Several
times a year someone asks me if I think they should take an offer from
LKQ. This always puts me on the spot
because this could be a life changing decision.
Honestly, I don't want to tell them what they should do. At the same time I want to help them think
thru the pros and cons of making such an important decision.
First
let me say that I think LKQ does a very good job of recycling vehicles and
supplying customers with the parts they need.
Their numbers are within reason for what we would expect to see in a
well run company
Also,
I know people who are very glad they sold to Greenleaf or LKQ and others who
are very glad they did not. And, realistically, most of us will never need to
make this decision because they won't come knocking on our door. At the same time it is getting increasingly
difficult for LKQ to grow sales without buying up more and more recyclers. There are several reasons for this and I will
mention just a few.
They
bid at every auction in the country. I expect you know that, however, you may
not realize what this means to their profits when they need more and more
inventory to grow sales. As independents
we can increase our purchases and even decrease our cost of goods by bidding at
more auctions. By doing this we increase
the variety of salvage which will meet our specifics needs. LKQ cannot do this
because they already bid at all the auctions.
Therefore, the only way for them to buy more salvage is to continue
bidding until they outbid everyone at the auction. This increases their cost per vehicle without
necessarily increasing their sales per vehicle. The
result is less and less profit per vehicle, which doesn't help the price of
their stock. One solution: buy one of the major players in a market. This eliminates one of the major bidders at
the area auctions, increases their customer base and gives them an additional
outlet for aftermarket and used parts.
Never
forget that a public company is under constant pressure to keep their sales and
profits trends headed up. Every quarter
they have to report how they are performing to both current and potential
investors. One good way to do this is to
buy another recycler. Basically, it
works like this. Let's imagine their current stock price is twenty times their
current earnings. That means they are getting $20 in stock price for every
dollar of earnings. Now, if they buy
your business for five to seven times annual earnings, they can go back to the stock
market and sell those same earnings at twenty times earnings. Not a bad deal by any measure.
There are other issues going on but I think
you get the picture.
It's
easy to get dollar signs in your eyes when someone offers you a chance to be an
instant millionaire. After all isn't this
part of the American Dream? However,
there are usually other factors you should consider.
LKQ is just like the rest of us, they don't
have a surplus of good management. One of their considerations
may have been that your company has very good management. Therfore,
they are probably going to want you or your key management to continue running
the company. If you are 60 years old and looking for the
"golden handshake" so you can retire and you are what makes the business work they
are less likely to see you as a good buy.
Reason, your leaving is very likely to disrupt your business and
diminish the value of what they purchased. Also, they have to come up with someone who
can step in and come up to speed very fast.
I think any of you who have tried to hire a manager know how hard this
is.
I think most of you who have good, young management find that you are related to
them. Usually they are a son or
daughter. They are probably in the
business because they think they will own it someday. So if you sell the company they will either
have to start another career or go from being the next owner of the
business to an employee of a big company. This may not be
that bad if they work best with supervision or if they see a potential of
moving up the corporate ladder. I have
seen situations where the company would be better off long term if they sold to
LKQ because the up-and-coming family needs the guidance that a big company can
offer. If your relative(s) think this
may be something they are interested in, you might consider having them call us
so we can put you in touch with some people who have gone that route and have been
very successful. They can tell you what
it's like to go from manager of a family business to an employee of a corporation.
Now,
let's discuss the money. If you are the
only owner and don't need to consider your relative(s) in the selling decision
and you have management in place that LKQ would want to keep then this may be a
God sent blessing. If you have family
where the business is their livelihood, then what are they going to do if you
sell? Are you going to get enough money
to support everyone and for how long?
Whatever
they offer you, multiply it by 60%, because that is what will be left after you
pay the taxes. Another way to look at it
is to take what you currently make every year and divide that into what they
offer you. This is how long it would
take you to make what they are offering and you would still own the business.
Next,
ask yourself what you would do every day if you didn't go to work and what are
you going to invest the money in. How
about the stock market or real estate?
How are those doing in your area?
You could put it into CD's. What
are they paying now? Or maybe you could
go out and start or buy another business.
You would have signed a non-compete so buying or starting another recycling
business is out of the question. How do
you feel about going into a business that you don't know much about? For some of you that might sound exciting.
I
know a lot of people who have sold to LKQ and Greenleaf. Some of them see it as the best thing that
ever happened to them and some of them went thru all the money and are back at
work trying to start over. It's a big decision and only you can make it, but
please think it thru and have a plan before you jump either way.
If
you want to talk about this or have questions, feel free to call. If anyone wants you to sign a confidentially
agreement that says you can't get advise, ask yourself why they would want you to make this life-changing
decision without getting input from professionals?
I hope this helps. It's what I say when people call me. I'm not pro or con on these issues and I hope the above reflects that. We want what works best for you. Yes, we have lost a lot of wonderful customers to both Greenleaf and LKQ but we just keep getting calls from new clients. I started this business as a part time job after I sold my yards and now there's three of us working full time at it. We believe that if we always look after your interests we will always have all the clients we can handle. So far this has proven to be a good business practice. Besides, it makes us feel like we are doing our job if our advise helps you become rich, allows you to live a better life by selling out or helps you in passing the business on to the next generation.
Jim Counts
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