National Auto Care has been buying finance-and-insurance agencies in a prominent example of a broader consolidation trend within that industry.
"It's going at a fast pace," Colonnade Advisors CEO Gina Cocking, an industry analyst, said of F&I agency consolidation.
Cocking estimated there are about 1,200 F&I agencies nationwide.
Courtney Hoffman, NAC senior vice president of mergers and acquisitions, said she thought her company would be one of the leaders left standing as the "highly fragmented" industry coalesces to produce a handful of large players.
"I don't think it [consolidation] stops," Hoffman said.
In October, NAC tallied its 10th agency acquisition in 18 months — Oklahoma City-based Mojo Consulting. The news followed its August announcement of five purchases: Ace Financial Development Group in Portage, Mich.; Pinnacle Dealer Services in Arizona; Pritchard Insurance in Stanwood, Wash.; Profit Concepts in Ogden, Utah; and RRC Companies in Oklahoma City. NAC is based in Ponte Vedra Beach, Fla.
NAC embarked on its self-proclaimed "aggressive" growth strategy following its 2018 purchase by private equity firm Lovell Minnick Partners.
The F&I products provider had been focused on organic sales growth, according to Hoffman. But Lovell Minnick felt NAC should pursue inorganic growth by purchasing agencies which could sell its products, she said.
Under this strategy, "we're in control of our own destiny," Hoffman said.
She said NAC had a "thoughtful and strategic integration plan," and wouldn't force its products upon the dealerships whose agents it acquired.
"We're buying relationships here," she said.
Hoffman switched her focus from sales to M&A in February 2020 to work on that goal, and has predicted that NAC would end 2021 having completed 14 acquisitions since that time. The company hopes to buy 15 to 20 more agencies next year, she said.
"We have no plans to stop," Hoffman said.
According to Cocking, it's more common for agency consolidation to take a form like NAC's, where an F&I product administrator is the one buying agents. It's less common to see an agency focused on buying other agencies, she said. Brown & Brown Dealer Services and Vanguard Dealer Services have been among the exceptions to this rule, she said.
"If I had my own agency, that's what I'd be looking to do," Cocking said.
Most of the acquisitions involve agencies in the $1 million-$4 million EBITDA range, Cocking said. She said "very few" agencies produce more than $5 million worth of EBITDA.
"It's hard to scale," Cocking said, and an agent might not want to bother doing so. If the agency owner can do $2 million a year in sales thanks to relationships with just a few dealerships, she said, "why stress yourself out?"
Scaling also doesn't necessarily yield more profitability, which is why few agencies grow beyond a few million dollars in sales, she said.
However, there are benefits to scaling as well, particularly expanding one's geography.
"I think this is kind of the biggest advantage," Cocking said.
She gave the example of a small agent doing business with a dealership group customer in nearby states but unable to service the group's rooftops located farther away. If the agency had coverage in the other states, "you absolutely get those stores," Cocking said.
A small agency also will eventually reach a plateau in the number of products with which it can familiarize itself. Buying other groups means the vendor can represent more administrators specialized in different vehicle types, such as exotics or high-mileage older models.
But a lack of diversification, such as more than 20 percent of revenue tied to a single dealership group, exposes an agency to risk and a lower valuation should it seek to sell, according to Cocking.
The auto dealership sector's own consolidation could lead to undiversified F&I agencies losing a key revenue stream.
"That is a critical threat," Hoffman said.
Cocking said if she were an agent whose customer dealer group were acquired, "I would be scared out of my socks." The buyer would likely want to install their own agent, she said.
Another challenge in the agency world involves dealerships that seek to buy F&I products directly from a provider. Hoffman said being acquired by NAC allows an agency to tell the dealership, " 'You are now direct.' "
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