With the recent combination of private equity-owned Mavis Tire Supply Corp. and Express Oil Change & Tire Engineers (Express Oil Change LLC), it’s a good time for tire dealers to understand how private equity plays the acquisition game differently than strategic acquirers like Monro Inc.
Private equity groups raise large amounts of money from institutions, pension funds and wealthy people so they can invest in leveraged buyouts of privately held businesses like yours. They’re different from venture capital funds in both the target size and stage of the business lifecycle they prefer investing in. While venture capital traditionally invests smaller amounts in earlier stage and riskier deals, private equity looks for larger and more established business opportunities with stable and predictable cash flow. That’s why they are interested in tires and service -- it’s stable and predictable.
There are about 2,000 private equity firms of varying sizes operating in the U.S. today (over 3,500 worldwide) and they have their fingers in all sorts of businesses you would never even imagine. Look around wherever you are right now and there’s a good chance that many objects within eyesight are products that private equity has invested in. And they like service businesses, too.
Most private equity funds are created to invest in companies for five to seven years, sell out, and return all of the original funds plus profits to their investors. This means that if you sell your business to a private equity group, expect another sale within seven years. Typically, private equity looks at a lot of opportunities before they invest in one, so it makes sense to “cast a wide net” and contact the many that have expressed an interest in tires and service if you are looking to sell. The larger you are -- say $40 million to $50 million in annual revenue -- the more likely you will be a “platform” onto which they will “bolt-on” smaller companies.
If you sell to a private equity group, expect another sale within seven years.
If private equity does buy your company as a platform, they typically acquire 70% to 80% of your company and encourage key managers of the ongoing entity to own an equity stake going forward so you all “row in the same direction.” When they sell out, you and your key managers get another cash payout if you were able to retain some ownership. They’ll pay cash for your business, but a lot of that cash is long-term debt: money borrowed from banks and other lenders that the new entity now owes. That’s why it’s called a leveraged buyout. If there’s too much debt on the books, the business is tough to run in a downturn. Watch for that. Private equity’s objective once they acquire you is to make you more efficient by investing in better IT systems, upgrading people and perhaps honing or expanding the strategy to grow revenues, margins and profits to make their investment pay off later.
At any point in their investment, they may look to realize a return on investment by taking a dividend of excess cash or by selling out to a strategic buyer or another private equity group. Some investments have been shorter than a 5-7 year time frame. Carousel Capital, based in my hometown of Charlotte, N.C., sold Express Oil in 2010 to Thompson Street Capital Partners. Carousel Capital re-acquired it from Thompson in early 2013, and just over three years later had Express Oil/Tire Engineers on the market once again. Golden Gate Capital acquired it in June 2017.
I was recently told by one private equity firm about how they bought a $30 million revenue company (in a different industry) with $6 million of equity capital and with only $12 million in additional investments, then built a $100 million revenue company that has generated a 300% return on their investment in under four years. They are looking to sell that company this year.
The incentive for private equity in doing all this is that as managers of the fund they typically get up to 20% of the gain on the sale without risking a penny of their own capital. Oh, and did you know that they get paid 2% of the money they oversee in management fees? And they sometimes charge their portfolio companies financing fees and monitoring fees on top of that? It’s a lucrative business. If your kids want to be in private equity, let them.
I think the key to getting private equity interested in your company is to understand they need a lot of information about your company and the industry before they invest. It takes a lot of planning, preparation, and persistence on your part to succeed at this. Plan on encountering smart, financially and strategically savvy people who may not have the years of experience you have in the business, but they catch up pretty darn quick. Deals can take a year or more to complete, and successful tire dealers commit to the process and follow through. The payoff for you and for the management team that continues to build the company after the sale can be worth it.
Michael McGregor is a veteran of the tire & service industry and a partner at Focus Investment Banking LLC (focusbankers.com/tire-and-service). He advises and assists multi-location tire dealers on mergers and acquisitions in the auto aftermarket. For more information contact him at [email protected].