Fast lube industry consolidation is accelerating — making 2018 a banner year for mergers and acquisitions (M&A). It’s the best time I’ve seen in 16 years to sell and acquire fast lubes.
Driving this performance are better growth, higher earnings, less do-it-yourself, more motor vehicle registrations, higher per capita disposable income, technology, mechanization, low interest rates, taxes, etc. Plus, these positive attributes apply to both independent and franchise operators.
While higher demand with the same supply drives prices up — mostly for multi-unit operators — a rising tide lifts all boats. Valuations remain high, and debt pricing has even inched lower recently.
Now, the main driver is the higher number of private equity groups (PEGs) who are interested in entering the industry, and then growing as fast as practical. Here are some current examples:
- Wynnchurch Capital LLC just acquired Heartland Automotive with 523 stores in 23 states. Before the acquisition, they had no retail investments — let alone fast lubes. But, I bet they are in it to grow significantly.
- Roark Capital Group that owns Driven Brands (Meineke) has 882 “total care” centers. Several years ago, I sold them a 200-plus store chain. In 2018, they want to open 55 new locations, and I’m guessing they’ll acquire more. Take 5 Oil Change is one of their fastest growing brands. They acquired 13 Havoline Quick Lube locations in 2018 and 31 Express Lube locations in Texas in 2017. In total, Driven Brands has 1,100-plus locations across North America.
- The two PEGs that own Express Oil LLC now have more than 700 stores.
- Jiffy Lube International, Inc. (a wholly-owned, indirect subsidiary of Shell Oil Company) recently named a new president, and one of their objectives is to grow the independent brand, again, through acquisitions and franchising.
- Valvoline Instant Oil Change (another major) now has 1,000-plus stores, having acquired Time-It Lube in 2017.
The Bottom Line
Right now, it certainly appears there are more buyers than sellers. Bottom line: more demand than supply drives prices up. As described above, the “usual suspects” are looking to grow. At the same time, numerous PEGs who currently don’t own fast lubes now want to acquire a first “platform company” that will be their entry into the fast lube industry.An initial platform company acquisition could include not only a multi-unit fast lube operator, but also one with carwashes — another attractive option. Size is important, too — say 20 or more stores — or a lesser number with a solid growth plan underway.
This platform company should have a robust recent growth pattern, both top and bottom line, and good succession management — the PEG doesn’t want to manage. The PEG will supply educated business guidance and, most of all, financing.
Other critical facts to consider when becoming a fast lube industry platform acquisition for a PEG:
- PEGs usually will pay more for the first acquisition in the industry — less for subsequent “add-on” acquisitions.
- The platform seller may, if desired, be able to “rollover” some of the cash sale price — say 20-30 percent — for a second bite of the apple when the PEG sells the much larger operation in three to five years. We’ve seen rollover equity value on a subsequent sale be higher than the first sale cash out — great for the family estate!
Just because now is a time when larger multi-unit owners get higher multiple prices (particularly as a platform), it doesn’t mean lower-unit operators won’t get higher prices, too. Attribute it to supply and demand — higher demand, but same supply.
How long will this market last? In my opinion, most likely for the balance of 2018, and perhaps a bit longer. Borrowing for sales and acquisitions is still reasonable, taxes are improved and consumer spending is good — but who knows how long these conditions will last?
Acquisitions
There definitely are solid reasons for a positive outlook for fast lube industry sales. But what about acquisitions? I believe it’s also a great time for making acquisitions based on most of the reasons detailed earlier. However, you need to get there before the “big boys” do, and it probably will cost more than you’re accustomed to paying.To succeed in a sale, in an acquisition or in financing, you need to work with a licensed investment banking firm with demonstrated expertise in the fast lube and carwash industry.
The firm you select should have a proven process that creates competition among buyers (and, to a lesser degree, among financing sources); that avoids competition in acquisitions; and that can find the good sellers “who are not for sale.”
When you’re selling your business, the investment banking firm you select should have proven collective experience not only in closing successful transactions but also in running businesses as CEOs. Be certain senior bankers will be doing all the transaction work for you, because you and your staff need to keep running a thriving business.
An established investment banking firm with solid credentials will:
- Contact dozens of qualified buyers on a confidential basis
- Obtain a signed confidentiality agreement
- Prepare and distribute a detailed confidential information memorandum
- Detail advantages of your business
- Request offers (competing on price and terms with other prospective buyers)
- Expedite the closing of a transaction
When you’re a business, there are slight differences. The selected investment banking firm will, of course, avoid competition and work to get a lower (but “market”) price. Otherwise, the previous list of selling processes/procedures is nearly identical.
Why You Need a Proven Investment Banking Firm
When selling or acquiring, you have one chance to get it right. Here’s an example of why you work with a proven, experienced investment banking firm with a solid history of success.Some time ago, I sold a good-sized fast lube company. In the process of finding a buyer, I went first to the most logical buyer who offered only $X million for the deal. The owner and I knew this price was totally unsatisfactory, so the offer was declined.
In a couple of months, we received three new offers — the best of which was 160 percent over the first offer. We were about to shake hands on the deal, when I decided to “sleep on it.” The next morning, I went back to the buyer with the first offer and told him what we had on the table. Before the end of the day, he came up to 180 percent of his first offer, and we closed the deal. Seller and buyer were happy!
Investment Bankers Are a Benefit — Not a Cost
When you work with a proven investment banking firm, you’ll cover all their fees many times over by receiving a higher price in a sale and a lower price in an acquisition. The firm you select should be able to demonstrate their past M&A successes.Are you ready to sell or to grow — organically or through acquisitions? Organic growth (from within) requires time, patience and nurturing but rewards you with the most control in how the growth occurs. While organic growth is most predictable long-term, it can require a long time and may have serious economic risks.
Inorganic growth through acquisition is much faster — rewarding you with immediate access to a bigger market share. Plus, it’s cheaper, far less risky, easier to finance and produces instant economies of scale. Your selected, proven investment banking firm can advise you step-by-step on successful planning and execution of all these profitable possibilities.
