The economic downturn has led to some belt tightening in the collision industry. Operating costs have increased during the past five years, while business in some regions has declined.
In order to survive and thrive, though, collision shop owners have to continually reinvest in their businesses to keep pace with changes in repair technology. Those investments have to be made judiciously when resources are stretched thin.
Given the tight credit market and the uncertainty in the economy, many shop owners may want to hang on to their cash. “In an environment like this, cash is king,” says Vince Clanton, a financial planner with The Chancellor Group in Atlanta. Clanton cautions that any investments should be targeted at projects that will save money, attract additional business or generate new revenue.
“We’re encouraging clients to hold onto cash as much as possible,” says Tim Ronak, services consultant at AkzoNobel. “As lines of credit are clawed back, shops won’t have cash to finance their operations and buy parts. If working capital dries up, they’re stuck. We’re not advocating any significant capital expenditures unless they are in a good cash position.”
Still, shop owners should consider a few key areas of investment that can help improve their business as the economy recovers, and that will prepare the shop for the future.
Real estate
The real estate industry has experienced a dramatic downturn lately. While that’s bad for agents and people who are trying to sell houses, it’s good news for anyone looking to invest in a new building or undeveloped land. And if you can get a loan, interest rates are at historic lows. If you don’t own a building already, now is a good time to consider it. If your business is strong enough, it’s also a good time to expand by buying an empty building and converting it.
“I would encourage people to look at existing buildings that could be reconfigured,” Clanton says. “There is so much pressure on owners to sell empty buildings that you get a much better buy that way. If you buy land, you will pay full price to get a building constructed.”
Existing shops that are failing also provide expansion opportunities for stronger shop owners in a good cash position. “Shops that are in trouble are not selling for the previous valuation dollar that they were,” Ronak says. “There are a ton of bargains out there, and a lot of owners just want to get out from under their debt.”
For shops that need to expand but don’t have much cash on hand, there is still credit available to companies with good credit histories. “My observation is that banks are lending to people who have long-standing businesses, good relationships and demonstrated profitability,” Clanton says. “They’re just going back to good, basic lending habits.”
Equipment
Shops also have to have an eye on future repair requirements when considering new equipment. Some states are already mandating use of waterborne paints, and more will likely follow, so a paint booth upgrade might be a wise investment sooner than later. New vehicle materials such as advanced high-strength steels will require different welding equipment.
“New vehicles will require new equipment. You won’t have the option not to buy it,” says Tony Passwater, president of Indianapolis-based AEII. “You can’t fix those vehicles properly without it, and you won’t be in a position to attract that business otherwise. These are large capital investments that you’ll have to be prepared for, or there will be a limited number of vehicles you can work on in the future.”
Schoonover Bodyworks, which has two locations in Stillwater and Shoreview, Minn., upgraded three of its spray booths to waterborne. “We converted one booth at our newer location, and in the course of that process we noticed that the booths at our main location were just in horrible condition,” says owner Mike Schoonover. “We ended up ripping down those old booth sand converting that location to waterborne, which put us about two years ahead on the conversion.”
Those upgrades also boosted productivity. “The original booth we converted was just inefficient, so we were able to improve our throughput and also get some gains on energy consumption,” Schoonover says.
But don’t just purchase new equipment for the sake of having it. Make sure that any new equipment will be used regularly, and will generate a return on your investment by making the shop more productive or generating new lines of business.
It’s also a good time to look for bargains. As body shops and dealerships close, the equipment in those shops is often sold or auctioned. Manufacturers squeezed by the recession may also be more willing to offer better deals on new equipment, along with more attractive lease terms.
There are some tax advantages to purchasing new equipment in 2009 as well. Section 179 of the U.S. tax code allows small businesses to deduct equipment up to $250,000 in value that is placed in service in 2009 at 100%, rather than taking the depreciation over the life of the equipment. Businesses in qualifying enterprise zones can deduct an additional $35,000 on equipment.
“By being able to write off that whole amount, it’s a way to dramatically reduce your income tax liability,” Clanton says.
Training
Keep investing in your people, as well. Newer vehicle models and new shop equipment will require your technicians to learn new repair techniques, so this is not the time to cut back on I-CAR or vendor-sponsored training. With many dealerships closing down, there also is an opportunity for shops to hire new, highly skilled technicians.
Depending on how you reimburse your employees, they may also be feeling the squeeze of lower commissions, reduced pay or even the threat of a layoff, so make sure you keep them informed about the state of the business and their role in keeping the shop profitable.
“It’s really important to get them to understand what affects the bottom line,” says Patrick O’Neill, co-founder of 911 Collision Centers, which operates eight locations in Tucson, Phoenix and Las Vegas. “We’re being asked to do more with less, and you have to have a work force that understands what you’re trying to accomplish, and believes in the business.”
Key investments in equipment and technician training also can put the shop in a better position when it comes to dealing with insurance companies. “Insurers are concerned about which shops are going to be around after the economic shake-up,” O’Neill says. “They are looking for shops that are continually investing in equipment and training, and improving their methodologies to process the cars.”
Invest in yourself
Clanton also encourages business owners to take a share of their business profits and invest it in stocks, bonds or retirement funds, such as Simple Employee Pensions (SEPs) or a 401(k). Investing cash outside of the business helps encourage owners to maintain profitability, which can make the shop more attractive to prospective buyers in the future.
“It’s easy to wind up with all of your assets and your net worth tied up in the business,” Clanton says. “We tend to lose sight of the fact that the purpose of the business is not just to provide a job for the owner, but to provide a return on his investment. By taking distributions of profit on a regular basis helps keep the business owner sharp, and encourages them to run the business in a profitable manner.”
