Private Equity and the Quick Lube Industry (with Anthony Lopez-Ona, Mufson Howe Hunter & Co.)

[Music] Welcome to the Nolan Podcast, I'm National Oil and Loop News Editor Tom Valentino. Like many sectors, the quick-loop industry is seeing a growing influence from private equity. Everyone needs to look no further than Shell's recent sale of Giffy Loob to Monomoi Capital. But what are investors looking for from the fast oil change business and what can operators expect in regards to M&A in the coming months? To answer these questions and more, the Nolan Podcast welcomed Anthony Lopez-Ona, managing partner for Muffsen Howe, Hunter and Company, a Philadelphia-based middle-market investment bank that provides M&A advisory services. Let's hear now from Anthony Lopez-Ona. [Music] All right, we are joined by Anthony Lopez-Ona, managing director at Muffsen Howe, Hunter and Company. Anthony, welcome to the Nolan Podcast. Great to be here Tom. Thanks for inviting me. Really looking forward to this conversation. In general right now, how would you say private equity firms are looking at the quick-loop industry? Is there any sort of a consensus general sentiment out there right now? I would not say that there's a consensus. Yes, five different PE firms, their opinions and you'll get five different opinions. But I would say that private equity does remain interested but with certain caveats. We've worked with a couple different private equities or with a couple different franchisees in the sale of their business and what I can tell you is some private equity firms as it relates to the franchise or franchisee dynamic, they're more interested in the franchise or it's a powered dynamic and they want to be on that side of the equation. Some examples of that would include a firm called Prince to an Equity, owning Strickland Brothers and another firm called Mid-Ocean, Owning Full Speed Automotive which is Monkey. Some PE firms though they feel really comfortable in the franchisee side of the equation. They're firms that really just focus on working that side of the equation. But what I can tell you though is what's very important then for them is who is the franchise or as a partner. In this regard, maybe we'll cover a little later on but the recent acquisition of Jiffy Loop is an important issue but when PE firm is buying into a franchisee essentially they're not only marrying that particular franchisee but they're marrying the franchisee or. And so from that standpoint they want to make sure that their interest are aligned and if there's any perception that there's a misalignment there they probably won't want to be dipping their toes into those waters. You and I had talked offline about how there's groups that will invest in certain brands for the growth opportunity and then there's those who are more interested in the cash flow side of things. What can you tell us just about the thought processes of those two groups and how they differ? So for a more traditional private equity firm, this being a firm that has raised money from pension funds and down places like that, they have to return their money to their investors. Their typical investment horizon, let's say is around five years between the time they invest in the time that they reap what they've sown. Could be longer, could be shorter. And so there's only so many different levers that they can pull on in order to enhance value. One of them is something that I would term as professionalizing the organization, getting a more robust management team in their systems, operating systems to manage performance. But a key factor for them is going to be growth and that's unique growth. And so that's something that they're going to be taking a hard look at. And in that regard, it's critically important for them to have enough opportunity or runway to grow the business, but then also leave enough for the next person. I'd like to say that a private equity firm doesn't enter into a room unless they know where the exit is also. And so for them, the exit typically is going to be a sale to another private equity firm or also something that is called a family office that I'll touch bases on. But they want to make sure that if they grow the organization and then turn it over to the next private equity firm that there's enough runway for that next private equity firm to continue to grow the business. And we ran into this situation recently when we represented a client in the sale of their business. There was another franchisee in that system who was the largest one and kind of represented the theoretical limit of how big anyone could grow in there. And given the dynamics of that other relationship, there was enough perception of it being a cap that the firm that we were talking to said, we're not sure we're going to be able to grow this thing enough if we can't turn it over to somebody else and they can grow it. Having said that, there is the alternative universe of family offices. These are wealthy families that are looking instead of growing the business and taking the EBITDA from 10 to 20 or 20 to 40 or looking for the cash on cash returns that they can derive from this business. For them, it's not so much about, it doesn't have to be about growth. It could also be about maximizing efficiency. So these firms, because they're focusing on cash yield, they can write to lower IRRs on returns. But that then means that they're going to pay a lower multiple than a private equity firm that's looking for a growth investment. So that's kind of the dynamic. It's going to be a family office, going to be a slightly lower multiple private equity firms that are focused on growth opportunities and white spaces. They're going to be able to pay a higher multiple. The growth-minded firms, you mentioned unit growth, are they looking at factors like average ticket increases as well and other ways to grow the business, adding on services and existing locations or anything else along those lines? That's a great question. I can tell you we represented a valveline franchisee in the sale of their business and as you are aware, valveline offers the most, what I would term, minimal of additional services. And then we represented a jiffy loop franchisee in the sale of their business and obviously jiffy loop offers the multi-care system. The valveline system is at this point, I would say, perceived as a very high value among private equity firms and the focus there is more on car count. Obviously, the average ticket is going up because premium oil as a percentage of oil changes is increasing. So yes, having an increasing average ticket is important, but for them it's more the car count. I can tell you from working as a related to our jiffy loop franchisee, they were having an increasing average ticket going up, but we literally had for instance a private equity firm say, great, their average ticket is going up, but their car count is going down. And there's at a certain limit in terms of how high you can take the ticket before the customer decides to go elsewhere versus if you can just continue the throughput through the station, that's a better way to grow. That's an interesting balance, I think one of our sister publications has an article coming out just kind of looking at dropping car count, but they increased their ticket so much that they more than made up the difference and they actually became more profitable servicing fewer vehicles. But strictly in the quick loop space that might not always be a practical approach necessarily. You touched on this earlier, I guess this is as good of a time as any to get into it, probably the biggest story in the quick loop industry so far this year was a jiffy loop being sold by Shell to a private equity firm. What can other operators in the industry take away from that bit of news and what should they be keeping an eye on as that transaction gets finalized here in the coming months? Sure, I'd say that it's not just even the jiffy loop transaction itself that there's been seismic events over the past couple years within the industry. You start off with. going back to March of 2023. So just three years ago, when Voweling announced that it was going to be selling its blending operations to a Ramco, and they were just going to be focusing on being a franchise or an operator itself of quick loop stations. And to that end, within less than two years of them, you know, making that pivot, they then acquired nearly 200 units at the end of last year in the oil change or transaction. On the other end, you also have, as you just alluded to, just a over a month ago, shall oil announced that they were selling jiffy lube international to a firm called Monomoi Capital. And you know, kind of the reverse of the Voweling transaction, where in this instance, the large oil operation, you know, refining, they decided they no longer wanted to be in the franchisee game. And so they spun out their franchisee operations. I can tell you that in summary, quick loop franchisee systems are becoming more pure play than just being part of a conglomerate, those synergies that were perceived between the blending operations and the oil changing operations, just weren't enough there to retain the businesses and be better to have people focused on just running the oil changing quick loop locations. Also, I would add that recently, a private equity firm called Windchurch, decided to exit the business and they sold a firm called Teen Carcare, which was the largest jiffy loop franchisee with over 500 units, which represents a very sizable portion of the jiffy loop system. As I alluded to earlier, Voweling is perceived as probably a more preferred target investment target for private equity looking to get into a franchisee system, because they've been doing it longer. In regards to jiffy loop, people are taking a wait and see approach. There was a perception that the jiffy loop system had gotten stagnant in terms of the number of flags. And at this point, right now, from talking to various different participants, people want to see what Monomoi does. I think that there is a favorable outlook over a slightly longer term in the sense that Monomoi capital is a really good private equity firm. It's a firm that we actually know ourselves. And so there's an expectation that they're going to take the jiffy system and start growing it again, and not just the number of flags, but also the car accounts reverse the trends on the car counts. It should be noted also that in acquiring jiffy loop, that they also acquired premium velocity, which has 400 units. And there might be an opportunity to reach free franchise, some are all of those 400 units. Several reasons why car counts have gotten down across the industry. And it'll be interesting to keep an eye out and see if they're able to reverse that trend. That's something we'll certainly be watching here. Beyond that, just in general, with regards to the world of M&A, is there anything else that should be on festival chain shops radar right now? You know, look, the elephant in the room is electric vehicles. When we took our valvally inclined to market that transaction closed at the end of 24. So we were just entering in the market at the beginning of 24. And there was a perception at that time that EVs were going to take over the road. We had a lot of private equity firms say to us, you know, now like it's just it's not a time to be investing in a quick loop operation. It's kind of funny. We actually had one private equity firm say something like that along the line along those lines. They subsequently after we sold our valvally in franchisee, they subsequently then ended up buying into somebody's system. So through 24, the changing dynamics, the declining car car sales unit sales for like Tesla have changed the perception. Having said all that it might not be the near term threat when we took our jiffy loop franchisee, it was not to market it was not nearly as big of an issue. But eventually EVs are going to start taking over a portion of the road. The good news, I guess is that people are holding on to their cars longer. And those are for right now ice vehicles. And so they need to be serviced. But if you are an operator, maybe it's not something that you have to be worried about in the next 12, 18, 24 months. But at some point down the road, it is something that is something to be thought about. Alright, so last question and then we'll let you get away. If you are a shop owner who's thinking about selling, what are some of the factors that you should be weighing? What kind of steps should you be taking to prepare? Well, there are so many factors that should be considered by an operator that if we went into them all, this would be an hour plus podcast. But I would say at the top of any list, would be scale, scale in our universe is going to be measured by EBITDA, the operating performance, you know, what are they generating in terms of profitability? And I can tell you that if an emotion plistic level, we break them down into three buckets, firms that have EBITDA of one five million firms and this is I'm just talking about from the franchise or the operator level, not the franchise or but firms that have one to five million dollars in EBITDA, then five to 10 million dollars in EBITDA and then greater than 10 million dollars in EBITDA. If you're less than five million dollars in EBITDA, from a private equity standpoint, you probably don't have enough scale to be what is termed a platform investment. So at that point, you're an add on or a bold on to an existing platform. And at that point, if a private equity firm has an investment in a platform and then they're talking to somebody who has less than five million dollars in EBITDA, they're looking to effectively leverage their multiple down that they paid for the overall business. So you're going to have an issue in trying to sell the business in terms of finding a pool of buyers and it's going to include strategics and negotiating to get the best multiple. In that five to 10 million dollar range, you're going to have a larger pool of investors, you're going to have private equity firms in that pool. They're not as many as the above the 10 million. Typically, the firms that might be in that five to 10 million might not be necessarily as professionalized as the above 10 million dollars. I would tell you that it's important that in you have a financial advisor, like an investment banking firm, which we are, that are adept at running a sale process that can help negotiate against all the different parties that are interested. And then after that, above 10 million dollars likely means that there's more robust operating system, a more robust management team, and that that you have already made platform for investment, and that there are growth opportunities. So like those are scale would be the most important thing. After that, the other thing I would tell you is things like financial statements, you don't have to have audited financial statements, reviewed financial statements are fine. It'd be great if the operator was on something other than QuickBooks, something a more robust accounting package. And then after that, we kind of touched on it before in terms of like what are the key performance indicators, things like same store sales growth, the unit economics, what are the margins at the four wall level for the store or what we just touched on earlier, what are the average tickets and car counts? Alright, Anthony Lopez Ona, thank you so much for joining us. Tremendous insights and I really appreciate you taking the time. Hey, great to be here Tom. Alright, as a reminder, if you enjoyed today's episode of the Nolan podcast, we invite you to subscribe to our show on Apple podcasts, Spotify or your favorite podcast listening platform. While you're there, leave us a five star review. All past episodes of our show are also available on our website, Nolan.net. That'll do it for today. I'm Nashville, oil and lubed news editor Tom Valentino. We'll catch you next time on the Nolan podcast. The Nolan podcast is produced by Endeavor business media, the division of Endeavor B2B. (upbeat music)