8 minute read
EV Intelligence
from Modern Tire Dealer - November 2022
by EndeavorBusinessMedia-VehicleRepairGroup
Anatomy of a turnaround, part two
By Michael McGregor
In turning around any business there are usually two phases. First, you need to arrest the slide by cutting expenses and rationalizing the business, then you begin to rebuild.
Last month, I explained how Larry
Jeffries, the former CEO of Tredroc Tire
Services Inc., closed 20% of the company’s 30 locations, reduced headcount by 25% and exited three money-losing businesses.
But he still had more things to do before growing.
Here’s the rest of the Tredroc turnaround story, in Jeffries’ own words.
“Once we got through round one, we’re now evaluating what we have.
Our six retread plants were losing a great deal of money, so we consolidated to four plants and became profitable.
“We identified additional staffing cuts.
We kept the best and built a strong team.
“We were transparent. Previously, managers didn’t have access to the P&Ls so we shared them. My CFO and I went to every store twice a year (and) sat down with the management and sales teams. We went through every KPI, went through every financial and said, ‘Guys, this is where we’re at. This is what we need to do. You help me, I’ll help you.’
“Every manager (and) every salesperson had my cell number.
“All along, we had to manage the banking side because we were… close to the edge.
“We had no inventory management system and were operating with a huge inventory. It was all guesswork.
“So we built an inventory management system from scratch and that helped free up a tremendous amount of cash.
“That inventory reduction helped us with the bank. We reduced our debt by almost 60%.
“We began making money, but I told everybody, ‘We need to operate this company as if we’re on our last dollar. Know your money, know your budget, and stick to it.’
“There were 19 different compensation plans between the three companies, but they were all geared towards driving sales.
“We automated everything, consolidated the comp plan and changed it to margin-driven.
“We didn’t put caps on it. I said, ‘I’m going to pay you as much as you want to earn, but you have to sell with profitability and sustainability in mind.’
“Everybody was up in arms, but the first year we changed the comp plan, every salesman but one made more money than the prior year.
“And the company made more money than it had ever made at the time. We incentivized them to sell profitable stuff. That was the key to the kingdom.
“We did a deep dive evaluation analyzing truck routes and made them more efficient.
“We made decisions to fire customers. We sat down with the big customers and said, ‘What can we do to become a better partner to you?’
“Some of those conversations were easy. Some of them were hard because while we were there, we said, ‘We’ve got to raise your price.’
“One customer looked at me and said, ‘I’m telling you right now, you’re not going to make money on me.’
“I responded, ‘Well, I’m sorry to hear that because I don’t want to lose you as a customer, but I’m not going to service you and lose money.’
“Some of that business came back at more profitable rates. When we pulled the unprofitable business out of the stores, we had record profits.
“Those customers we fired ate up so many resources. So we freed up resources for profitable business.
“We had our growth plan in place for 2020 and then COVID-19 hit. That put us back on our heels a bit. But we reevaluated and managed to ride through the hard part without laying off a single employee.
“We emerged from that period in a good position because we were already tuned and ready to go.
“Looking back on it, we just went back to the basics,” says Jeffries.
“It wasn’t just me making decisions or my CFO making decisions. It was everybody making the decisions together. And when you have that, you have cohesiveness of a team and everybody’s going in the right direction.
“One of my best leaders I ever had was Larry Morgan.” (Editor’s note: Morgan is the former owner of Morgan Tire & Auto and a past recipient of MTD’s Tire Dealer of the Year Award.)
“He told me one time ‘There’s three things you need to remember to have a successful business.’
“And I said, ‘OK, what?’
“And he said, ‘It’s pretty simple — people, people and people.’
“He said, ‘You get those three things and you won’t have any problems.’” ■
Michael McGregor is a partner at Focus Investment Banking LLC (focusbankers.com/automotive/tire-and-service). He advises and assists multi-location tire dealers on mergers and acquisitions. For more information, contact him at michael.mcgregor@focusbankers.com.
Charity, non-profit or for-profit?
MAKE YOUR CHOICE AS YOU GEAR UP FOR 2023
By Dennis McCarron
Iwant you to go outside and see if there is a giant red cross on a sign pole outside your building. Go ahead and check just to make sure. Now check your most recent income statement. Go to the net profit line and see if there’s a negative sign, because if there’s a red plus sign outside, there will be a minus sign on the bottom of your income statement.
As a successful tire dealer, you should be helping charities — not be a charity.
Sometimes a down-on-his-luck customer may need a kind soul to take pity on him and help him out. There’s a time and a place for that.
Hopefully, you may have a process for this, either working with a real charity or having a selection process that can pick a deserving recipient.
However, if your charity is being run at the counter and every complaint about tough times is met with a discount, it won’t take much to mutilate the bottom line of your dealership.
It is possible to be empathetic to customers and maintain profitability. After all, you’re here to take care of the entire community — not risk closing your doors over a handful of local residents who are looking for a less expensive repair.
Make sure your employees know to not sell with their own wallet.
They should present options for customers — not discounts.
Is your dealership run like a non-profit? In a scenario like this, employees look for “donations” from customers just to cover expenses.
If you’re operating as a non-profit, I can guarantee you that your profit margins on parts and tires — along with your labor rate — aren’t in line with today’s metrics to run a business.
In order for a tire store to turn a profit, it needs to have proper margins and it also needs to recommend additional, legitimate services to customers. A dealership will not be profitable if it only does the minimum requested work.
The things customers ask for are usually the least profitable items you sell.
Customers rely on professionals to bring complete pictures of their vehicle’s health and present an honest assessment so they can decide what they will do now, what they will do later and what they won’t do.
It’s OK if a customer says no. It’s not OK to avoid letting them know.
Hopefully, you’re running your business as a for-profit company because that’s what it is. That means making sure you charge the right price, you sell the right parts, you back
your warranty, you pay your employees well — more on that later — and at the end of the month, you have about 10% of your sales in profit so that you can fund your cash flow easily.
Net profit doesn’t go in the owner’s back pocket. It funds tire purchases, pays your taxes, makes repairs and upgrades to your facilities possible and helps make sure that when it comes time to sell your business, there’s a cushion for all the new taxes you’re going to have to pay.
Good employees also should be rewarded. Employees who regularly show up to work on time, hit their goals, actively seek out educational opportunities and create bonds with customers and employees alike should be treated like royalty.
But there is a limit. Professional service advisors should consume about 7% or less of gross profit. In a store with $1.5 million in sales and a gross profit of $900,000, that should equate to about $60,000 in total compensation — not including payroll taxes.
This is achieved by selling equal amounts of tires, parts and labor. If a store is light on service — or heavy on tire sales, depending on how you look at it — this number will skew downward as tires are less profitable than service.
A tire dealership’s biggest ongoing struggle is typically controlling payroll.
Total payroll should be kept under 50% of gross profit at all times. Any higher and the store is just spinning its wheels as a charity or a non-profit. It doesn’t take a lot of overtime or just pushing cars through with only requested services to reduce your business’ net profit to nothing.
So it’s time to make a choice as you gear up for 2023. Do you want to be a charity, a non-profit or a for-profit business? If you want to make a profit in this business, start with charging the right prices, employ professional sales advisors who present legitimate findings, back your warranties, control your payroll and keep the place looking clean. That’s a good start to a new year. ■
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.
