The Gold Mine Under Your Shop

Welcome to Ratchet and Wrench Radio,

produced by Endeavor Business Media,

a division of Endeavor B2B,

bringing you strategies and inspiration for auto care success.

Welcome back to Ratchet and Wrench Radio.

I'm your host, Editor Christine Schaffrin.

In episode two of this special series,

the Financial Future of Independent Auto Repair Shops,

I sit down with CPA Nick Papacaricos

to unpack one of the industry's hottest

and most misunderstood topics, private equity.

From EBITDA and shop valuations

to platform companies and generational wealth,

Nick explains why investors see

independent repair shops as prime opportunities,

even when owners feel burned out or undervalued.

Whether you plan to sell someday

or grow for the long haul,

this episode breaks down the financial game

reshaping the aftermarket

and how shop owners can stop thinking like technicians

and start thinking like investors.

Let's listen in.

Hi Nick, welcome back for episode two.

Hi Christine, I do want to take a minute here.

I always enjoy being on the podcast

and I just wanted to thank the listeners

because I really enjoy working with shop owners

instead of trying to grow their business.

And I like to say that growth follows your environment.

So if you're listening to this podcast,

you're a shop owner that's chosen to grow

and that's probably the biggest step you can take.

It's a step a lot of shop owners don't end up taking.

Well, let me stop you right there for a second.

So in episode one, we talked about

why busy shops often feel broke

and we talked about how to fix that

with a five account system.

Now we're looking at a little bit different.

What's the big idea behind episode two?

So yeah, we talked about, so episode one,

hopefully it gave people the idea

of how to make things look more profitable in the shop,

how to make them more profitable.

But the real key to this next episode

is that I still hear far too often from shop owners

regularly that say some pretty negative things.

I mean, I'm really struck by what I hear sometimes.

And it's usually one of a handful of things.

They say more or less the same things.

They usually sound something like this.

This is a really tough business.

It's a competition under the corner.

Everybody is price sensitive.

It's really price competitive.

Where they'll say, I can't find good help.

And when I do service advisors or texts,

I almost feel like I'm held hostage

by them if they leave, I'm sunk.

Or half the time my customers say no,

it gets really sort of disappointing.

And it just kind of makes me feel beat down some days.

And the last one, which is the real sad one

because it's so off the mark,

it'll say something like,

if someone made me a decent offer, I'd sell tomorrow.

And the sad part about that is that would be the worst thing

you could do, not knowing at least what we're gonna talk

about hearing in the next episode,

because there's such an opportunity there

and you just need to know it.

Well, that's kind of a bleak picture.

Is that how you see the industry?

Not at all.

I mean, that's exactly the point of this episode,

like I said.

So at the same time that I'm hearing this

from some shop owners,

you need to realize that there's literally trillions

with a T of dollars sitting on the sidelines,

looking to invest and buy businesses,

especially independent audit workshops.

So the question you might ask is,

well, what's the great big deal about audit shops?

Short answer is you're sitting on a gold mine.

It's beneath your feet.

You just have to dig in the right spot.

And maybe you just need to dig a little deeper

to make a lot of money,

but it's really a great industry to be in.

You just have to know how to make it all that it can be.

And so many shop owners go from being mechanic,

except they're very good at,

through running a business of the audit repair shop.

And those are two different skillsets.

So, you know, our goal is to help people realize

the opportunity and then later on tell them how to get there.

And in this segment,

we're gonna focus a lot on private equity.

So let's start from the beginning,

because a lot of shop owners may have heard the term,

but don't really know what it means.

Or if they have heard about it,

sometimes they affiliate it with a bad story

where the seller felt taken advantage of.

So let's start at the beginning.

What is private equity

and how big of a deal are we talking about?

Well, as far as a big deal,

the numbers alone should stop people in the tracks.

Worldwide is anywhere between nine and $20 million

out in the private equity investment world.

But more relevant, there's about $2 trillion today

actively looking for deals.

So let me explain to you in English

what private equity actually is.

Because once you get this, everything else makes sense.

So most of us have heard of a mutual fund.

And mutual fund, for those who haven't,

just think of it like this.

A bunch of regular people each kicking some money

into a pool and a manager uses that big pool

to buy a bunch of stocks.

So you don't pick the stocks yourself,

the manager does it for you,

hopefully the manager does it well,

you make money and you don't need to have $100,000

to invest in this pool.

You can put as little as $1,000 in.

Well, private equity works pretty much the same way

except instead of buying stocks, they buy whole companies.

So they get a pool of money from people.

They buy companies, they grow them,

they run them for a few years and they sell them

for more than they pay for them.

That's the whole game.

And that's the big picture, that's their objective.

So who's actually putting the money

into these private equity funds?

Is it regular people with their 401ks?

Mostly not that, but there are some similarities.

The money usually comes from one of three places.

Could be, first of all, very wealthy individuals.

And by that I mean people who are willing to commit $250,000

or more to this fund.

Family offices is the big one as well.

So think of billionaires or other extremely wealthy people,

Bill Gates, Michael Dell has his own private equity fund.

These are people who are trying to find ways

to get better returns on their money

and they know that a private equity deal

is a good place to do it.

And the last place, which is also huge,

are big pension funds.

And by that I mean, think of employee retirement system.

So CalPERS, which is the California

and public employees retirement system,

every year is one of the biggest investors in everything

because there's so many employees here.

So believe it or not, if your spouse is a teacher,

a police officer or a firefighter,

you're very likely a private equity investor

and don't even know it through your investment account.

Some of your retirement money is probably already in there.

So you oftentimes are already in these things

and don't realize it.

And the reason they do it is because they make a decision

that there's a good chance of a return on these things.

It's better than what they can get elsewhere.

And once all that money is in that fund, what's the pressure?

Well, simple version is this.

These private equity funds have a clock.

They have a limited number of years to buy the companies,

to grow them and to sell them.

If they don't use up all the money

that these people have committed

to put into this fund buying companies,

they don't make money and most importantly,

nobody will ever give them another nickel to invest

because they had to keep this money sideline

until they ask for it.

So they have to invest this money.

So as that clock ticks down,

these guys get more aggressive.

They become more willing to buy

and sometimes they get less picky about what they're buying.

So think of it like going into a shopping mall

on Christmas Eve to buy your mother a gift.

There isn't much time left, very slim pickings,

but you have to walk out with something.

So you can mention yourself

that the ugly green porcelain frog

would look pretty good on mom's coffee table

and then you buy it.

Because you can't go to mom's self about a Christmas gift.

Even if she hates it, at least she can't say,

you didn't give me a gift, I'm not at the end of it.

So that's where the bad private equity stories

sometimes come from.

The buyers getting near the end of the clock,

they know they have to put this money in

because not doing it is not an alternative.

They don't have a great plan

because they'll buy companies in different industries.

They'll buy some auto, they'll buy vets, they'll buy dentists.

So they don't have a great plan left.

So they haven't been able to find something good yet.

So the seller ends up paying the price for it.

They sell them a song and a dance,

they try to get the business cheap.

And the seller is, if they get the money upfront,

that's great.

If they leave money in the deal,

or they plan on working for a while,

this is where the deals go really sideways.

If the place doesn't make money, they let the owner go,

the former owner go, it's a bad deal.

So that's how the bad equity deals happen.

But the important thing to remember

and why this is so successful oftentimes

is that in the early years,

the good private equity firms are patient

and they're very selective.

They're not guessing,

they're hunting really for the right shops.

So why auto repair?

What is it about this industry

that makes it so attractive?

Well, there's quite a few things.

There's one I wanted to make sure shop owners know.

I mean, in general, private equity looks for industries

where there's a lot of independent owners,

like accounting firms like that.

There's a lot of small CPA firms, a lot of small dentists.

There's a lot of small auto repair shops,

the independent auto repair shops.

And the reason that's good for them

is it means there's plenty of businesses

to look at and buy.

And when it's time to sell the combined company,

when they bought 10, 20, or 40 companies,

there's still so many companies out there,

that means there's always gonna be a bigger fish

looking to buy the 10 or 20 company shop company

that they bought.

So from a private equity point of view,

there's almost a limitless supply of shops to pick from

and there's not limitless,

but a pretty big pool of people who are gonna wanna buy it.

So think of a big fish buying a little fish,

buying a little fish.

You could probably do a turn 23 times

if you're in the private equity field,

each time selling to a bigger buyer.

Second reason is that cars have to get fixed.

It's a need, it's not a want.

So when the economy tanks, people might skip a vacation,

but they can't very well skip fixing the car,

they need to get to work.

So private equity says it's a pretty strong

and steady demand for that work.

There's also recurring revenue.

By that I mean cars constantly need maintenance,

even if it's not a repair.

So the same customers come back year after year

as long as you treat them well.

Now compare that to a roofing contractor.

Roofing contractor customer might replace a roof

once every 10 or 20 or more years.

So if you're buying a roofing company,

you have to also worry that how are they gonna find

new customers to replace the ones

that aren't gonna be back for 10 years.

That isn't a problem with auto repair.

Auto repair also has a very strong cash flow.

You get paid when the car is repaired

right there on the spot.

Money comes in the door very fast.

Other than maybe some fleet accounts,

you're not waiting around to get paid.

That cash flow is really, really attractive to a buyer.

Auto repair is a huge market.

As of a couple of years ago, the last day that I saw,

the US auto repair and maintenance market

is 183 billion with the beat.

That's a lot of money.

That's a lot of customers to serve.

And there are so many people in this industry

to do it poorly.

Almost all of that is up to grabs.

So smart shop owners, shop owners

who know how to run their shops

are always picking up a more and more market share.

The other one, there's two last ones.

One is it's, even though you might not think so

from a shop owner perspective,

it's a relatively low cost to get into this space.

So if I'm a private equity company and I'm buying a shop,

it's not gonna cost me a lot of money in mere terms

to fit it out, to expand it.

Lifts, machines, they cost a decent amount of money,

but compared to what they look at,

manufacturing companies or heavy equipment,

we are paying hundreds of thousands of dollars for a vehicle.

It's a pretty low, comparatively low way to get in.

So they don't look at it as a heavy capital investment

industry because when they come in,

they're gonna invest a lot of money

and they're gonna wanna get the best return they can.

So the less expensive it is to get in,

the more attractive it is.

The last one is one we've really started to hear a lot

about in the last two years.

And I know it's gonna resonate with a lot of people

is artificial intelligence can't fix a car,

at least not yet.

You still need to train tech in a physical shop.

That's a real nice comfort to an investor,

the same way it's a nice comfort to the shop owners,

that you're in a world where a lot of jobs

are getting automated away every day.

We're still pretty far away from the point

where an AI tool will fix the car.

So when you add it all up,

it almost sounds like private equity

is smarter about the value of the businesses.

Well, that's exactly the point.

And I say that with respect

because this isn't a shop owner's game.

Your business exactly is what private equity

is built to buy.

And all I'm hoping to do here is to awaken you

or remind you probably because you knew this

when you went into it, I'm sure,

that this is a great business to be in.

And sometimes the environment every day beats you down,

but it's good to step back once in a while,

recalibrate and say, you know what, this is a good deal.

Let me figure out how I can make it as good as it can be.

So for a shop owner listening and thinking,

wow, great, there's all this money out there,

what does that actually mean for them?

What's their shop worth?

Where do they go from here?

Well, this is one of the most common misunderstandings

I hear from shop owners.

What makes my shop worth more?

What are the drivers of value?

One of the most important things I can tell you

because this is a very common misconception

is your total sales means nothing to a buyer.

You might recall from the first episode we say,

some people think more sales solves their problems,

but it doesn't do that, it's more profit.

Same thing here, what a buyer is concerned about.

This is whether you're a private equity buyer

or any other reasonably sophisticated buyer

who's gonna approach you.

They care about what is your profit.

Specifically, it's a type of profit called,

but for purposes of our conversation,

we're gonna refer to his profit.

It's what determines what your shop is worth

and what a buyer is willing to pay.

So for most smaller shops,

they'll pay you, give or take five times your profit.

So if you profit at $100,000,

they'll say I'll give you $500,000 for your shop,

or I'll give you 10 times depending upon the variable.

So 10 times 100,000 million dollars.

It all depends upon how big your profit is.

And that number, the times you profit that they'll pay you,

5x we call it for short hand or 10x,

that's what they refer to as a multiple.

So some people may have heard of that phrase.

All it means is how many times

are they gonna multiply your profit

to determine what your shop is worth?

Yeah, but let's make sure everyone knows what that means.

Okay, just for the sake of understanding,

it's very simple.

It stands for earnings, which is another word for profit.

Earnings before you deduct interest, taxes,

depreciation and amortization.

So you just start with the bottom line.

Whatever your profit is on your correct books report,

you use error report or whatever it is that you use.

If it sounds really fancy,

it just means take that profit

and add those things back to it.

All it really means is how much profit the buyer

is gonna actually acquire when they buy your shop.

So the buyer isn't buying your loans.

So he doesn't care what interest you're paying.

His tax situation will be different than yours.

So he doesn't care what you pay in income taxes.

And the depreciation and amortization,

number one, isn't cash going out the door

and it doesn't go with the business.

So they're looking at your income number on QuickBooks,

adding back to things that aren't relevant to them.

And they say, here's what I'm getting.

That's basically it in that shop.

And you wanna make sure your QuickBooks reports reflect that.

You wanna add that structure set up

so you can see it quickly too.

And just to be clear, when we're saying EBITDA,

it's actually an acronym.

So popular in the world of alphabet soup in auto repair.

It's actually E-B-I-T-D-A for those words.

That's right.

Yes, us being kind of sometimes forget that

everybody doesn't think that way.

Thank you for pointing that out.

So that's what it is.

But it's just simply your profit

and adding those things back.

You'll hear a lot of fancy words in this field,

but they're all very simple.

I mean, that's the difference in a nutshell

between your profit and your data.

It's the number that, like I said,

any smart buyer is gonna use to compare businesses

across any industry.

Now here's where it gets really interesting

because I said they're gonna look at your profit

to decide what your shop is worth.

But the interesting part about that is

when the buyers are deciding,

I'm gonna pay you five times your profit

or some of the number,

the amount they're gonna pay five times, 10 times, 15, 20,

it depends on how big that profit.

So a small shop, let's say most small shops

that might be listening today,

chances are the profit for at least their one shop

is less than a million dollars a year.

Shops like that will typically get offers

from anywhere from on the low side,

two times profit, five times,

maybe you'll creep up to six or seven,

but somewhere in that range.

Now let's say your shop has $10 million more profit or more.

Those shops will sell for 10 or 13 times the profit,

a lot more.

Wait, did you say 13 times the earnings?

Yeah, so 13 times your profit.

Same business, same industry,

the only difference is the size of the profit.

So you might be asking yourself,

what difference does that make?

It's still an auto repair shop.

Well, what it really means is there's far fewer

large shops that have $10 million in profit

and for sale at any time.

So the fewer there are,

big private equity firms would rather do one deal

by 10 small shops.

And a bigger company carries less risk.

It usually means it's got more sophisticated systems.

It's more consistent,

maybe it's a more reliable track record.

And most importantly,

it doesn't depend on one owner showing up every day.

Well, the math's a little staggering

when you lay it out that way.

Can you give us a more concrete example

of how this would look?

Sure.

So let's say your shop generates $500,000 in profit

and the buyer says to you, I'll pay you four X,

four times that number.

So four times $500,000 is $2 million.

So that shop might sell for $2 million.

Now, if you could grow that profit number,

your shop becomes more valuable.

Now, to be clear, when I talk about a $10 million shop,

it's gonna look like this.

To get that higher profit and higher multiples,

you're gonna most likely need to do your buy more shops,

open more locations,

or at least significantly expand your current location.

And these new shops, locations, or the expanded shop

has to be just as profitable as your current one

because it still has to generate

the same percentage of bottom line.

But if you can do that,

that's how you individually can get up that scale

and increase the value of business.

Because once you've done that,

you now have two things working in your favor.

The profit is much higher

and the buyer's gonna pay you 13 times instead of four times

that profit.

So just by virtue of you making your place bigger

and still profitable,

you have a lot more sales value there.

Same industry again, same type of work,

very different outcome.

So how does private equity actually create that value?

Because they're not just sitting on these businesses,

there's a strategy behind it.

That's right.

I like to call it the buy and build strategy.

And once you understand this,

you'll see why that when somebody's coming to buy your shop,

your shop is really just a piece

of the much larger puzzle they're trying to put together.

So here's how it works in three steps.

The buyer, private equity in this case,

buys a lot of smaller profitable shops

at their market value,

which we said is going to be somewhere between

two to five times their profit most often.

They combine these shops, all these smaller shops,

into one bigger company.

And that has, just because they've added 10 shops together,

now that profit is higher.

If there's 10 shops with $500,000 of profit,

now this new company has $5 million of profit.

And maybe they buy 20 shops,

now they're at $10 million.

They put their systems in place,

but when they go to sell this company now

that has $10 million or whatever it is in profit,

they're selling it to somebody for 10 times, 13 times,

or even more.

And they only paid five times for the beginning.

So that difference that up to eight times more

is all profit to them.

It's really, remember this,

they're not fixing shops so much as they're stacking them up.

They wanna buy well-operating shops.

They'll make improvements to improve operations

certainly along the way.

But at the end of the day, their end goal is,

let's get as many shops that are operating

in the same manner, extremely profitable,

stack them up, and then we're gonna sell them.

So they're essentially buying it five times

and selling it 13 times,

just by combining various businesses.

Right, the fancy word for this is called arbitrage,

but really it's just as simple as saying buy low

and sell high, extremely powerful.

So the profit that the buyers make

doesn't come just from running the shops better.

A big chunk of it just comes from simply the difference

between what they paid for

and what the combined company is worth.

So that's why you'll hear terms also

when people start talking about this.

You'll hear terms like platform companies

and add-ons or bolt-on acquisitions.

So they might look at you, your shop,

as a bolt-on to a platform.

So let me explain what a platform is,

because it's really interesting.

The platform is typically gonna be the first company

the private equity group tries to buy.

So ideally what they're looking for

is this one company to make their anchor

and then they're gonna buy other shops to add on to it.

So the add-ons of these smaller shops,

they get bolted on over time.

Every time they add on a shop

at that low multiple of the paid for,

it immediately increases the value of the bigger company

not the platform company, because it's got higher profit.

So in auto repair, again, the math is just so compelling.

The small shops, $100 million in profit,

you sell for two to five X, platform companies

build them up to $10 million,

they sell for 10, 13 X, can it be even more?

And the reason they pay more is

because there are fewer shops,

they have $10 million in profit.

So when there's fewer of anything,

the demand, the supply is limited,

the demand is higher, you sell for more.

So for a shop owner who might not understand this,

they might sell too cheap or even at the wrong time

without realizing what they're actually worth.

Yeah, it happens all the time.

Combination of the person who's beat down

is just at the end of the rope and they wanna sell them.

So these guys buy businesses every day.

You sell yours maybe once in a lifetime.

That experience that they have

and the information gap between them and you is enormous.

And they cost you as a seller a lot of money

on a lifetime of work.

So what are the key items that you want shop owners

to walk away knowing and remembering about private equity?

Well, a few things that I hope

will really resonate with people.

Remember, investors love your industry

for the very specific and rational reasons

we talked about here.

You know they're not doing you a favor,

but they're not saying,

gee, we wanna help some of these guys

who've been working at shops forever.

They're trying to make money like everybody else.

The size of your shop,

meaning the size of the profit is the value,

not just the performance.

So a more profitable shop with a higher profit

gets a much higher sales price.

There's a deliberate strategy

that these buyers are following behind every acquisition.

It's not random.

They're gonna go at you,

they're gonna try to get the lowest price possible.

They'll typically give you an initial offer

and there'll be a laundry list of 10 or 11 exceptions saying,

well, we're gonna check this and check that.

And what I tell people is the price you see,

the sales price you see on that letter of intent

is all that's gonna happen

once they start doing the review process,

they call it due diligence,

is that number's gonna go down.

So you're not gonna get that number.

So you need to know what the rules are

and what the risks are.

So again, they do this every day.

You do it once that mismatch matters.

So you're either participating in this game

or you're being left behind.

What about shop owners who might be sitting there thinking,

I'm not planning on selling anytime soon.

Does this even matter to me or why should I care?

Well, you don't have to sell.

In fact, younger shop owners are doing well.

That's the last thing they wanna do.

You do absolutely need to understand

the game that's being played around you.

Let me give you an example.

Let's say you are a successful shop owner,

maybe a little younger, not near retirement.

You're not looking to sell.

You're probably actively looking

to expand your shop, buy more shops.

In general, you're looking to grow.

You figure out this business.

You say, I understand how to make it work.

If you understand that the bigger your bottom line

is not just looking to grab sales.

And if you realize it when you acquire these shops,

you need to focus on making them profitable.

If the same way you made your first shop profitable,

then you're gonna see that dramatic

jump in your shop's value.

Once you understand that,

then when you try to put together your plan,

you're gonna set realistic, attainable goals

with a realistic timeframe to reach whatever value you want.

If you wanna have a profit of 10 million,

you now have a very concrete way

of knowing what you have to think of to get there.

So this one part of creating generational wealth

is, in my opinion, life-changing knowledge.

If you understand this, then you realize,

I'm gonna go for more than selling my shop

for a decent price.

I can really make so much money that I set myself up

and my next generation and the next generation forever.

Here's an analogy I like to use.

There's two analogies that I feel relevant.

The first one is this.

Think of an airplane pilot.

An airplane pilot gets into the seat of the cockpit

and you just can just turn the plane on,

hit the runway and take off

and just decide where he's gonna go once he's in the air.

Pilot gets into that cockpit.

He or she knows where he's going.

He has a flight plan in place.

Has the flight is in progress.

He's checking these waypoints to make sure he's on target.

If he isn't, he adjusts and he knows where he's gonna land.

Well, business owners, it's the same thing.

You know, when we start thinking about selling a business,

you really wanna start thinking about the day you open.

You wanna know where you're trying to go.

So this example we just gave you is,

once you know where you wanna go,

using this information,

you're gonna be able to figure out where you're gonna go.

It'll change because goals change,

but you at least need to know

the rules of the road if you wanna call them.

And why this matters is, as I said before,

the people who are gonna likely buy your shop,

buy businesses every day.

Now, if you're a single shop owner, particularly,

and even if you have bought,

let's say three or four shops over time,

you still need to understand this

because when you get into the process

of selling your business, whether it's now or years from now,

it's very much like walking into a bullfighting arena.

So there's two people, two actors in the bullfighting.

It's the bull and the matador.

So you're really gonna walk into that arena

to sell your business as the bull or as the matador.

If you don't understand how this structure works,

how this game works,

there's no question about it, you're the bull.

But if you understand this,

if you educate yourself, if you pay yourself,

you understand the process, you know your numbers,

you know your value, you can be the matador.

And we all know that in a match

between the bull and the matador,

we know who usually wins.

So you absolutely now have time to plan.

We'll talk in the next,

so when you need to make this plan.

But right now, you wanna prepare yourselves.

Well, this has been really eye-opening

and incredibly, I'm sure, informational and helpful.

I know it's one of our most requested topics.

A lot of trepidation around private equity.

People have a lot of concerns about what to expect,

what's gonna happen to their people.

A little bit of mental anguish

goes into making these decisions,

but we appreciate the insights.

Let's talk about what's coming up in episode three.

Can you give us a little peek?

Sure, it's the grand finale.

We're gonna take everything we talked about

in my first two episodes,

and we're gonna show you how understanding this

is really when it comes down to the difference between

getting a decent sales place

when it comes time to selling

and hoping that it lasts you through your retirement

or having a sales price and a strategy

that can create legitimately generational wealth

for you and your family.

That's the difference between a transaction

and a transformation.

So I'm looking forward to talking to you folks in episode three.

Well, thanks so much for stopping by, Nick.

We enjoy having you.

I enjoy it too, thank you.

Until next time.

Bye-bye.

platform companies

bolt-on acquisitions

add-ons

anchor

multiple

AMC Matador

About this episode

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