John Yoswick (155)
John Yoswick is an automotive freelance writer based in Portland, Oregon, who has been writing about the collision industry since 1988. He has a body shop in the family and is the editor of the weekly CRASH Network (for a free 4-week trial subscription, visit www.CrashNetwork.com).
So it came as somewhat of a relief to the Automotive Service Association (ASA) and its event team to announce that about 20,000 attendee made the trip to Las Vegas for the trade show and classes, a more modest drop of 8% from last year but less of a decline, they say, than that experienced by some other trade shows.
So while you’re working to keep your company profitable and paying those dividends, it also pays to think longer term, in order to do the things that will build the value of your business.
And whether you’re planning (long-term or short-term) for retirement, want to give a son a daughter some equity ownership in the business, are ready to sell or are just curious about your own net worth, it’s good to understand how to calculate what your business is worth right now.
No doubt you can think of several different ways to go about determining a value for any of the vehicles in your shop right now. Determining the value of a business is similar in that there are dozens of ways to approach it. And even experts will tell you that business valuation is almost as much art as science.
But here’s an example of one method of determining the value of a business (see Chart A). ABC Autobody has assets totaling $500,000. The owner’s salary, bonuses and profit total $59,000. When half of the depreciation expense on equipment, and all of the interest expense on loans is added to this $59,000, the owner’s “cash flow” totals $70,000.
A portion of this cash flow is assigned to cover the cost of carrying the shop’s assets. Let’s say the current interest rate is 10 percent. Then $50,000 (10 percent of the $500,000 in assets) is deducted from the cash flow and viewed as satisfying the return on the investment in assets. Any cash flow over that amount is considered excess.
Deduct $50,000 from the ABC Autobody owner’s cash flow, and there will be $20,000 in excess earnings. This amount is then multiplied by a number between one and six (based on such criteria as stability and growth potential of the company) to get the value of ABC Autobody’s cash flow.
Let’s say ABC Autobody’s track record indicates that it is about average in terms of risk and desirability. Its excess earnings ($20,000) could be multiplied by a factor of 3.5. This figure is then added to the value of the assets to get the total price. For ABC Autobody, this means $70,000 is added to its $500,000 in assets. The total value of ABC Autobody: $570,000.
Or you can use the method the owner of XYZ Collision used to determine the value of the business (see Chart B). Write down the net profit of your business for the past five years. Figure a “weighted average” by multiplying your 2008 profit by five, your 2007 profit by four, your 2006 profit by three, your 2005 profit by two and your 2004 profit by one. Add these five numbers and divide by 15 for your average yearly earnings.
Then divide your average yearly earnings by an appropriate rate of return (usually between 20 and 30 percent for businesses with average “risk factors”). XYZ Collision, for example, found its weighted average yearly earnings was $90,000. Divided by a 30 percent rate of return placed the value of XYZ Collision at $300,000.
Perhaps the most common valuation tool, which is similar to the first example, goes by the acronym “EBITDA” (earnings before interest, taxes, depreciation and amortization). Once EBITDA is calculated, it is increased by a multiple, usually between 2 and 6.
A buyer might recalculate your EBITDA after reviewing your company’s financials. A buyer with multiple shops, for example, won’t have the salary expense of an owner onsite, which could boost your business’ EBITDA. Or if the buyer expects to offer better employee benefits than you offer, that would lower the EBITDA.
Getting a Professional AppraisalIf your interest in the value of your business is more than just idle curiosity, it may be time to hire a professional. When choosing a business appraiser, ask about their training, certification and experience with the industry. One option: Calling the American Society of Appraisers (www.appraisers.org, 800- ASA-VALU), or the National Association of Certified Valuation Analysts (www.nacva.com, 800-677-2009), for a referral.
Remember that a business appraiser will help you determine a value for the business but isn’t likely to be involved in the sale process. A business broker can help you buy or sell a business, and may be able to help you determine an appropriate selling price, but might not have formal training or certification in business valuations. A broker’s valuation also may be influenced based on their interest in selling the business.
The cost of a professional business appraisal will be based on which of three types of reports you want. The most comprehensive reports can easily cost $12,000 to $18,000. At the other end of the spectrum is a verbal report, in which the appraiser provides a valuation but no written report. Probably of most use to shop owners is the “limited-scope report,” in which the appraiser provides a valuation letter and often some supporting documentation. Costs for this type of report generally start around $3,000.
The appraiser is likely to ask for a variety of documents including financial statements and tax returns for the past five years, incorporation papers, any buy-sell agreements, and accounts receivable and payable aging reports. He or she will likely want to tour your shop to get a feel for the age and condition of the facility and equipment, the training level of your employees, how closely the success of the business is tied to you or a key employee, etc.
Make sure you end up with a good understanding of any business valuation. And keep in mind that while it’s foolish to blindly accept what a broker or appraiser tells you your business is worth, part of the reason so many businesses fail to sell in a reasonable amount of time is that many business owners don’t accept what a competent appraiser can demonstrate is a reasonable price for the business.
Chart A: Method No. 1
$________ owner’s salary, bonuses
$________ 1/2 depreciation expense on equipment
$________ all interest paid on loans
$________ TOTAL CASH FLOW (line A)
$________ total assets (equipment, furniture, inventory, cash, tools, etc.) (line B)
_______% current interest rate
$________ RETURN ON INVESTMENT IN ASSETS (line C)
$________ line A (above)
$________ line B (above)
$________ excess earnings (line D)
Multiply line D by the number that best describes your business…
1 or 2... low stability, low growth potential
3 or 4... average stability, average growth potential
5 or 6... high stability, high growth potential
…and write that total on line E (below)
$________ Line E
$________ Line B
$________ BUSINESS VALUE
Chart B: Method No. 2
Net profit for…
2004 $__________ x 1 = $__________
2005 $__________ x 2 = $__________
2006 $__________ x 3 = $__________
2007 $__________ x 4 = $__________
2008 $__________ x 5 = $__________
(total of above 5 numbers) $__________
divided by... 15
= weighted average profit $__________
divided by... 20-30% (.2 or .3)
= BUSINESS VALUE $__________
Improving your company’s valueWhether you plan to sell your business soon or decades from now, here are some things you can do to improve its value.
Accretive value. Owning multiple shops can often make your business worth more than the sum of its parts. If you own one shop worth $1 million, and buy a second one also worth $1 million, the sum of the two might actually be worth $3 million because of how you are positioned in the market. But it can work the other way too: A weak shop can pull down the value of your other shop.
Capacity. A buyer will want the ability for the business to grow. So if you are running your business at its peak capacity and have maxed out your property, that’s great for you but may decrease its value to a potential buyer.
Debt and other encumbrances. While having debt isn’t necessarily a negative when it comes to the value of your business, it can have an impact. A Small Business Administration (SBA) loan, for all its advantages, can scuttle a sale because it generally must be paid back in full at the time of the sale.
Trending. About the time your business is growing and doing well – and you decide maybe you should stick with it – is actually the time it has the most value to sell. Anyone buying your business is likely to review your financials for the last three years, but the most recent information – especially the last 6-12 months – are the most important. So timing can be critical.
Barriers to market. Zoning laws that would limit others from operating a shop in your area can obviously drive the value of your business up. On the other hand, grandfather clauses or zoning overlays may be good for you now but may restrict a future owner’s options, driving the value down.
Accurate financial records. Most businesses are operated to minimize reported earnings. To a buyer, this may make it seem like the business is overpriced. Your books should directly reflect what you’re doing in business.
In a tough economy, shop owners are usually more concerned about attracting work than they are recruiting employees.
But many business and personnel experts say a focus on employee recruitment and retention is every bit as important in times of stagnation or decline as it is for businesses growing rapidly.
Why? Unlike in boom times, there’s a much larger pool of available workers. If your business has job openings – or employees who might not be the best fit once the economy rebounds – now may be the ideal time to seek out new talent.
“Collision industry surveys indicate that database manipulation continues to be a top concern for repairers,” Lou DiLisio, chairman of the CIC Database Committee, said in a prepared statement by the committee on behalf of the members of three national repair shop groups. “The CCC bumper prompt issue is both a prime example of this manipulation, and an opportunity for the repairers to draw a clear line in the sand and say, ‘Enough is enough.’“
The subject of the committee’s anger was the reinstatement by CCC of a refinish prompt in version 4.5 of its Pathways estimating system. The prompt asks the user if a plastic bumper is being refinished in a “continuous process” with other parts of the vehicle. If the estimator indicates that it is, Pathways automatically deducts overlap from the clearcoat refinish time for the bumper.
After reviewing information challenging the prompt from the CIC committee and refinish manufacturers, CCC a year ago removed the prompt from the system, saying it had determined “unequivocally that... refinishing non-metallic bumpers requires use of a material that is not recommended on the rest of the vehicle,” and thus it was inappropriate to even ask if the bumper was being clearcoated in the same process with other parts of the vehicle. But last December, the committee learned – apparently months after some insurers had been told by CCC—that the prompt once again would be available in Pathways 4.5.
DiLisio said the committee this spring again held a meeting with CCC and representatives of the paint manufacturers to reiterate to CCC all the information that led to the removal of the prompt. But CCC wrote to the committee just prior to April’s CIC meeting in Hartford, saying it was unmoved.
“Estimators are responsible for ensuring that the estimate written is consistent with the operations, parts and labor that will be used to repair the damaged vehicle,” Jim Dickens, general manager of CCC’s automotive services group, wrote to the committee. “In many instances, that repair properly may be done in more than one way. Therefore, CCC’s estimating tools are designed to provide the flexibility for the estimator to make choices within the estimating system… It is clear that there are thousands of repairers who use the same clearcoat on flexible bumpers and non-flexible parts. It is recommended, warranted and trained that way by a top five refinish manufacturer. In light of this, CCC will continue to provide the estimator with the option of enabling the “bumper prompt” as programmed in Pathways version 4.5.”
Dickens has also pointed out that the prompt is not turned on when the software arrives at a shop.
“The bumper prompt remains off. What we are doing is facilitating the ability for somebody to turn it on,” he said. “Our recommendation is that the estimate be written to reflect the process used. So if you aren’t using a continuous process, you should not answer ‘yes’ to the prompt. If you never use a continuous process, don’t bother to turn (the prompt) on.”
Awareness a ConcernAt CIC, DiLisio acknowledged that Dickens is correct that one of the five largest automotive refinish manufacturers has one product that does not require additional additives to the clearcoat and could thus be used on both sheet metal and flexible bumper covers. (That product, however, does require an additive in the basecoat.) But all of the other paint manufacturer product lines—so by far the majority of all bumpers refinished—require an additive and thus cannot be sprayed in a continuous process with the rest of the vehicle, DiLisio said.
Shops receiving a CCC estimate also may not realize it was prepared with the bumper prompt turned on and thus might not know the overlap deduction is inappropriate if they are spraying the bumper with different clearcoat than the rest of the vehicle, DiLisio said. And some insurers have required their direct repair shops to answer the prompt in the affirmative no matter which pant system or process they are using.
“I know you’re going to say, ‘We don’t have any control over what an insurer does in the marketplace,’” industry consultant Tony Passwater told Dickens at CIC in Harford. “But that’s like the cop-out by the bartender who doesn’t believe he has any responsibility to make sure that guy who’s had 27 beers doesn’t go out and drive. The fact is you do have some responsibility to our industry for that.”
Bruce Yungkans, who also represented CCC at CIC, said it will be “obvious” on a CCC estimate when the prompt has been turned on because following the bumper line on the estimate will be another line indicating a two-tenths “overlap major non-adjacent panel” has been deducted.
DiLisio told Yungkans that “may be obvious” to him, but most shops won’t know to look for that. Andy Dingman of Dingman’s Collision Center in Omaha, Neb., agreed.
“If someone else is going to choose that (prompt option) for a repair facility, I hope you as an information provider are going to do more to give the information that that prompt has been chosen,” Dingman said. “A very large percentage of shops don’t even know about this.”
“We’ll take that suggestion into consideration,” Yungkans responded. “We still think that it’s obvious when you see the overlap line that it’s a clear indicator of which way you answered the prompt. But we’ll discuss what we can do to make that more clear on the estimate.”
To see sample estimates showing what to look for on a CCC estimate to determine if the bumper prompt has been used – and to see the $128 difference it can make on an estimate that includes two bumpers–visit www.crashnetwork.com/ WhatsInCrash.html.
Issue Remains UnresolvedCCC this spring also announced it is forming a new “Technical Advisory Panel” to “review modifications and provide recommendations” for the company’s estimating system. (DiLisio called this “admirable” but “a year too late.”) Yungkans also pointed out that CCC has been responsive to industry concerns about its system posted on the Database Enhancement Gateway (DEG) website.
But Aaron Schulenburg, now the executive director of the Society of Collision Repair Specialists but previously the administrator of the DEG, said it’s wrong for CCC to equate correcting errors in its product reported via the DEG to being responsive to industry needs and concerns.
“We’re just making the product more accurate through (the DEG),” Schulenburg said. “Adding a tool like this (bumper prompt) isn’t making it more accurate. It’s just giving an option for people to do whatever they want regardless of what is the approved procedure for doing the operation. Period. Where are the (options for automated) add-ons for things like ‘fill, sand and featheredge’? We know not everyone does it, but we know people do, so where’s the option to add that in? Where is the option for ‘color sand and buff’ so that doesn’t have to be a manual entry?”
“At some point in time will there be different prompts for someone who uses air tools to put on a panel versus someone who uses hand wrenches to put on panels?” Oklahoma shop owner Gary Wano asked.
It was clear from the discussion at CIC in Hartford that the CCC bumper prompt is not something many in the industry are willing to accept.
“The committee contends that (it) is just as indefensible today as it was when it was first introduced,” the CIC Database Committee statement reads. “These estimating products need to be trusted by all end users for them to be of any value… When an estimating solution…seeks to accommodate or reflect market desires and pressures, we are left with chaos and the reinforced perception that these estimating systems and their underlying databases are the subject of manipulation… We challenge CCC to explain how our industry is bettered by the reintroduction of a tool that has had a long history of abuse by parties seeking to artificially influence estimate values.”
Audatex and Mitchell on Bumper ClearcoatingCCC Information Services’ estimating system handles the clearcoat of flexible bumpers differently than its chief competitors.
“The Audatex system assumes the bumper cover is refinished off the car,” Rick Tuuri of Audatex said. “It’s a separate operation and it does not roll-up into the 2.5 system-generated clearcoat threshold.”
Wayne Krause of Mitchell International said his company’s estimating system handles bumper refinishing similarly to Audatex.
“Our systems are calculated with the thought process of (the bumpers) being refinished off the vehicle, and they are not subject to overlap,” he said.
The CCC system is based on the Motor Information Systems database and estimating guide.
“According to Motor, bumpers are not excluded from the clearcoat cap,” said Bruce Yungkans of CCC. “In the other two systems they are.”
In the last 12 months, approximately 21,500 collision repair technicians—about one in every 9 currently working in shops—left the trade. That doesn’t mean they left to go to work for another shop; that means they are no longer turning wrenches.
The 2007 I-CAR Education Foundation survey used to determine this figure did have some good news. Not all of those techs left the industry entirely. More than a third of them took an industry-related job, such as an estimator or manager.
But still, the industry needs to replace them. Fortunately, vocational schools are generating about 10,300 new technicians each year, enough to fill almost half of those openings left by techs leaving the industry.
But there are things you can be doing to help those schools improve the quality and quantity of those new technicians. And with more input from the industry, schools could begin to fill more of those technician job openings that they do each year, and students could enter the industry more prepared to be productive and profitable for employers. Here are a few ways you can do your part.
● Pony up $100. The non-profit I-CAR Education Foundation is asking shops to donate $100 a year to assist the Foundation with its ongoing work to attract entry-level students to autobody training and assist in preparing them to enter the industry. The Foundation will return 85 percent of funds donated by shops back to collision repair training programs in that region, to help these schools acquire up-to-date curriculum or other training tools they lack—and for which they may not have a budget. For more information or to make a tax-deductible donation and receive a framed certificate and window decal, visit the Foundation’s website (www.ed-foundation.org) or call (888) 722-3787, ext. 283.
● Help keep the program’s enrollment up. Hal Carman, a collision repair instructor at Portland Community College (PCC) in Oregon said there’s rarely a shortage of shops calling looking for students as potential new technicians. But some years the program struggles to attract enough students to fill its classes. He urges shops to consider if there aren’t dependable, hard-working employees in lower-skilled positions within the shop—such as detailers or lot attendants—that could become the shop’s new technicians with the needed training. Help those employees attend collision repair training while still working at your shop, Carman suggests, and you’ll “build” a new tech out of someone who already is familiar with your business and has proven themselves to be a good employee.
● Be a guest lecturer. Some lessons—such as the importance of wearing personal protection equipment—sink in faster for students when they hear it from potential employers. Some collision repair training programs arrange to have shop owners, vendors or technicians make short presentations to students on a variety of topics. Some have been technical while others relate to trends in the industry, employer expectations, etc. The more involvement students have with shop owners and others actually working in the industry, instructors say, the more realistic their expectations are when they graduate.
● Help the program become NATEF certified. Just as the National Institute for Automotive Service Excellence (ASE) certifies technicians, the National Automotive Technicians Education Foundation (NATEF), an off-shoot of ASE, offers a voluntary evaluation and certification for mechanical and collision repair training programs. If a training program can meet NATEF’s evaluation of curriculum, instructor qualifications, equipment, and administrative and industry support, it’s generally able to produce the type of entry-level technicians the industry so desperately needs. To find out more about NATEF and see a list of certified programs, visit its website (www.natef.org).
● Help the program get access to late model vehicles. NATEF certification is often one key step in helping a school get donations of vehicles from automakers. Shops can also help connect schools with regional claims supervisors at insurance companies to see if the insurers are willing to donate one or more salvage vehicles each year for the school to use in training.
● Help students get the tools they need. Laura Angell, a collision repair instructor at Warren Technical College in Lakewood, CO, said she worked with local shops and vendors to set up a internship program that also helps students acquire the tools they need in the industry. If a student saves $400 for tools during his or her internship at a shop, the shop matches that $400 and Snap-On also offers a $400 credit, so the student can acquire $1,200 worth of tools in just a few months.
● Let students tour your shop. Even the best students at the best training programs are apt to feel overwhelmed their first day on the job in a “real shop.” Help give them a better idea of what to expect by inviting instructors to bring students in to visit your facility. This can also help students keep your shop in mind when they’re looking for work. Your shop will become the benchmark against which they will measure others—which may make it harder for competitors who don’t have as nice a facility compete for those technicians in the future.
● Sponsor a scholarship. Most schools have a foundation that accepts tax-deductible scholarship donations and can help you determine how much or how little you want to be involved in establishing selection criteria, etc. Aside from helping a student and the school, such scholarships are also an opportunity for positive publicity for your company in your community, as many such scholarships are announced at high school graduations and in local newspapers.
● Join the industry advisory committee. This is often the best first step to turning a bad program around—or helping a good one get even better. If the school’s instructors and administrators aren’t interacting with shop owners and others in the industry several times a year, how can they hope to give students what they need to succeed in the industry?.
● Help students graduate with I-CAR Gold Class credits. A growing number of schools participate in the Industry Training Alliance, which can help prevent graduates from also having to attend I-CAR classes in order for their new employer to get Gold Class points for the new technician. Click the “Industry Training Alliance” link on the I-CAR website (www.I-CAR.com) for more details, including a list of participating schools.
For more ideas see the online version of this article at www.autobodynews.com
About 100 women representing collision repair shops, insurance companies and industry vendors gathered in Dallas, Texas, in mid-March for a 2-day Women’s Industry Network (WIN) conference that included presentations on topics ranging from conflict management to networking, employee recruiting and process improvement.
Minnesota shop owner Geri Kottschade, ending her term as chair the WIN board of directors, kicked off the event with an overview of the 3-year-old organization. She also presented the WIN “Cornerstone Award” to Trish Serratore of National Institute for Automotive Service Excellence (ASE). The award is presented annually to a WIN board member who “lives the mission of WIN through her daily actions at work and in her community.”
That mission was outlined by incoming WIN Chair Kim White, the next speaker at the event, who explained that WIN is dedicated to “developing and cultivating opportunities to attract women to collision repair while recognizing excellence, promoting leadership, and fostering a network among the women who are shaping the industry.”
On the second afternoon of the event, John Edelen, a former executive with Allstate Insurance who last year became CEO of I-CAR, offered his overview of the state of the industry. Edelen opened his presentation by saying he felt a little like a “buzzkill” offering grim statistics on the state of the nation’s economy during a conference that was otherwise focused on more positive and upbeat topics.
“But it would be dishonest of me to not to lay out a perspective of the things that are taking place,” Edelen said. “I have too much respect for you and the reasons you are here to not share that with you.”
During his more than three decades at Allstate, Edelen’s responsibilities varied from developing the company’s practices and procedures for auto damage claims handling, to overseeing the launch of Sterling Autobody Centers following the insurer’s acquisition of the chain, and even establishing an Italian subsidiary of Allstate.
His career, he said, had made him comfortable in a strategic planning role, and his presentation at WIN was designed in that vein, as a look at the threats and opportunities the current economic realities offer various segments of the industry. Much of what he shared, he said, were not his words and thoughts, but those of others he has read as he scans the industry, looking for trends.
“If there’s one thing I would advocate it’s reading,” Edelen said in the preface to his presentation. “Read about your industry. Stay up on it.”
Among the observations Edelen shared:
● The “alternative parts” industry stands to benefit from a number of economic trends, including the turmoil among automakers and the closing of dealerships, which in some cases is hampering quick availability of new OEM parts. With the drop in new car sales comes an increase in the vehicle population, Edelen said. This in turn can fuel demand for used or non-OEM parts to keep older vehicles from being declared total losses, or to save money for cash-strapped vehicle-owners.
● A number of trends are driving down the number of accidents and insurance claims, Edelen said, including a drop in the overall total number of vehicle miles driven by Americans, which has surprisingly continued to decline even as recently as January, despite the drop in fuel prices.
● The government’s economic stimulus efforts include about $30 billion for highway and infrastructure improvements, and $16 billion for mass transit and high-speed rail projects. That will create jobs, Edelen said. but longer term “improved roads means fewer accident accidents,” and “more public transportation means less traffic and fewer accidents.”
● Insurers, Edelen said, often operate with “combined ratios” that exceed 100 – that is, their expenses and losses outpace their premium revenue. That’s fine when the companies’ investment income can offset such losses, he said, but as with individual investors, insurers are challenged right now to generate investment income. As auto insurers see combined ratios nearing or exceeding 100, he said, they will look for ways to trim expenses or raise revenue. Insurers entered the current downturn flush with cash from profitable years in 2006 and 2007, Edelen said, which is why the industry is among the most stable in the financial sector. But such “policyholder surplus” doesn’t last forever, and insurance premiums are beginning to rise, he said. In tough economic times, that generally results in higher deductibles and more uninsured motorists – more bad news for repairers who rely on insurance-paid work.
● Increased fuel efficiency and other clean air regulations are likely to result in more smaller, lighter cars, Edelen said, which also could contribute to an increase in total losses.
● Depending on which numbers you track, Edelen said, the total number of collision repair shops in the country is up, down or flat. Regardless, the declining accident rate will impact the industry, he said. Weather has helped give many markets a boost in the first quarter of 2009, he said; the second and third quarters of the year will give the industry “a more realistic view of the new economy.”
● How shops view (and likely will be impacted by) this may vary by shop size, Edelen said, pointing to the latest results of a quarterly CollisionWeek survey. In the fourth quarter of 2008, according to the survey, almost half of shops saw a decline in sales and 54 percent saw a decline in net earnings. But such drops were more pronounced among shops with annual sales below $1 million; 60 percent of those shops reported a drop in revenue, compared to 40 percent of shops with annual sales over $2 million. Less than one in 10 shops under $1 million said they planned to add staff in the next 90 days, while one in three shops over $2 million foresaw hiring in the short-term.
● When the economy will bounce back is tough to say, Edelen said. Government efforts to free up credit markets will work, he said, but how that will translate into new spending is unclear. “People are not going to be willing to load up personal debt the way that we as a country have for the last 15 years,” Edelen said. “They’re not going to be willing to do that for a good long time, perhaps until the middle of the next decade. That has a direct impact on consumption.” But some analysts, such R.L. Polk & Co., he said, are projecting demand for new cars to return to pre-crisis level by 2012.
● One upside for businesses, Edelen said, is that an unemployment rate that is likely to peak above 10 percent into next year means availability of talented people looking to work. One way to emerge from a downturn stronger, Edelen said, is to upgrade your staff now by seeking new talent and helping your current staff improve its skills and efficiency.
Edelen’s other prescriptions for making it through the downturn and emerging stronger were not dramatically different from those offered by others: cashflow management, targeted capital investment, a focus on creating value.
“Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable,” Edelen said, quoting Stanford University economics professor Paul Romer. Romer, he said, compares it to cooking: taking ingredients that combine to more valuable than the sum of the recipe’s parts.
“Growth,” Edelen said, quoting Romer, “springs from better recipes, not just from more cooking.”
Having spent decades as a technician, claims adjuster, shop owner, I-CAR volunteer, jobber, industry trainer and consultant, Hank Nunn has a unique perspective on changes in shop management and measurement. He recalls, for example, the days of the 3M ARMS seminars when shop owners were taught the why’s and how’s of measuring and improving gross profit percentage.
“But today there’s a different thing to look at because of changes in our industry,” Nunn told students in a recent “Financial Performance” class. “Today you have to maximize your gross profit dollars per hour worked, your gross profit dollars per clock hour.”
Here are some of Nunn’s perspectives —and those of others—on what shops today should be measuring and working to improve.
Repair vs. replace
Nunn said the ARMS seminars focused on improving labor sales because labor did – and continues to – offer a shop the highest gross profit percentage.
But to see why labor sales may not be as valuable as some shops think, it’s important to first understand another common shop measurement: efficiency ratios, or the relationship between hours sold and actual clock hours worked. You can measure efficiency ratios by employee, by a team, or by a whole department on a daily, weekly, monthly or annual basis. To determine a technician’s monthly efficiency ratio, for example, just divide the total labor hours sold on that technician’s jobs in a given month by the number of clock hours worked by that technician in the month to produce those hours.
A technician, for example, that turns 120 labor hours in an 80-clock-hour pay period, for example, has a 150 percent efficiency ratio.
While it’s important to have a good idea of your technicians’ or teams’ efficiency ratios, Mike Anderson, a Virginia shop owner and another popular management and estimating instructor, said efficiency ratios are not a good measurement to compare with other shops or industry benchmarks. Anderson points out that those ratios are controlled not just by the tech but by the quality of the shop’s estimates. Nunn agrees.
“What if you send your estimator to a good damage analysis class, where he goes into the P-pages and finds out that masking interior jambs is an not-included refinish operation?” Nunn cites as one example. “What if we armed our estimators with the documentation that proves conclusively that feather prime and block is a not-included refinish operation? What if we arm them with the information that spotting and blending within a panel and cutting the base time in half and paying full clear is ridiculous and unsupported, and gave them the tools to negotiate that? The technician will do that same job using the same tools and products and time but his efficiency ratio goes up. It’s much easier to improve efficiency ratios by working the sales number on that formula.”
In any case, once you know your labor efficiencies, you can start to measure your gross profit dollars per clock hour. Nunn uses a basic example of a borderline fender: Should you repair it, or replace it?
Here’s a basic comparison with just some sample rates and gross profit percentages: See tables
In this example, repairing the fender yields a higher percentage of gross profit (48 percent vs. 36.2 percent).
“But you don’t buy groceries or a new car with percentages,” Nunn points out. “You buy those things with dollars. So are you really maximizing the amount of gross profit dollars your technicians generate for every hour they are out there working on the shop floor?”
To calculate gross profit dollars per hour, start with your technicians’ labor efficiency. For this example, let’s say it’s 150 percent. At that efficiency, the 7.6 labor hours (body and paint) needed to repair the fender will require 5.1 clock hours. The gross profit dollars repairing the fender produced ($196.02) divided by the 5.1 clock hours results in a gross profit of $38.44 per clock hour.
Now calculate the gross profit dollars per hour if you replaced the fender. At 150 percent efficiency, the 5.5 labor hours would take 3.7 clock hours to produce. The $200.64 gross profit dollars divided by 3.7 clock hours results in $54.23 gross profit per clock hour – significantly higher.
“So if you look at it that way, your make more money replacing the fender, and that’s a number you should be tracking,” Nunn said.
Nunn is careful to point out that he’s not suggesting replacing fenders that can be repaired. And shops on DRP programs are likely being measured on repair vs. replace decisions. But Nunn said on borderline repair vs. replace cases, shops are generally better off selling the part rather than the repair labor. They will move the job through more quickly (which is good if there’s another one waiting to fill that stall), and the job requires less skill and has less risk of warranty issues.
Paint and materials sales per labor hour
Bernie Blickenstaff offers another way of looking at the repair vs. replace decision. Blickenstaff is another former shop owner turned jobber turned industry consultant and trainer. Like Nunn, he said there’s no question that unless your techs are leaving early every day because of a lack of work, selling parts replacement is more profitable that selling repair labor.
One quick way to determine how well you’re doing at that, he said, is a parts-to-labor ratio. Just take all your parts sales (new, used and non-OEM) for a given period and divide it by your total labor sales (of all types) for that same period.
An industry benchmark for that ratio is 85 or 90 percent, Blickenstaff said, but he has client shops with ratios above 100 percent. No matter where your shop’s number is, he said, you’ll improve your financial performance if you work to nudge that number up.
“I’ve measured it way too long: If anyone gets their part to labor ratio to go up but their gross profit dollar per technician clock hour doesn’t go up, you call me,” Blickenstaff said. “Because I haven’t see it yet.”
Blickenstaff also said when he asks most shop owners what their paint and materials sales are per paint labor hour, they recite whatever number is on their sign of posted rates. But Blickenstaff said that’s probably not exactly what any shop’s exact paint and materials sales per labor hour is. To determine yours, take your total paint and materials sales for a month and divide it by the paint labor hours for that month
Every month it will likely be different, Blickenstaff said, but particularly if your actual number is lower than your posted paint and materials rate, you need to improve paint and materials sales. Rates haven’t kept pace with increasing paint costs (which have doubled) over the past decade, Blickenstaff said, and to counter this, shops have needed to find additional materials to charge for: flex additive, car cover, sound deadener, hazardous waste disposal, bonding kits, bumper repair kits, etc. Insurers would rather pay for such add-ons than higher rates, Blickenstaff said, because while most shops will charge the highest rate allowed, far fewer will think to charge for these reasonable add-ons.
Don’t fly blind
Blickenstaff and Nunn point out that more shops have scales and systems to measure paint down to the tenth or a gram than have the systems in place to measure their business performance to any degree. Without such measurements, they say, shops can’t see what they need to improve let alone have the ability to track whether they are making needed improvements. And such numbers are crucial in determining, for example, what work you are doing that is the most – and least – profitable for your business.
“Without those numbers, you don’t have a way to make a good decision,” Nunn said. “You’re making some huge decisions by the seat of your pants.”
If there’s anything positive about an economic downturn like the country is experiencing right now, it could be that for the business owner, it certainly focuses the mind. Extraneous (even if valuable) activities often get set aside as such core fundamentals as getting work to the door take precedent.
Here are some low-cost, high-impact marketing ideas that shops around the country are using to keep collision-damaged vehicles rolling in. Some of these ideas may be more effective in some markets more than others. But even an idea designed for a community with a population of 15,000 could possibly be altered to work in a metropolitan area (and vice versa)—or may just help spark a related idea that will work for your shop.
Dinner on the shop. One shop owner is trying to spend a bigger portion of his marketing budget during the tough economic times in his small community to directly help local families and other community businesses. At least once a week when he’s out eating in a local restaurant, the shop is picking up the dinner tab for one or more other couples or families elsewhere in the restaurant.
“It’s not a big expense, and I figure every time I’m doing it, at the very least three I’m touching three households: the people whose dinner I’m buying, the waitress who tells them, and the owner of the restaurant,” the shop owner said. “And you know those people are telling others about it. That can have an impact in a town this size.”
The paid dinner tab comes with one of the shop’s business cards that says, “We hope you won’t need us, but if you do…”
The shop owner said after several months, it’s become something a group of local restaurant owners are talking to him about helping promote (he decided to keep the money local by buying dinners only in local restaurants, not national chains). One family wrote a letter to the editor of the local newspaper to thank him. He said he feels much better about spending the money this way rather than buying advertising. And, most importantly, he can track at least several jobs that have come into the shop as a result.
“It’s not a lot, but I’m also not spending a lot,” the shop owner said. “And I think it’s only going to build as I keep doing this.”
Happy birthday to you. Robert “BJ” Bjorneby says that he first put his best low-cost marketing tool to work back in the mid-1970s, the last time a gas crisis seriously cut into people’s driving habits and “you could have played football on the street” in front of his shop near Seattle. He invested in a reader board he still uses near the street in front of his shop on which he displays birthday greetings to local residents and customers and other “fun stuff.”
“It’s become real well-known and it works,” Bjorneby said.
Happy birthday, dear BMW. Similarly, real estate agents, investment advisors and insurance agents have for years used birthday cards as an annual way of keeping in touch with clients. Mike Anderson of Wagonworks Collision Center in Alexandria, Virg., has put his own twist on the idea by sending birthday cards to his customer’s cars.
The shop notes the production month and year of customers’ cars, and each month sends a “birthday” postcard to all customers whose cars “were born” in that month of the year. The card invites the customer to schedule a free wash, vacuum and 12-point inspection of the vehicle.
Anderson said the program keeps his name in front of customers in a unique way, and gets many customers to come back into the shop, helping keep Wagonworks “top of mind.” It also gives the shop a chance to reinspect its own work. But perhaps most valuably, Anderson’s customer service team is well-trained to look for opportunities to up-sell a customer, and getting customers back in “between collisions” is a chance to look for minor damage or other opportunities for the shop to be of service to its customers.
(Another shop with good drive-by traffic holds a “free community carwash” at the shop once a quarter, holding signs—that include the shop’s name—out front to direct drivers into its parking lot. Shop employees and their families are asked to volunteer to help for a few hours —the shop buys lunch—and the shop accepts donations from drivers for a non-profit group, which also results in some positive publicity. Customers can get a tour of the shop while they wait, and the shop looks for damage or other possible work on the vehicles it washes.)
Your vehicle as billboard. Anderson jokes that he removed all the signage for his shop from his vehicle when another driver called the shop to complain how one of its employees was driving—and Anderson realized they were calling about him.
But other shops owners see their company vehicle as the perfect “rolling advertisement” for their shop. Painted lettering, magnetic signage, window decals or license plate frames can put your shop name in front of others on the road.
You can also make that message stand out a little more by wrapping your entire vehicle in a pre-printed decal promoting your shop. Signsource USA in Pompano Beach, FL, is among the companies offering this service, which can average about $3,500 per vehicle (depending on required design work, vehicle style, etc.). For ideas, you can visit that company’s website (www.wrapyourcar.com).
Look for free publicity. Yes, Craig Camacho is marketing director for the eight-location Keenan Auto Body organization based in the Philadelphia area. But he didn’t really do anything any shop couldn’t have done when he arranged earlier this year for a reporter from the NBC affiliate in Philadelphia to visit a Keenan shop to try her hand at automotive welding and painting with the help of Keenan technicians. The reporter does a regular “Take this job…” segment on the station’s morning newscast, and Camacho just called in to suggest “collision repair technician” as a job she may want to feature. The segment on the reporter’s visit to the shop aired in March, providing a virtually no-cost television promotion for Keenan.
Tough times force some businesses to make cuts where they can, and marketing is sometimes one of the budget lines that (often foolishly) gets cut. That makes this an ideal time to beat out competitors by keeping your name out there—often in ways that don’t have to cost a fortune.
“For repair shops, this is not acceptable,” Pat Gisler, executive director of the Automotive Service Councils of Kentucky, told representatives of CCC at the meeting. She said her group and other state associations would be urging their members to register their displeasure with CCC’s decision.
The subject of Gisler’s ire was the reinstatement of a refinish prompt in version 4.5 of CCC’s Pathways estimating system. The prompt asks the user if a plastic bumper is being refinished in a “continuous process” with other parts of the vehicle. If the estimator indicates that it is, Pathways automatically deducts overlap from the clearcoat refinish time for the bumper.
He described the changes as primarily “minor” or “editorial,” and that unlike the transition from State Farm’s “Service First” to “Select Service” program, the change in the agreement was not coinciding with a reduction in the number of shops participating in the program.
“Local management may have some market areas that they want to adjust (the number of shops) but that’s not associated with this update,” Avery said.
With the election and economy first and foremost on many people’s minds this fall and winter, it’s almost hard to remember how many other topics and news items the industry talked about this past year: Changes in some insurer’s repair policies. Changes in some shops’ relationships with insurers. Changes in the leadership of some associations. Changes in gas prices and consumer driving patterns. Changes brought about by laws and lawsuits.
Here is an annual review of the past year’s news as viewed through a collection of some of the most memorable, important, interesting or enlightening quotes heard around the industry during 2008.
“We have heard how complex we have made it to do business with I-CAR. We have to go after that with a vengeance.”
– I-CAR CEO John Edelen, speaking at the organization’s annual meeting in July, about the training organization’s internal restructuring following several significant financial losses.
“I believe this isn’t going to be popular, but my opinion is that it is our business and I don’t think we should be dictated to as to how we should operate.”
– Michael Lloyd of California Casualty, when asked if an insurer’s decisions about which shops are selected or removed from its DRP in any market should be made by a “board of independent individuals that cannot have a close enough relationship with a shop to gain any …gratuity.”
“They’re not opening their arms and saying welcome to the fold. It still takes some effort.”
– Bruce Halcro, a shop owner in Helena, Montana, and president of the Montana Collision Repair Specialists, saying insurers are, if only reluctantly, abiding by a 3-year-old law that the association backed which requires any shop meeting the requirements of a direct repair program to be allowed to participate.
“We’re going to see the current model for quite a while. Entrepreneurs owning one, two, three, six or eight shops will continue to dominate this business. Multi-state, 100-shop networks? Hard to do.”
– Brian Sullivan, editor of the weekly “Auto Insurance Report,” saying he no longer believes as he did a decade ago that the collision repair industry
– Crystal Abele, assistant manager of Collision Repair Specialists in El Cajon, California, speaking about State Farm’s required use of an electronic parts ordering program for its Select Service shops in some markets.
“I see this an inevitable part of progress. And I do believe at some point it will work. (And) when it comes to the extra time it takes to deal with aftermarket parts, and the reduced quality of repairs with aftermarket parts, a little bit of extra time dealing with an (OEM) parts system so that State Farm can get their discount is something I’m willing to put up with.”
– Brian Orr, second-generation owner of Jack Orr’s Autobody in La Mesa, California, also speaking about the State Farm parts ordering program.
“We believe now is the time to address this issue for the long run. We are encouraging other states to pursue this type of legislation.”
– Bob Redding, national lobbyist for the Automotive Service Association (ASA), following the U.S. Supreme Court’s decision in February not to hear Allstate’s appeal of a Texas law banning insurers from owning collision repair shops.
“We believe this bill represents a substantial threat to the way in which we currently do business.”
– from an unsigned letter that California-based Mercury Insurance sent last March to shops in that state, urging them to contact state lawmakers to oppose an anti-steering bill that was eventually amended to only require the formation of a task force to look into issues arising from possible changes to existing California anti-steering laws.
“The consumer may be under the impression that he or she has no real choice. We want to make clear: Your car, your choice.”
– Connecticut Attorney General Richard Blumenthal, voicing support for a proposed anti-steering regulation in that state.
“It’s outrageous that legislation is necessary to protect consumers from their own insurance companies, but that is exactly the problem that this bill addresses.”
– California Sen. Carole Migden of San Francisco on proposed legislation in that state that, had it not lost by one vote, would have prohibited insurers from requiring the use of non-OEM parts on vehicles three years old or newer.
“(Although) we strongly believe that reducing refinish times on a more widespread basis is an acceptable practice and reflects operations that allow the shop to restore the vehicle to its pre-loss condition, the decision to limit the use of partial refinish was made in large part to improve our working relationships with shops, and thereby improve the customer’s experience.”
– Chris Andreoli, corporate physical damage process manager for Progressive, announcing last May the insurer’s revised stance on partial paint / full clear.
“We are committed to strengthening Allstate’s relationship with the collision repair industry. Bringing strong leaders such as Dan into our organization will allow us to accomplish that goal much faster.”
– Bill Daly, Allstate auto claim assistant vice president, in announcing that former SCRS executive director Dan Risley had accepted a position with the insurer.
“In other words, you choose to pay, so end of game. The judge felt she had absolutely no decision but to dismiss the case.”
– New York shop owner Greg Coccaro explaining that the dismissal of Progressive fraud lawsuit against his shop was based in part on Progressive’s failure to indicate on its payment to the shop that it was “paying in protest, with all rights reserved,” on the $34,000 repair job that led to the lawsuit.
“As a result of this review, we have determined that this repair method is less feasible on newer model vehicles which incorporate special or alternative metals.”
– Mike Poulard, State Farm estimatics section manager, in a June letter to Illinois shop owner Pam Pierson saying the insurer will no longer include a full rear-body sectioning procedures (or “clips”) on State Farm-prepared estimates.
“Furthermore, only when a collision repair facility is confident that a full-body section is the appropriate repair, has the proper training and equipment to facilitate a quality repair, and has the approval of the customer or claimant for such repair, will the adjuster authorize it.”
– from an Allstate announcement in September saying that, like State Farm, it will no longer specify full-body sectioning (or “clips”) on its estimates.
“They will promise you the world in order to persuade you to go to one of their direct repair or network shops. Don’t be steered wrong.”
– wording in an newspaper ad jointly sponsored by a handful of shops in Temple, Texas, many of whom dropped out of State Farm’s “Select Service” program this past summer.
“Progressive and Nationwide definitely got the most hands. He said, ‘Maybe I need to be looking at those companies a little harder.’”
– Georgia shop owner Steve Peek, speaking about an association meeting with Georgia Insurance Commissioner John Oxendine at which Oxendine asked those in attendance to raise their hands to indicate with which of the insurers that he named one-by-one they are having problems.
“If everyone in our industry would utilize these charts…Wow, what a difference we could see.”
– Mike Anderson of Wagonwork Collision Centers in Alexandria, Virginia, and a member of the ASA Collision Division Operations Committee, speaking of the association’s two “not-included operations” charts designed to assist collision repair shops in writing complete estimates.
“This transaction will be a transforming event for the insurance claims and collision repair industries. Our customers are under increasing pressure to achieve new levels of efficiency and customer satisfaction, which requires their service providers to offer new and enhanced products, services and solutions. CCC-Mitchell will be positioned to meet these needs as we bring together our two talented teams to create greater value for our customers and business partners through increased innovation and network connectivity.”
– Githesh Ramamurthy, chairman and CEO of CCC Information Services, in announcing last April its intent to merger with Mitchell International.
“There is no doubt that this merger would reduce competition that benefits auto insurers and autobody shops and ultimately would lead to higher prices and less innovation for consumers.”
– David Wales, acting bureau of competition director for the Federal Trade Commission, announcing in late November that it had filed suit to block the CCC-Mitchell merger.
“While we are disappointed and disagree with the FTC’s position, we intend to vigorously challenge the FTC in court.”
– CCC’s Ramamurthy, responding to the FTC suit.
– Larry Rogers, owner of Mr. Rogers Auto Body in Cathedral City, California.