M&A in Vehicle Service Contract Industry

Colonnade publishes industry commentary on vehicle service contracts.

The vehicle service contract (VSC) industry continues to attract significant interest among investors and consolidators. Macro fundamentals are compelling, and the industry demonstrates growth, strong margins and recurring cash flow. The industry value chain includes administrators, F&I agencies, direct-to-consumer marketers, payment plan providers and specialty insurance carriers. In 2018, the industry was $35 billion at retail with significant opportunity for growth; there were 132 million vehicles that did not have a VSC but were eligible. Since 2010, more than 60 companies in the VSC industry have changed ownership. We expect sellers to continue to benefit from strong demand among financial investors and strategic buyers for well-run businesses in the sector.  New entrants and consolidators should enjoy industry tailwinds for several years.

The pace of acquisitions and investments in the VSC industry is increasing, driven by demand from financial and strategic investors and the availability of capital. Private equity firms are attracted to the industry for its high margins, strong cash flow, fragmentation and growth.  There are several trends in the current M&A activity in the VSC industry, including the acquisition of administrators with a strong book of house accounts, companies with a specialty in captive reinsurance, diversified F&I agencies and companies that address the largest opportunity: vehicle owners after they buy their car.