debt, Bad Debt: Distinguishing Healthy Leverage from Financial Risk [THA 460]
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Part
alignment rack
An alignment rack is a part of the steering system that lets you adjust how your wheels point. By moving it, mechanics can make sure your car turns straight and the tires wear evenly.
Term
ADAS
ADAS are safety features in cars that can help you stay safe on the road, like automatic braking or keeping your car in its lane.
LIVE
This is the Automotive Repair Podcast Network.
You can see us at the Automotive Repair Podcast Network.com, go there, all kinds of stuff pointing
you in the direction in order for you to get this app and download it.
I've got a great topic today, tactics to stay out of debt, got a great panel before we
move.
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Hey, welcome back.
Let me introduce my great panel to talk about tactics to stay out of debt.
Siju Thomas, five shops, Denver, Colorado.
Hello, Siju.
Good morning.
Now we're actually at six.
I'm sorry.
I apologize.
I knew that and I was at his place.
Was it last week?
Last Tuesday.
That's right.
I was in Denver.
It gave my rise of the specialist speech to the Denver Napa BDG.
And on the way there, Dustin Older just said, listen, we're going to go to this place.
Siju Thomas.
This is one of his oldest buildings.
It is so cool.
You got to go in there and see it.
And I said, no.
And so we met for the first time.
But of course, we knew that a week later, he's going to be on this podcast.
Thank you so much.
Great operation.
I met a lot of his leadership team.
So.
Good to meet you, man.
Hunt Demarest is here.
C-P-A-PAR, Melis and Associates.
And business by the numbers podcast on the Automotive Repair Podcast Network.
Hello, Hunt.
When I listen to your stuff, I always hear the rings of debt.
Pay attention.
You always say, pay attention to your debt.
I thought you were going to say you hear hums and a lot of pauses and stuff like that.
So I'll appreciate that.
Yeah.
We do, but our job is to get rid of them so that the listener has a really quality
experience.
Exactly.
Justin Brown is here.
I'm probably going to say the number of locations wrong.
How many are you up to now?
We're up five.
Yeah.
So a couple of years ago, I think there were three.
Now there's five in New Mexico.
Yeah.
Beautiful stadium.
Mexico's trying to cool off a little bit.
But it's all right.
We're enjoying the weather.
Good for you.
Okay.
So we've got the specialist in Automotive Shop, C-P-A, Finance, Smart Guy and two multi-shop
operators that have probably dabbled in debt in their lifetime.
And so we want to talk about maybe scaling trends and what to do about money, maybe cash
reserves, budgeting, good debt versus dumb debt.
I think Hunt wants to talk about that and investment and equipment.
But first of all, I want to talk about one thing, Dustin, and you, this is a talking point
you sent to me.
And I have to tell you, I've always believed in this cash is king.
Cash is always king.
You can't make anything happen.
Hold on to that cash.
Save it.
You can even move it.
You don't have to necessarily keep it in the company, I think.
I love some things to say about the risk associated with stashing a whole lot of cash
within your entity itself.
But yeah, cash is king.
If you can utilize cash to expand and grow, use it as a tool that's going to be much
more beneficial on the long run.
And you know, it's going to give you better terms as well when it comes to any debt that
you're going to want to acquire.
You know, when we're talking about cash gentlemen, do we need to have, or maybe Hunt, you
can, how many months of expenses, I mean, let's go back to COVID and just think about
boom, that happened to us.
How many months of cash reserves do you need just to sustain the business if something
happens?
So general rule of thumb is three to six months of operating expenses.
Really, I will tell people of, hey, if you want a rule of thumb, then fine, but it's
just that.
In actuality, it's a lot more complicated because it depends on your specific business.
If you have a high volume shop with lower air row, don't have a whole lot of carryover
from month to month and are extremely consistent on your sales, you can probably operate with
much lower reserves because you don't really have a whole lot of cash flow crunches.
And compare that to some of my fleet guys or maybe your restoration shop, you're going
to have to have much larger reserves because of some of those inflows and outflows can swing
massively from week to week.
Any thoughts on that, did you?
Yeah, I think that's exactly right.
Hunt brings up that point of every shop is going to be quite different in my organization.
We have those high value volume shops that have tremendous car count, strong ARO, strong
customer demand, and for shops like that, you can be a little more, I'd say, liberal
or have less cash stashed because there's a strength and foundation to that business.
At the same time in our organization, we have a few shops that are a little bit newer.
There's more marketing spend as a percentage of total revenue.
It has a higher growth trajectory.
And if something were to go sideways, whether it be COVID, whether it be something geopolitical,
those are the stores that I feel are going to be less resilient.
And like when COVID happened, I took a lot of pride in not laying off employees, making
sure our team was taken care of.
And I think that's part of the ownership responsibility to have financial discipline
for the sake of all stakeholders, employees, vendors, customers, et cetera.
Hunt, is there any kind of magical formula you take on a new client and you look at their
debt load?
Do you look at one of these teeter-taller things by saying, one of the things that we have
to work on is getting you a semi out of debt?
Yeah, I mean, I think that you could argue two different aspects of this, right?
Just like what does she do about saying, if cash is king here?
So the businesses that did well during COVID and were able to keep their customers sleep
at night, not make impulse decisions based on cash flow, or not my most profitable businesses,
it's the ones that had the most cash.
Because some of these extreme events that happen, profit and cash flow can stop instantly.
But if you have the proper reserves, you can still stay the course and make the right
long-term decisions.
Whereas if you don't have the cash and you don't have access to any cash on it,
you're making decisions specifically based on cash flow.
And so, yeah, we got some clients where we come on board and they say, hey, your business
is good.
The actual business itself is making money and we got to get a plan to tackle this debt
and get out of debt.
But there's also some businesses that are also stifled by their lack of cash.
And there's ways to bootstrap it.
You could say, hey, you know, well, we don't want to get into debt.
We're going to bootstrap this and we're going to try to get out of this on our own, but
there's also some people where it's like, maybe we need to get some smart debt to
be able to invest in ourselves and actually dig ourselves out of a hole even faster than
being debt-free.
I would suggest that you would know better than me.
The majority of debt held by auto shop owners in this country, I bet, is related to real
estate, which is probably a very different type of debt than when we think about the business
debt.
And it has a different risk profile, particularly because most of that real estate debt
is really getting paid by the businesses that need to pay a normal market rent for that space.
And therefore, your real estate debt is actually far more healthy and less risky than, say,
the business debt that some people might acquire, whether that be for equipment or potentially
acquisition.
Absolutely.
Right.
Yeah, if you want to use two examples of the most common things that I see, and we want
to talk about good debt for one and bad debt on the other, if you have real estate, that
is good debt, right?
It's collateralized.
There's an underlying asset behind it.
We have a liability, but the asset should be worth significantly more than it'll continue
to grow.
But if you look at good debt and you're saying, you're going to have to be in a piece of real
estate or a location no matter what, your rent is $6,500.
If you buy that, it's going to be a monthly mortgage payment or $4,500.
I mean, that makes sense from cash flow, investing, future, everything on this.
If you want to look at what the worst that is on the average shop's books, it's a high
interest credit card advance.
There's your collateral on it.
There is no underlying asset.
It is strictly a liability and even worse on that compared to maybe a 25-year amortization
or 30-year amortization on real estate.
Some of these high interest aggressive credit card advances are three-month, three-payment
or six-month, three-payment, which is really what's killing shops.
Wow.
We could probably go on and do a whole entire show on that, honey.
I think you may have been the past on your show.
I think we have.
I hear the word cash flow, and I'm going to add a third word to that cash flow statement.
Do all of your clients get a cash flow statement every month?
Yes and no.
The way that we issue all of our balance sheets is in comparative format.
What we're looking at is we're looking at current year numbers and we're relating it
to the end of the previous year, previous fiscal year, and then the third column is going
to be the change.
If we give out the cash flow statement out of QuickBooks, QuickBooks actually does a really
bad cash flow statement.
They give people way too much information.
One of the primary objectives when I've talked to my clients is we're going to say your
profit and loss made $150,000.
My clients look at their bank account and they say my bank account is no different.
That comparative balance sheet allows us to show the cash flow.
There's the change in inventory.
There's your change in accounts receivable.
Here is you paying down debt because you're absolutely right, Carm.
Everyone wants to know what their profit is but what people are really feeling and really
care about is their cash flow.
You said I made all that money.
Where is that?
Where is the money?
If you had a legit cash flow statement, but I love your idea why get another statement
in the mix.
Just look at the, you want to know where your cash is?
Well, it's over here in this debt category and that's why there's none compared to what
you had at the end of the last year, even though you made a lot of money.
You spat money or you moved it around in different places instead of the bank.
You didn't go in there in the safe deposit box and count the hundreds.
I think a lot of shop owners, you know, they're not accounted, so some of them I don't think
are even looking at PNLs as regularly as they really need to be and they look at PNL
and they say, for example, I even made 150 grand.
Just to comment, you know, not everybody realizes that if you're paying off a note, only
the interest is going to be on the PNL.
The principal comes off afterwards.
So you make a hundred grand.
You have to pay taxes, then you have to pay your inch, your principal and all your loans.
So and then whatever's left after that is money you could put in your pocket.
I'm going to be missing one, but those are the two big ones that are always on.
You've got to pay the tax and you've got to pay the principal really be mindful of what
that looks like to manage your PNL and to know, okay, I need to net profit X amount of dollars
just to cover the cash needed to pay these loans is important to know what that number
is and that helps you take a decision on if you're going to take on more debt or not.
Do I take out a loan to replace that alignment rack at $30,000 or do I hold it off because
I don't have the cash flow after the net profit to pay that note on top of whatever responsibilities
I might already have.
Some people just don't really put those two together.
You make a really good point too, does it here because one of the things that we notice
a lot is people think that they're healthier when we think they're unhealthy and vice versa.
So a great example of this is, if you have someone that goes out and gets a high interest
loan deposit into a bank account, they're going to think that they're doing pretty well
because they look at that operating account and they say, man, I got $100,000 in here.
And then we look at this six months later on it and they're almost out of money and
they say, man, what the heck is going on with the business?
And we look at the underlying profitability and we say, actually Dustin, you've never been
more profitable.
Your business has turned around and we are actually making profit.
But since that loan that you got was a six-month repayment, you're not seeing any of that.
You're making profit and all that profit is going back to a principal off.
I mean, at the smallest baseline, what a bank is looking for is 1.25 coverage.
So if you make $125,000, $25,000 of that's going to go to taxes, leaves you with $100,000
to pay your mortgage payment.
So if you have $100,000 of debt service and you make $125,000 on your PNL, you should
not expect to have any more money personally, any more money in the business.
And that, like Dustin says, is a surprise to a lot of people.
That's a great comment, hunting really from a finance perspective.
It's a question of cost of capital.
At the end of the day, the business generates some level of cash flow.
From that cash flow, there should be investments in capital expenditures and it might be that
lift that's $30,000 or $40,000.
Now in five different situations, hunt might be advising as clients very different things
in what to do.
On one hand, you could have a different interest rate environment.
If you can go buy that alignment rack and get it financed at two or three percent over
the next few years, then that's a great way to utilize leverage.
That's healthy debt at a low interest rate.
In another environment over the last couple of years, it's very high interest.
So if you have a seven, eight, nine percent interest rate on that loan and you don't have
great debt service coverage, you're putting your shop at risk when you think you're investing
and improving your business with that alignment rack.
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On the web at pitcrewloyalty.com, here's with burning in my mind, and I need to ask
to you and Dustin, would you pick up the phone, your successful, your smart, you've been
around a while, you get this thing, but for the hell of it, would you pick up your phone
and call your accountant and say, I think I want to do something like this, I want to
maybe it's a capital improvement, or maybe it's an eight-ass piece of equipment, and you're
going to spend 50 or 60 grand, so you or Dustin, would you pick up the phone and call
the accountant, or you've gotten this yourself?
I don't, you know, I actually use to use a hunts group over there, and there are cases
that I call Billy, but for the most part, you know, I like to keep a really good thumb
on my pulse when it comes to the financials.
We mentioned Dave Ramsey a little bit, but I'm going to be looking at my cash to pay for
that.
If I don't have anything down the line such as another acquisition, right, because
we are constantly kind of stacking some cash, because we are lining ourselves up for the
next acquisition, for the next investment opportunities to be ready for that, potentially.
So if I'm in the market for an expensive piece of equipment, we're weighing that against
timeliness of acquisitions and growth, and so I always, you need a lot more cash to
acquire than you need to buy equipment.
So mostly equipment is generated on like a cash purchase for our company, and unless
there's something more strategic on, you know, ADAS would be a more strategic play, like
how are we going to enter the ADAS environment?
How are we going to enter the ADAS competition level?
How much ADAS work are we going to be doing in-house and how are we going to go out and
outsource, right?
That's a whole different markup.
So I kind of strategy there on how do you, getting into ADAS repairs.
But yeah, we're going to utilize cash at all possible if we can, if not, we're also
going to utilize our vendors.
So vendor utilization is going to be like, I don't know, buy a lift from an all-by-piece
they see coming from NAPA, and NAPA says, okay, increase your revenue by X amount of
dollars each month, and we'll pay that note off for you.
So there's utilization for vendors to help avoid any debt, but even in that case, I want
to buy the equipment cash out front and look for the rebate on the statement, and not
depend on the rebate to pay that payment, because I don't want to be continuing to add
more payments to the balance sheet.
I want to always have a very healthy looking balance sheet, very healthy looking P&L, especially
when we're looking in acquisitions and growth.
Lastly, they'll stop you riding your tracks, can't buy this building because you're
getting heavy.
Now, your goals of acquisition and growth, you're going to be halted, yeah.
Seems like Dustin and I have near identical playbooks, I need to drive down to Alper Curkey
so we can get a pair of notes.
So I have a very similar mentality.
When I think about the debt that I would bring into my organization, that the healthy debt
as we mentioned before is going to be real estate, as it relates to acquisitions and growth,
the second would be some of the business acquisition debt, particularly the best version
is a promissory note from a seller, and then the third, which I would consider, is equipment,
but in reality, you really shouldn't be making huge equipment purchases.
If your cash flow can't cover those purchases, and I think Dustin hit it nail on the head,
we have amazing vendors in the automotive industry that will partner with you for earnbacks
and credits, and we've used WorldPac, NAPA, factory motor parts, and it has been a great
asset to use Tridentrude vendors because they'll help you on the financing side if needed.
And at the same time, you're getting a lot of earn back on spend you would already do with
best in class vendors.
So again, I think equipment financing, there's a place for it, especially in a lot of industries,
we're in an industry where healthy shops should generate a solid amount of cash flow and
really equipment financing should be, I think, within that cash flow that the shop generates.
And obviously, that's different for brand new shops, where you know there's X, Y investment
because you're trying to get it off the ground, but certainly not a mature shop.
Yeah, it could probably be different for like a green field or brown field build-up, right?
If you get to buy six lifts and everything new, but I agree, 100%, I wish it should
you there.
Well, if you look at the cost of capital and just like the cost of equipment in general
for an auto repair shop, it should really pair in comparison to what the revenue is, right?
You go out and you buy a fairly expensive rack for $10,000.
It's there for 10 years.
How many gross profit dollars did that lift create for you?
Like Siju said, and Dustin was agreeing to, if your business has run correctly, you should
have plenty of cash to replace that a decade later.
If a decade later, your business doesn't have enough cash to replace that lift, then I'd
really be looking back at the underlying profitability or cash flow decisions that led
you to that point.
You know, when I sit and I listen to some of the incredible panels we have here, and to
think if the semi-marginal shop was listening to this, and they became not overwhelmed, but
in, enveloped in this discussion of how this really intelligent discussion can help
them move forward and make a lot of right moves.
You had told me, paying down debt too quickly may not be the right thing to do.
Yeah, I think what I see the most common issue is like debt is like a mountain or valley
for most shops.
Either things are all good or all bad.
And so like the most common example that I see of someone coming out of a rough year,
like credit cards kind of going up, line of credit kind of got maxed out on it.
This is generally in smaller shops that have some volatility, right?
Maybe you lost a key player, key production member in the shop.
So over the course of 12 months, they've built up $60,000, $80,000 in debt, but then they've
kind of righted the ship profitability looks good and they're training in the right direction.
So they try to undo all of their past sins as quickly as they can.
I don't want to be in debt.
I know I want to retire at some point.
I'm going to pay down debt, pay down debt.
And now where we are is we're sitting here in August, September, October and they're
like, great, I am debt free, but I'm now also cash free.
The way that you stay out of debt is by having cash in a way that you continue that is keeping
your reserves.
So if you pay down all your debt and you have zero reserves left, it only takes one bad week
or one bad month to be right back where you started.
That's great.
And I'll add, when I bought my first shop, didn't have a lot of credibility as an auto shop
operator.
The interest rate was relatively high on an SBA 7a loan.
And it was a 10 year maturity that I paid back in two to three years.
And I did that because it was expensive debt.
Fast forward a few years, I was able to get much lower rates when I was doing other 7a
acquisitions loans.
I was able to get low rates when I did 504 SBA deals.
And those interest rates were anywhere from the high twos to the low force.
So I tell you what, I didn't prepay any of those because those are really cheap long-term
fixed rate loans that meant I could use my cash for other investments, whether that be
equipment financing, whether it be additional business acquisitions, and especially real estate
opportunities that come with those businesses that tend to be quite expensive, but great
wealth building strategies.
So again, I think there's nothing wrong with managing your leverage and making sure you're
paying down expensive debt.
Good example would be things like promissory notes that might come in those acquisitions
that sometimes not always might demand a higher interest rate.
Well pay those down and then work from your highest interest loans to your lowest interest
loans if you're really trying to be cash rich.
Let's call it.
Something that we haven't mentioned is keep in mind, that interest is tax deductible
on your PNLs.
So in the long run, it's actually a way to create more cash flow in your pocket and decrease
your taxable income.
The cash flow's key again for a batch of, like with both you said, let's say you pay off
a debt accelerated, you pay off a debt quickly.
In that example, you gave Hunt, at the end of the year, he still has taxes on that money
that he doesn't have, right?
Because all that money he put into paying off the debt was all taxable income.
So then the tax bill comes and he goes, oh my God, how am I going to pay this tax?
Well, I don't have any money.
I use it all to pay off his debt.
I think you've been listening to my phone calls.
You need the cash.
You need to hold on to it.
As you're aptly right, we've got some loans that are low interest rates and we've got
some that are now in the six and a half, like the last one I got was like 6.5 or something
that we just bought our last building, last April.
So if I'm looking at getting rid of cash and putting it towards principal, that's going
to be strategic.
Am I going to put it, I'm definitely going to put it towards the highest interest loan?
And I'm going to be looking at, okay, I have a hundred K, I can put a hundred thousand
dollars towards this principal on this loan, never get it back.
Once it's gone, it's gone, right?
On that situation, or I can put a hundred K down on this other property or on the
other acquisition and start generating a much quicker ROI on not a hundred K, because
real estate generates an ROI of course and builds wealth.
Just kind of slow and take some time.
You've got to live there, you don't, you don't just, I fast as ROI is going to be putting
that a hundred K towards another building, another store, right?
Or if you're a single store operator would be injecting it into some marketing to increase
a car count, increase revenue, increase sales, so you inject that money into building and
growing the value of the company, growing the revenue will give you a much higher ROI, much
faster than dumping the cash into the principal of a loan specifically if it loans low rate.
Now, if you're on a high interest credit card, you got to pay that thing off right away,
of course.
Right?
You need anything of that.
Line of credits, keep those things low.
Any of those high-rate stuff like, yeah, don't mess around with that.
But if you got some 2015, 20, 30 year fix, some of these SBAs are 30 year fix, or do you
just cash as a tool that you use?
One of the things, too, that exactly what you're talking about, how do we attack debt?
Which one are we going for?
It's fairly simple.
Get your motions out of it.
It's going to be the highest interest rate.
What's the most expensive?
But then going back to what I said before and what you just said now, Dustin, if I have
a hundred grand of bank count and I have a hundred grand on a credit line, I'm paying
off the credit line immediately, as long as I have assurances that I can get money back
off of there.
If I ever need this, I can always get this back, but why am I sitting here paying 12% interest
when this is getting me 0% in my checking account?
Same thing with high interest credit cards.
Yeah, I can pay off that $30,000 balance.
If things get tight, then I'm just going to run up that card and swipe it everywhere
the following month.
Stuff like paying down true debt, where it's either equipment debt or real estate, it's
a one-way street.
Yeah, in real estate, in a larger sense, if you aggressively pay that down, you can get
the money back out.
But what if you can't qualify for refinance?
What if interest rates go up?
Stuff that I can always draw back on, revolving credit lines, I'm always going to be much
more aggressive on.
And then the last one on here is I think that probably the most common question I got
during COVID, a lot of people got a lot of government money, what do they want to do?
It's what everyone is shooting for as soon as they buy a house is, you want to own that
house.
You don't want to bank to own it.
So I had a lot of shops that were like, huh, I got 300 grand in my bank account.
I'm going to go on, I'm going to pay off my mortgage.
I am so excited.
And I say, I wouldn't do it if it was me.
If you need to do this fine, but it's probably one of your dumbest financial moves because
right now you could put that 300 grand into a money market account and get 4% like clockwork.
Why am I going to spend 4% to save 3.2%?
It just doesn't make any sense.
But again, if you have the same perspective on it and your mortgage is 6%, then yeah, it makes
no sense to squirrel all my money away at 4% when I'm paying 6%.
But a lot of people look at this and say, well, hey, what is your opinion?
Going back to what Dustin was saying, if I can't make that decision for my client, I can
give them the education, I can give them the tools to understand the stuff themselves,
but they're the ones that ultimately need to make the right decision for their shop,
their overall perspective.
One thing I'll jump in, great conversation Dustin and Hunt on the point of revolving
credit lines, normally most shop owners I've talked to are leveraging a credit card for
those situations.
However, if you have a reasonable banking relationship, oftentimes you can get a line of credit.
And for that line of credit, it's not going to be your 3% and 4% type of interest rate,
but it's also not going to be the 20% interest rate that you have on a credit card.
So you open this line of credit and I've had one for years in which I've used it a total
of zero times and I pay a small fee each year to have it.
But if something happens and somehow we are in a cash crunch, I could use that line of
credit, access cash at a 8, 9% interest rate, not great, but it's far better than rolling
the dice on a credit card.
But those are usually prime plus or minus, aren't they?
They are.
And depending on your credit and your banking relationship, that's where it's going to
be better than a credit card, but certainly not better than a standard conventional bank
product.
So banking relationships, did you are like King?
You know, you bring up a good point, Garm, that I think traditionally banking relationships
have held tremendous value in business growth.
I venture to say today, they're still important.
It is really important to know your bankers, but increasingly the power at the bank is in
the credit department.
It's the underwriters and the credit officers.
So one needs to be extraordinarily wary of bankers with great intention to promise you
the world.
And then all of a sudden, the credit department and the underwriting department don't like
what deal you're looking at, what expansion strategy you're trying to pursue.
And I've had some challenging situations where the bankers told me X and on the backside
the credit department couldn't back up what the bankers said.
So yes, banking relationships are important, but this is where getting to know other people
at the bank is extraordinarily important and understanding what kind of influence that
banker has on the credit department.
I would add to that, great point is quality banking relationships I have found to be more
difficult to make.
The reason is there's just been so much M&A activity when it comes to banking in general.
So I had banks with a good relationship with a banker here in town.
They got bought out and I don't know who's in charge and this guy's no longer there.
And then I find my new banker and then he's there for six months and then he goes somewhere
else.
It's made it a lot more difficult in this day and age to really kind of create those
relationships with bankers.
I located a local bank.
There's a last locally owned bank in town, you know, and the CEO is my banker now, right?
I call.
I got a cell phone number.
We go have lunch together lunch couple weeks ago and regarding acquisitions and growth.
He's like, let's turn key this.
Let's put together a package when you make a deal.
We got to move fast.
I can move fast with you.
It's more difficult now.
I think than ever to establish those relationships with these bankers because he wants to do business
with us.
I have a bunch of cash in his bank, you know, and this is different worlds.
It's a little more challenging to find these guys.
Dustin's point was great in order for him to get deals done now.
He needs to be friends with the CEO of a bank that sells you something.
Hey, it's like known who the head chef at the local pizzeria is, right?
He's going to make it extra special for you.
Or it's like, hey, you were working with the vice president of Wells Fargo.
Unfortunately, there's 50,000 vice presidents at Wells Fargo, right?
I love the point about being local.
Do you feel that you're paying slightly, you know, half a quarter point more on money?
I think it's about the same.
He's just what it is, what it is.
I would say that it wouldn't even be a quarter point and there was a local bank I was using
for multiple years and I knew their pricing was probably 100 to 150 basis points higher.
But it was significantly easier to work with them and there was greater transparency.
Their deal execution was flawless and at some point, always looking for pricing, i.e.
the cheapest product or the cheapest debt is no different than, you know, auto shops.
Customers out there that just want the cheap service and the cheap oil change and the cheap
repairs with the terrible parts.
Well, that's not necessarily my target, customer and I think there's banks out there that
invest in high levels of service, extraordinary execution and really take care of their clients.
But there's a price to pay for that.
So I don't mind paying a little bit more in my debt to know it's in good hands.
Just like our customers, our key droppers, right?
Just get a fix, call me when it's done, right?
If you get these relationships and you trust them and they're going to make it happen and you
might look back, it's like, yeah, I paid a little more, but it was seamless, it was easy, worth
every penny.
Yeah, and like you said of like sometimes having that banker that actually is willing to fight
for you at loan committee is the difference between you actually getting opportunity and you
not getting the opportunity.
So if you're looking at something being like, hey, this bank's going to be at 6%, this one's
going to be at 7%, what you actually might find out is the bank that's cheaper takes
nine months to actually go to closing on this and I'm missing every single opportunity.
What I would say in 2025, you can kind of tell by all of our tone here, Carm, it's never been
harder to get a lasting relationship with a banker.
It's fine.
It's easy to get a relationship for one year, but whatever one's looking is a banker to grow
with them.
They understand what we're doing, they understand where we come from.
When I call them up and I get these opportunities, I don't have to sell it to them because he knows
what we're doing here.
Realistically, I have always preached, you should probably have a big bank and probably
have a local bank.
The sad reality is for probably 60% of my clients, they have one option or two options and
it's all the big banks.
The consolidators, the local regional credit unions are just kind of being gobbled up, which
I think it is even more important to understand this stuff and let your financial speak for
yourselves because for most shops listening to this, you're not going to be able to find
a CEO to fight for you.
There's just not an option or maybe you're not large enough for them to really care and
so you're going to have to have the strong numbers so that they speak for themselves and
any banks going to want to do this deal.
Hunts exactly right.
I hate to say this and I'm almost embarrassed to say it, but across my various properties
and businesses in the organization, I probably bank with six to seven different institutions.
I'm not proud of that and I've always tried to be loyal to one or two, but it tends to
be that every time there's another acquisition opportunity, growth opportunity, I go to the
banks that I'm banking with and something might be odd or it's not the perfect fit.
Then I'm moving on to the next one and over time it means that you're in bed with a lot
of different banks and I think one of the other issues that I'll bring up that is problematic
for a group like Dustin's or myself is that at some point, a lot of MSOs transitioned
beyond that traditional small business banker.
There's not a lot of bankers that service groups in the middle because there's the commercial
lending groups, but they're looking for organizations and businesses that are doing $25, $50 million
and a lot of the small business banking groups are looking at businesses and organizations
that might do $1, $2, $3 million.
Well, who's servicing the businesses and organizations that are making between say $5 and $25 million?
That's a really challenging place to be and particularly when we look at the products
by the US SBA, the small business administration, those really tailored for small businesses,
not for MSOs.
Now, I'm not sure if you guys have come here and you probably won't want to publicly share
this on here either, but what a lot of people don't realize is there's limits to SBA.
I think right now the SBA 7A limit is $5 million, so you're going to get to a certain point
if you're trying to scale this that the SBA is not going to give you any more money.
We've given you all the money that we're going to give you and you have to prove yourself
where when I see a lot of people scaling, they have to either find that bank that's willing to
do this conventionally or willing to go along with them on the ride, but realistically for most
multi-shop operators that I see, they originally start the SBA route. They try to go commercial,
but most of these guys are doing owner financing or some sort of alternative method
because you're pushed to the secondary or tertiary markets and you're right,
she do. In one aspect, you're too big for the classic banker that's used to one location,
but then when you go to the next level, you're way too small to even get a meeting with some
of these guys. So getting that creative financing to handle these deals is what a lot
of people are trying to do and all the time struggling. This banking discussion was very interesting
and I think extremely critical in trying to learn to scale, but also in the struggles that many
shop owners have and not being able to manage a cash to consolidate, to pay off debt because
they don't know how to talk to a banker. They only know how to talk to a car and the cars don't
talk back and that's why they do this. Right and this is where I think the platforms like yours,
Carm, just does a really extraordinary job of allowing a lot of operators that just know that
car extraordinarily well, but need to understand how do we look at a P&L? How do we educate ourselves
beyond fixing a car? How do we think about ourselves as a hospitality industry rather than just a
you know fixing car industry? And I think there's a sophistication that you've been talking about
for years that is so critical to us elevating this industry to one where, you know,
we're more highly respected, we're a trade that people know require engineering sophistication
and everyone within our trade, whether it be the technicians, the front-offer staff,
the owners, everyone needs to step up their game. I so appreciate this.
Seju Thomas, Hunt Demarest, Dustin Brown and in lightning discussion, Hunt will make you the
rap guy will do Dustin first, Seju and then Hunt. Dustin, final words or three. Final words will be
just be smart with your money, cash is king. That was a great final. Be smart with your money,
cash is king. I love it. Seju Thomas, talk to me, man. Well, I'll keep it simple.
Leverages a tool. If you overuse it, you're going to be in dangerous waters, but if you use it smart,
it's great for growth. It's great for scaling. It's great for risk management.
In so many of the marginal or struggling shops, it says, now I'm going to learn something new,
hot leverage. Wow. But you know what? It's critical. And again, this is where I would pick up the
phone and say, huh? Teach me how to leverage. Hurt your final words. Final words, I mean, I guess,
you know, kind of coupling on what these guys have said on this is be smart. Know your own finances,
know your own direction, know what you're trying to do here and keep in mind. You might have got to
this point and it might have taken you four or five years and maybe misdecision misopportunity
to build up this debt. Don't try to get out of it in the next five months because it's a recipe
for disaster. Well, thank you all so much. Tactics to stay out of debt. I learned a lot. Very
enlightening. Thanks, guys. Appreciate it, Carm. Thanks, Carm.
Thanks for being on board to listen and learn from the premier automotive repair business podcast,
Remarkable Results Radio. Get your episodic education on the ARPN listing app at automotive
repairpodcastnetwork.com. Also, enjoy the podcast on our Carm Capriato YouTube channel.
Carm is all for advancing the professional automotive service industry. Until next time.
About this episode
A panel of automotive experts discusses the nuances of managing debt within auto repair businesses, distinguishing between good and bad debt. They emphasize the importance of cash reserves, budgeting, and understanding the implications of various types of debt, such as real estate versus high-interest credit. The conversation highlights strategies for leveraging debt wisely to foster growth while avoiding financial pitfalls. Insights are shared on maintaining healthy banking relationships and the significance of cash flow management, particularly in the wake of economic uncertainties.
Original notes
Thanks to our Partners, NAPA TRACS, Today's Class, KUKUI, and Pit Crew Loyalty
Watch Full Video Episode
It’s time to dig into real-world strategies for managing debt and strengthening the financial foundation of your auto repair business.
- Shiju Thomas,Hotchkiss Auto Repair
- Dustin Brown,Brown Auto Experts
- Hunt Demarest, CPA,Paar Melis and Associates
The first big takeaway: Cash is king.
Our panel emphasizes the power of maintaining healthy cash reserves—ideally three to six months of operating expenses—to safeguard your shop against unexpected disruptions. If the pandemic taught us anything, it’s that cash on hand can be the difference between surviving and scrambling.
Another core theme is recognizing the difference between good debt and “bad debt.”
Good debt includes real estate and other collateral-backed loans that appreciate, add stability, and support long-term growth. Bad debt includes high-interest burdens like merchant cash advances or short-term credit card loans—products that drain cash flow fast and offer zero assets in return.
The panel also addresses a common pain point: “Why doesn’t my bank balance match my profit?”
The answer lies in understanding the cash flow statement—specifically, that principal payments don’t appear on the P&L, even though they hit your bank account hard. Their guidance: pay off high-interest debt first, but don’t erase debt so aggressively that you end up “debt-free but cash-poor.” Cash matters just as much as debt reduction.
Bottom line: Be intentional with your money. Understand your numbers. And approach debt reduction as a strategy, not a sprint.
Additional Resources:
- How to Grow Your Shop Without Losing Control [RR 1046]: https://remarkableresults.biz/remarkable-results-radio-podcast/e1046/ - Business by the Numbers with Hunt Demarest: Understand the Numbers of Your Business with CPA Hunt Demarest. https://huntdemarest.captivate.fm/ Thanks to our Partner, NAPA TRACS NAPA TRACS will move your shop into the SMS fast lane with onsite training and six days a week of support and local representation. Find NAPA TRACS on the Web at http://napatracs.com/ Thanks to our Partner, Today's Class Optimize training with Today's Class: In just 5 minutes daily, boost knowledge retention and improve team performance. Find Today's Class on the web at https://www.todaysclass.com/ Thanks to our Partner, KUKUI Stop juggling multiple marketing tools. KUKUI’s integrated platform delivers 4x better website conversions, automated follow-up, and real-time ROI tracking. Get industry-leading customer support with KUKUI at
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