cawa 2016: how you can benefit from aftermarket consolidation

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FEBRUARY 4, 2016

Driving Smarter Mergers & Acquisitions

© 2016 Marx Group Advisors, LLC

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PRESENTERS:

Devin Hart President

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Tom Marx CEO

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© 2016 Marx Group Advisors, LLC 3

How You Can Benefit from Aftermarket Consolidation

Part 1: Market Dynamics

CAWA MEMBERS

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Consolidation • Larger companies acquire smaller companies using affordable capital to grow

o Economies of scale – Provides goods/services relatively more efficient and at lower cost

o Consolidators will continue to acquire for two main reasons

– Furthers their competitive advantage – More transactions = better processes = lessens cost of acquisition

Source: Brad Mewes, Sep 2015

Consolidation will continue because it is a virtuous cycle

MARKET DYNAMICS

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MARKET DYNAMICS Four Stages of Consolidation

• Stage 1: Fragmentation o Acquisitions are often “one off” in nature and tend to be opportunistic

• Stage 2: Acquisitions o Frequent and rapid at this stage -- scalability becomes key!

• Stage 3: Expansion o Less frequent but more focused -- core competency with the process

• Stage 4: Maturity o Acquisitions trickle to a standstill

Source: Brad Mewes, Sep 2015

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Aftermarket now at high level of consolidation and this results in a changing competitive landscape

• Creating opportunity and risk for your business

MARKET DYNAMICS MARKET DYNAMICS

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MARKET DYNAMICS

What’s driving the strong M&A activity level? • Supply vs Demand • Strong revenues across value chain • Inexpensive Cost of Capital More recently • Smaller M&A transactions have become more attractive

- Acquirers seek to strengthen infrastructure positions within key aftermarket segments

• Low gas prices add to activity levels -- positive effect on discretionary spending - Increase in miles driven = more automotive maintenance

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Supply Side • Number of service, repair, and maintenance facilities across the US has

decreased by 9% over 10 yr. period

• Jobber store averaging 0.4% decline year over year for past 10 yr. period o Only 1/3 of stores are in the west

– Stores count declining at a faster rate in the west (0.5%)

• Continued consolidation at all levels within supply chain o The pool of highly valued acquisition targets diminish with each M&A

transaction completed Source: Lang Report

MARKET DYNAMICS

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MARKET DYNAMICS

Demand Side • Structural shift in favor of DIFM segment

• Industry financials solid and improving

• Inexpensive cost of capital

• Increased competition from offshore companies interested in US aftermarket

presence o China example

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Example of Offshore Company Activities

MARKET DYNAMICS

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Demand Producing Macro Factors

MARKET DYNAMICS

Number of Vehicles in Operation

Average Age of Vehicles Driven

Miles Driven Per Vehicle

Overall State of the Economy

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Financials Improving

Source: SRR research

MARKET DYNAMICS

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What is all the activity doing to sales price multiples? (Industry Wide)

MARKET DYNAMICS

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What is all the activity doing to sales price multiples? (Mid – Large Cap)

Source: Capital IQ

MARKET DYNAMICS

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MARKET DYNAMICS

What multiples are we seeing now for Small Cap? • Wholesale/Retail distribution companies

o 5 to 9X (typical)

• Suppliers/Manufacturers o 4 to 7X (typical)

• Multiples depend on many factors

o Financial vs Strategic buyers o Company Performance and Trends o Attributes Unique to the Business o Deal Terms and Financing

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Overall Aftermarket Assessment

Prices up… “ITS GOOD TO BE A SELLER” Abundant low cost capital… “ITS GOOD TO BE A BUYER” 2015 to reach the Highest level of M&A activity ever!

Source: PwC

MARKET DYNAMICS

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How You Can Benefit from Aftermarket Consolidation

Part 2: Making it Personal

CAWA MEMBERS

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What type of businesses are buying and selling?

MARKET DYNAMICS

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What type of business owners are most actively selling?

MARKET DYNAMICS

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What type buyers are most active?

MARKET ACTIVITY

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BUYER

Join the bandwagon! • Interest rates at 3-5%

• Pervasive ‘Grow or Fail’ mentality • Generational shift

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BUYER

• Private Equity (PE) buyers have deep pockets and must expand faster than economy to satisfy Return on Investment (ROI) demands from their equity partners

Source: Federal Reserve Bank of Chicago

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BUYER

• Low unemployment (5%) adds pressure to inorganic growth • Wages and benefit costs increase at a slow pace


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BUYER

• Low inflation supports acquisitive strategies – real growth is fundamental to valuation


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SELLER

Cash out! • It’s a Sellers market

• Boom expected to continue into 2017 • “As good as its going to get”

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SELLER

• Unique value proposition • Instill and follow best practices -- Efficiency • 12-15% adjusted EBITDA (you must ‘bite the bullet’) • PE firms (financial buyers) threshold size

o $1M EBITDA small firms (= $7M - $10M revenue) o $5M EBITDA medium firms (= $35M - $50M revenue) o $10M EBITDA larger firms (= $70M - $100M revenue)

• Higher EBITDA with documented growth = Higher valuations

What increases multiples—and therefore sale price?

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SELLER

• Perform better than industry standards • Key managers and succession plan – so the business can thrive without you • Clean up facility and obsolete inventory • Have the right inventory -- stop giving away the sale • High performing field sales and counter people • Invest in technology, especially accounting and CRM • Survey for customer satisfaction and make improvements

Prepare your business for sale

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MUST FIND WAYS TO GROW ORGANICALLY

• Training: sales, customer service, product – and train your DIFM customers • Expand front of counter and merchandise – DIFM and DIY incremental sales

will follow – up to 10%+ • eCommerce – or give it away to Amazon, EBay Motors and others • Improve web presence, SEO (Search Engine Optimization) • Marketing: Build community awareness with sponsorships, associations,

scholarships and interns

Prepare your business for sale

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COMBINATION

Divest and Reinvest! • Organic and non-organic growth together

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COMBINATION

• Annual growth can reach 8-10% or even greater • Keep 10-25% equity and get repaid for your life’s work • Larger companies produce higher EBITDA and multiples • Attract high performing team members (Millennials!!)

Organic + Inorganic = winning formula

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GET THE SUPPORT YOU NEED

• Determine market valuation and design steps needed to improve • Understand market dynamics • Learn where your business lags or exceeds standards • Often allow 2-3 years • Avoid ‘for sale by owner’ strategy

The right moves to make

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THE M&A JOURNEY – IT’S A PROCESS

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BUY-SIDE PROCESS

Determine Target Profile 1 Leverage

Networks 2 Maintain Confidentiality 3

Deliver Candidates 4 Provide

Due Diligence

5 Finalize Transaction 6

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SELL-SIDE PROCESS

Valuation/ Due Diligence 1 Offering

Package 2 Seek Qualified Buyers 3

Maintain Confidentiality 4 Negotiations Finalize

Transaction 6 5

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Helping companies thrive in consolidating markets

AFTERMARKET EXPERTS

AUTOMOTIVE PERFORMANCE SPECIALTY PRODUCTS

MOTORSPORTS COMMERCIAL VEHICLES & HEAVY DUTY

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San Rafael, CA - Headquarters

• CHIP CARLSON: DETROIT and MEXICO – President of Cima International, former General Director of Corteco de Mexico

• DENISE RONDINI: CHICAGO – President of Rondini Communications, a company specializing in researching and writing about the medium- and heavy duty industry

• HOWARD KESTEN: NEW YORK – Executive Recruiter • JON DEHNE: MINNEAPOLIS – Consultant; former SVP

Market Availability at Advance Auto Parts, Managing Director Automotive Parts Platform at Solera Holdings Inc.

• LOU MERZ: FLORIDA/ILLINOIS – Former President of Borg Warner, VP at Delphi P&SS, former Chairman of AAIA, President of Automotive Sales Council

• JOHN NODSON: FLORIDA – MGA VP of Research; former

Director of Marketing at Standard Motor Products

• RICK ROLLINS: FLORIDA – Former Chairman of SEMA; operates Rollins Performance Marketing and Filter Solutions Technologies

ADVISORY BOARD

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PROFESSIONAL NETWORK

BUY SELL

MERGE

INTEGRATION PLANNING

BUSINESS CONSULTING

ADVISOR TO PE FIRMS

RESEARCH DEAL ANALYSIS ACCOUNTING

LEGAL

SUCCESSION PLANNING

EXECUTIVE RECRUITING MARKETING

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EXPERIENCE. KNOWLEDGE. EXPERTISE.



cawa 2016: how you can benefit from aftermarket consolidation

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