KAR Auction Services may touch more cash in a year’s time than any company you’ve never heard of. We’re talking about $27 billion. Only $2 billion of it is KAR’s revenue, but the company generates some nice float from the rest.
KAR is a holding company for three businesses. One, ADESA, is a used-car auction operation. Insurance Auto Auctions is in the salvage business, auctioning damaged cars being sold for dismantling, recycling or repair. And Automotive Finance Corp. provides inventory financing for used-car dealers.
ADESA and the salvage company take transaction-processing fees, which account for most of KAR’s revenue. Cash management is a core function of the company, for a couple of reasons: it distributes $25 billion worth of payments from used-car dealers to their vendors, and that huge pile of cash is generated through millions of small transactions.
“We sell over 3.7 million cars a year,” says the company’s CFO, Eric Loughmiller. “The largest automakers in the world don’t get near that. Dealing with that much cash, and transaction sizes that are in the hundreds of dollars in many cases, our operations are very complex.”
Despite that complexity, KAR’s value proposition is simple, Loughmiller says. There are two components. For the buyer (the used-car dealer), the company guarantees it will deliver a title, enabling that buyer to sell the car. For the seller, “we guarantee check,” the CFO says. “We’re a large company, and our creditworthiness guarantees payment. Sellers don’t have to worry about how much money Joe’s Auto Dealership has. We do, but they don’t.”
Making what seems at first blush to be an odd comparison, Loughmiller says KAR is “not unlike the New York Stock Exchange, with cars as the product instead of stocks. With stocks, somebody has to be sitting in the middle of the transaction guaranteeing that if you buy a share, there is a share available. We do that for vehicles.”
Many of the cars KAR helps sell had been leased. When a General Motors vehicle, say, is returned to a dealership at the end of the lease term, GM will first offer it for sale to GM dealers. If none of them buys it, GM offers it to the broader universe of about 18,000 franchised dealers of all brands and models in the United States. If they don’t buy the car, GM can auction it through KAR to the approximately 40,000 independent used-car dealers in the United States and Canada that aren’t affiliated with any manufacturer.
Each of KAR’s three main business lines, says Loughmiller, operate in oligopolies that are more like duopolies in that there are just two dominant players.
Nimble with Cash
A highlight of finance at KAR in recent years has been a tripling of free cash flow to about $300 million a year. Some of that came from administrative efficiencies gained as a result of a 2007 leveraged buyout that combined ADESA and Insurance Auto Auctions. Some of it has resulted from the efforts of an enterprise optimization team that focuses on operating activities at KAR’s approximately 300 auction locations.
“When cash management was spread through the organization, a location’s best vendor would get paid the day of the auction. But our terms said 30 days, so why were we doing that?” — Eric Loughmiller, KAR
In particular, free cash flow got a boost from centralizing cash-management and accounts-payable functions, which formerly were handled separately by each location.
“We now manage all our cash out of a single treasurer’s office that has fewer than 10 people,” Loughmiller says. “They stick to terms. When cash management was spread through the organization, a location’s best vendor would get paid the day of the auction. But our terms said 30 days, so why were we doing that?”
The same decentralized inefficiency applied to accounts payable. A few years ago, there were 82 people processing AP transactions for ADESA alone. Now there are 13, all at headquarters. “I didn’t want to get rid of 69 people, but it was too inefficient,” Loughmiller says.
For much of the 2000s, Loughmiller was a CFO at software companies, where he adopted their idea that “the faster you fail, the faster you succeed.”
At KAR, he discovered a problem with emergency checks, used “where somebody says I need a check right now or I’m not going to give you this car.” Sellers were having a hard time getting those checks. The problem, which had been identified by regional vice presidents, was that the IT organization had not prioritized the printing of the checks at the right level. The vice presidents told Loughmiller that IT had said it would have the problem fixed in six to eight weeks.
“I said, well, this is more important than you think,” he recalls. “I got with IT, and we had it fixed in four days. So, we had failed in taking too long to process the emergency checks, but once we knew we failed, we reprioritized. And we got accolades from the field for that.”
Loughmiller, who joined KAR in 2007, helped take it public two years later. The experience was something like putting on a comfortable old shirt. While a partner at PriceWaterhouse between 1987 and 1997, he helped some 30 client companies execute initial public offerings. “I lost track of the exact number,” he says.
His first IPO involved helping Exxon spin off a $2 billion subsidiary, Reliance Electric, in 1987. Another big break came in 1991 when Loughmiller took bicycle-helmet maker Bell Sports public. It was a very successful deal, and after that he came to be seen as an IPO expert.
“In a public-accounting setting, when you develop an expertise, it becomes in demand,” he says. “What’s most interesting about my career profile is that all of this experience was prior to the Internet bubble. I’ve never taken a company public that didn’t have profits.”
His finally left PriceWaterhouse in 1997 to run finance at May & Speh, a family owned database-marketing business that he’d previously taken public and was acquired by Acxiom Corp. the following year.
Based on his IPO experience, Loughmiller offers some thoughts for those who take companies public.
“All kinds of financial experts, including many private-equity firms and investment bankers, underestimate the knowledge of the underlying business that you need to have, in conjunction with the financial aspects of its performance,” he says. “You can’t sit in an office listening to people telling you what they do. You’ve got to get out in the field and watch the actual operations, meet customers, find out what they find valuable and what you need to improve on. It will fit into how you tell your story [to investors] and how you’re going to expand your revenue down the road.”
A key priority is to identify core themes in your business that investors can get quickly. “You typically meet with investors for 30 to 45 minutes,” Loughmiller says. “You’ve got that long to convince them that you’re competent and have a business they’d be interested in investing in. So you have to be a good communicator, know the numbers, and have a strong understanding of the company strategy. You don’t have to be the strategy’s owner or author, but you must be able to boil it down into some fairly simple, understandable terms.”