Maximizing Body Shop Profitability: Key Strategies for Financial Growth and Labor Efficiency

Until recently, Walt Link was Division Vice President for Gerber Collision & Glassand oversees nearly 200 stores in the company’s Western Division.

Link joined Cole StrandbergHost of the podcast “The Collision Vision”, powered by Autobody Newsfor the first episode of the new series, Operational Excellence: Strategies for Business Success. Link talked about financial management and growth planning, as well as his latest career goals – including an innovative new tool he believes will help businesses solve their labor shortages.

A diamond in the rough

After four years of service in the U.S. Navy, Link wanted to return to civilian life. In 1997, he opened a collision repair shop with a business partner. A few years later, Link sold his share of the business to his partner and went on to work for various companies in the Atlanta area.

In 2019, he joined Gerber Collision & Glass, first as Regional Vice President in Florida, then in Atlanta. In 2022, the company was restructured and Link was promoted to Division Vice President in the South. In November 2023, he moved to the same position in the West.
“It’s been a really good career for me,” Link said. “This business is a diamond in the rough.”

Financial indicators

The overall health of a company is measured by its bottom line, or earnings before income, taxes, depreciation and amortization (EBITDA). “Top-line sales are for beginners,” says Link. “EBITDA is where the pros play.”

“I don’t want to downplay what peak sales can do for your business,” Link said. “I just want to say that it’s the way someone manages all facets of their business that leads to higher EBITDA.”

Link says there is a “sweet spot” where a repair shop’s indirect costs reach a point where peak revenues begin to increase. However, getting to that point requires additional employees to service more vehicles.

In his experience, Link said, a business with peak sales of around $275,000 will generate just as much EBITDA as one with sales of $450,000.

“I can prove this all day long because if you can’t stretch people that thin, you’re going to start losing at CSI,” Link said. “I’m not saying you can’t grow organically and start from $275,000, but you have to be prepared that your bottom line won’t start to see the fruits of that increase in peak sales until you hit the $475,000 or even $500,000 mark. That’s when you’ll see a significant improvement in your EBITDA.”

When creating a budget, Link said the goal is to achieve organic growth year after year. The target amount will vary from business to business, whether it’s 1% or 10%.
“Financial growth is not always about revenue,” Link said. “In my humble opinion, earnings growth is much more important.”

The end result shows the strength of management in dealing with employees and represents how much an owner can reinvest in the company.

Owners need to be aware of indirect costs, such as overtime worked by employees who support but do not directly contribute to the company’s revenue, such as the general manager, production managers, cost estimators, CSRs, porters and parts coordinators.

“Managing your overtime can be an absolute EBITDA killer,” Link said. “Don’t get me wrong. There are good overtime workers in every business. But how you manage them and those indirect costs will most likely make the difference between positive or negative EBITDA.”

“Labor efficiency” is based on the number of hours a technician can work compared to the amount of time he or she can work. Link said that as a manager or shop owner, he wants his technicians to work at about 200% — that is, if they work eight hours, they can work 16.

A technician’s experience influences the distribution of repairs because it affects his work efficiency.

“You don’t want your least experienced technician doing your most difficult repair, or vice versa. That’s why we have A-technician and B-technician categories,” Link said.

“Labor costs are by far the No. 1 area that can have the greatest impact on our gross profit as this is where the highest margin opportunities exist,” he added.

Parts are another important item in a store’s budget. Link said that while it’s important to build and maintain good relationships with suppliers to ensure your store gets the best discounts, sometimes it pays to shop around.

“People like talking to the same (parts) people because they think they’re going to take care of them,” Link said. “I’m not saying they won’t take care of you if you ask them for a better discount, but I would definitely call around and make sure because the margins on parts are getting smaller and smaller and you need every dollar you can get.”

Parts coordinators also need a tight system for tracking parts credits.

Repair shops must ensure they charge for everything they do to restore a vehicle to its pre-accident condition, Link said.

“I’m not talking about driving up repair costs just for profit,” he said. “But you have to make sure your team is aware of what our insurance partners are allowed to charge us. That’s constantly changing because vehicle repair methods are constantly changing.”

Considerations for growth

Simply adding new stores to increase the number of stores is not a healthy strategy, Link said.

Location is important. This includes making sure the market can support another collision repair shop. Look at population growth projections for the next few years. It is also important to have the right team in place before expanding.

“I would say there can come a point where you lose focus on whether growth is just a win for your owners or your shareholders or whether it’s just a win for your employees’ bonus structure,” Link said. “I’m not saying that financial responsibility is negated when people look at growth. But you have to have discipline.”

Company leaders should keep an eye on career development and monitor industry trends, such as the impact of new original equipment manufacturer production methods on post-collision repairability, which may require new tools and training for technicians.

Private Equity

Link said that the more people involved, the stronger the position. A larger group of repair shops can have a greater influence on insurance companies in how repairs are carried out and how they are reimbursed.

“Personally, I believe that private equity plays a big role in our work,” said Link.

He said that in addition to the five major consolidators in the U.S., another segment should grow: “Maybe 20 or even 30 more private equity firms taking on 100, 150 deals,” Link said. “I think there would be some strength there. And again, I’m not saying it’s a battle between us and the insurance companies. That’s absolutely not the case. We have to find a way to be partners.”

Trends

According to Link, the most important trend in collision repair is the increase in work in progress (WIP).

“I think the biggest trend that everyone has to accept is that we are going to go back to 2019 levels,” Link said.

“We’ve seen the highest claim numbers and WIP levels we’ve ever seen in this industry over the last three years, and for some reason people are panicking now,” Link said. “And I understand why. We’re just now getting back to pre-pandemic work levels.”

As ADAS continue to develop to prevent more collisions, this will also help reduce the amount of damage.

“But don’t forget that the severity of claims has increased tremendously,” Link said, as parts prices have risen and ADAS need to be recalibrated.

The lack of technology – maybe not after all?

“Maybe we don’t have a shortage of engineers,” Link said. “Maybe we’re just not making the best use of the technologies we have.”

Link said he is developing a “tech-share” product called Bolt that will allow a shop to bring a body technician, painter or estimator to another shop during its downtime.

“What if there was a system that could utilize all the downtime that technicians have and will have in the future as claims go down? What if there was an app or a website that let you use that time as tech share? Think about the savings in benefits, in payroll taxes, and all of those things.”

Link said he will introduce Bolt to the industry at the 2024 SEMA Show in Las Vegas.

“I’m going to show everyone how Techshare is going to revolutionize our industry,” Link said. “It’s the gig industry,” he said, comparing it to Uber.

Link said he is also talking to a private equity firm about investing in acquiring some body shops and building more shops so he can run them the way he wants.

“I can’t tell you how excited I am about this,” Link said. “I got to do this once when I was just out of the Navy, and my goal was to get back to that point.”

Key finding

Claims and WIP are decreasing, and so are peak sales. Evaluate the impact on your business and consider offers from consolidators, private equity groups, or other independent owners who may want to acquire your business.

“This is not scaremongering. This is just real talk,” Link said. “This is probably a deciding point as to whether you want to sell now or wait. And I would say every month that goes by is going to have a negative impact on the valuation because we as consolidators value this business differently.”