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Mergers and Acquisitions

Things to consider when divesting

ARE YOU REALLY GOOD AT EVERYTHING?

By Michael McGregor

Afriend at Monro Inc. asked me last year if I could name one company that was in retail, commercial and wholesale tires and excelled at all three.

Fast forward to this past June, when Monro sold its wholesale tire operations to American Tire Distributors Inc. (ATD) for $105 million and entered into a long-term agreement that will see ATD supply tires to the stores in Monro’s retail network.

It was smart of Michael Broderick, Monro’s CEO, to make this deal early in his tenure. He must have looked at the various segments Monro was in and concluded that the wholesale tire division was not core to the company’s business.

Making this decision early allows him to free up resources, focus his team on Monro’s core retail business and with the ATD deal, improve tire deliveries, reduce costs and drive long-term value. He’s clearly putting his stamp on the business and preparing it for more store conversions from auto service to tires.

Publicly traded companies face challenges that many privately owned companies don’t have in that there are all sorts of “activist” shareholders who invest in public companies to force change, like Ides Capital, an investor that’s pushing Monro for a strategic review.

Activist shareholders look for ine cient balance sheets, stalled growth, unclear strategy and questionable investment decisions. Publicly traded company CEOs need to keep one eye out for these shareholders and sometimes make pre-emptive divestments to keep the business on the best path.

Privately held companies don’t face the same outside pressure as publicly traded companies, but they also can bene t from a periodic review of their portfolio of businesses. ere are tire dealerships of all sizes that have a nice chain of retail stores, but pro tability could be dragged down by a wholesale division that loses money. When one adds in the cost of carrying tire inventory and today’s higher fuel costs, the pro t picture sometimes looks even worse for them. And we’ve all seen great retail tire companies with unpro table commercial divisions or large commercial tire dealerships with a sprinkling of break-even retail stores.

It’s pretty clear that each segment — retail, wholesale and commercial — requires di erent core competencies to be successful. Retail is a people-andprocess business. With wholesale, you better be great at logistics. And to survive and grow long-term in commercial tires, you better be good at making yourself indispensable to your tire supplier of choice — and to your customers. e tire industry is changing faster than ever, so every company needs to analyze its strategy and determine how its business ts with that strategy. Consider how segments t with your company’s overall vision and mission, how they stack up against competitors and how your dealership’s competencies and nancial strength match up to the challenges ahead. Next, look at underlying business trends and long-term growth outlook.

Analyzing return on assets employed is one way of determining the relative return one is getting. It’s calculated by taking the net income of a business segment — be sure to fully allocate a fair share of corporate overhead — and dividing that by the assets employed in the business segment. Other metrics to consider are: a. the cash generated by each segment and whether it’s worth the e ort; b. projected pro tability, and; c. expected revenue growth. One of the bene ts that may come from divestment is freeing up capital to invest in higher- growth businesses. in higher-growth businesses. Or maybe you can use the cash to invest in technology to improve the customer experience? Perhaps your company can enter into new geographies? Certainly many companies end up nancially stronger, reenergized and more focused a er divestment. Most companies wait too long to divest non-core divisions. Inertia must be one reason. Or perhaps there is disagreement among owners and senior management in a family-owned business? is is where hiring outside advisers or strategy consultants may make some sense. In every case, it’s always better to sell when your business is healthy and before it really slides. Depending on the size and pro tability of a carve-out, private equity rms may be interested, but certainly strategics are good buyer candidates. A divestment can be disruptive to an organization and cause anxiety among employees. And you certainly don’t want competitors nding out. I always advise keeping the decision to divest extremely con dential until a deal is done. A er it’s announced, communicate regularly with customers. Keep key employees motivated and incentivized through the period of uncertainty. And make sure that the going forward vision is clearly communicated o en. ■

If it is determined the business segment is no longer a t, consider whether divesting it as a going concern or selling o those assets makes sense.

One of the bene ts that may come from divestment is freeing up capital to invest

Michael McGregor is a partner at Focus Investment Banking LLC (focusbankers.com/automotive/tire-andservice). He advises and assists multi-location tire dealers on mergers and acquisitions. For more information, contact him at michael.mcgregor@focusbankers.com.

How to break the Peter Principle

CHALLENGE YOUR EMPLOYEES WHO SHOW GROWTH POTENTIAL

By Dennis McCarron

The Peter Principle states that every employee in an organization tends to rise to his or her level of incompetence. In other words, if you are good at your job, you will get promoted until you reach a position that you are not good at.

This happens regularly at tire dealerships and other automotive facilities. A general service or auto repair technician is promoted to doing alignments before getting any sound training or the best salesperson gets to be the new store manager.

The store manager scenario is the best example of the Peter Principle that I can provide. A very good salesperson is motivated through personal goals, such as having the most sales, selling the most tires or whatever metric the company’s owner is focused on.

And often, the best salesperson is driven by personal glory — and the accolades awarded for doing the best job by yourself.

Now let’s look at the competencies of a successful store manager. Sure, personal selling goals are still on the table. But overall store performance is more important. Who cares if the store manager is number one in sales, but the store is down 10% from last year?

Other competencies also carry forward, like a focus on customer service.

But does a salesperson really care about the mix of sales or making sure controllable expenses are kept in line?

Let’s take a look at some core competencies necessary for a good or great store manager:

Leadership (“look at me versus follow me”). A good store manager doesn’t just do well in sales and then tells others, “You need to do this, too.” A good store manager builds a team and supplies knowledge and tools so that everyone has a chance at success. A good store manager figures out what motivates each employee and aligns that motivation with company goals and results. Successful managers inspire others to do things their way — not just any way.

The trick is in balancing all three and not sacrificing one for the other. Operational discipline also covers a fundamental understanding of business and how profits are made. Managers must understand concepts like every dollar in expense is a dollar taken from profit, yet only 10% to 15% of all sales dollars reach the bottom line. They don’t have to have an MBA, but they need to be able to read a P&L and understand how it works. A focus on results. Managers must monitor the process by which results are achieved and provide a path for employees to get there and not just set goals. Store managers must convey this path in simple terms so that everyone can be on the same page. For example, “Team, we need to improve our alignment sales, so need to sell more alignments this month” is not a strategy. How do you know which employees have those skills? If an employee reaches his sales goals regularly, have a conversation and see if he is interested in taking on more responsibility. Not everyone wants to get promoted. But if the answer is yes, start assigning simple tasks a few times and observe the employee’s Not all great salespeople make great performance doing something out of his comfort zone. managers and not all great managers Ask him to conduct part of a started as the best salesperson. store meeting or ask him to look at some expenses and see if he can come up with a plan to reduce those costs.. Ask him to plan a tire sales event. You could also sit down with him once a month and review your dealership’s P&L, one-on-one. Explain how it works and what the metrics are. If he asks intelligent questions or participates enthusiastically, there’s a good chance there is room for growth. Not all great salespeople make great managers and not all great managers started as the best salesperson. The qualities that make up a store manager are very different from those of someone who is applying personal goals to themselves. If you have an employee with growth potential, start challenging that person in small ways to begin the transformation. ■

Operational discipline. Effective managers understand what the company is good at and what it is not and guides employees to make sound, reasonable decisions that make the customer happy, the employee happy and the company happy.

Dennis McCarron is a partner at Cardinal Brokers, one of the leading brokers in the tire and automotive industry (www.cardinalbrokers.com). To contact McCarron, email him at dennis@cardinalbrokers.com.

ITDG rolls out new workers comp insurance program

PLAN GIVES PARTICIPANTS ‘MORE CONTROL,’ BIGGER RETURNS

By Mike Manges

The Independent Tire Dealers Group LLC (ITDG) is offering its 1,000-plus members a new captive workers compensation insurance plan, which replaces the group’s original captive insurance plan that was introduced more than 15 years ago. Workers compensation insurance plans “seem to be more of a value-add to our members than ever before,” says ITDG President and CEO Dave Marks, who adds that ITDG members requested an updated program.

“People are trying to take better control of their workers compensation insurance and have a vested interest” in a plan that can help minimize their costs. e new program, Cell ITDG Captive Insurance, provides segregated accounts for each member. Claims are deducted from a pooled fund.

If claims exceed the fund’s balance, the “extra” becomes a shared claim. And any surplus belongs to individual members, who also have full discretion when it comes to the distribution of funds and can enjoy returns for good performance. (Buy-in is a one-time payment of $1,000 — less than the previous captive’s buy-in amount.)

MORE CONTROL

e Cell ITDG Captive Insurance program also gives policyholders more control over the management of claims and losses. “And more importantly, instead of receiving a dividend against the total bucket, they now get a percentage of their reserved funds, which they control,” says Marks. “If they’re a good steward of their money and business and have a safe workplace, they are now guaranteed a portion of those funds back over a period of time.”

In the previous plan, “all money went into the pool. Now only part of that money goes into the pool and part remains in their own account. If they have a claim, that money is spent. If they don’t have a claim, that money stays in their reserve.

“Long-term, it gives members better control and better visibility. And if there’s a member who’s not a good steward, they’re going to get pressure from their fellow dealers. You also get some good shared ideas and best practices” as a member of the captive.

CONSISTENCY IS THE KEY

Lionel Peres, longtime ITDG member and co-owner of Tulare (Calif.) Firestone, a dealership with 13 retail locations and three wholesale distribution centers, says he paid “a fairly high premium” for workers compensation insurance before ITDG established its original captive insurance program in 2005.

“I was skeptical (of the program) in the beginning. But I realized these guys knew what they were doing.”

He likes the new Cell ITDG Captive Insurance program even more. “ e same management people are in place. And the main factor is the balance goes into two di erent funds. One is a claim fund, which is basically in our name, and the other is a shared fund. We write our own check out of the claim fund. Once those claims are closed, money will be distributed back to us. I get a substantial amount of the premium.

“The fact we’ve maintained the same loss prevention individuals” after moving to the new program “is the most critical part,” says Peres. “I have seen them close claims that were litigated very rapidly. at’s the key — getting in claims and responding to the injured employee as quickly as possible. “And if we’re communicating with the employee and our insurance group is communicating with the same employee,” you can reduce the possibility of litigation, he adds. “Insurance companies are out to make a profit. We’re out to take care of the employee and control our expenses as much as possible.” Other Cell ITDG Captive participants “love” the program, says Marks. “ e insurance industry is pretty di cult. It’s very, very competitive. It’s not unusual for some insurance companies to completely underbid somebody to take a plan. “How sustainable is that? Usually over time, it’s not really sustainable. We’re trying to build stability and sell ITDG,” while providing enhanced bene ts, he adds.

“We’re trying to build stability and sell ITDG,” says Dave Marks, CEO of the Independent Tire Dealers Group LLC (far right), with, teammates, from left to right, Chris Barry, senior sales director; Sherry Bily, director of programs and pricing; Mike Burns, sales director, eastern U.S. region; and Cheryl Bluman, of ce and administrative manager.

Photo: ITDG