Auto salvage yards are no pretty sight--except to Bradley S. Scott, who has made a fortune buying and selling junk cars.
Scott is the founder, president and chief executive of Insurance Auto Auctions Inc., a North Hollywood company that buys totaled and recovered-theft vehicles from insurance companies and auctions them to rebuilders, used-car dealers, dismantlers and amateur car buffs. The company's operating profits have jumped more than fivefold since 1986 on a quadrupling of sales to $35.8 million in 1990, and it expects 1991 sales to reach $50 million.
"We see a good opportunity to be the Waste Management of the salvage industry," IAA Chairman Robert H. Kenmore said, referring to the Oak Brook, Ill.-based waste disposal giant.
About 90% of vehicles bought by IAA are so-called total-loss vehicles, meaning that it would cost insurers more to repair them than to sell them for salvage. The remainder are vehicles that were stolen but recovered after the insurer had settled the claim.
Most insurers dispose of wrecks by paying a fee, say $100 per car, to so-called salvage pools that auction cars or put them up for sealed bid. Insurers retain title to the vehicle until it's sold and they get the money from the sale--but that can take 10 days or more.
However, IAA buys the vehicles immediately from insurance companies for 20% to 25% of a car's replacement value (what the car would be worth if it were sold undamaged)--and then IAA sells them at auction for what it hopes is a profit. IAA, Kenmore said, spares insurance companies the administrative headaches and extra costs of waiting for their cars to be bought.
IAA's system is a hit among big insurers, primarily 20th Century Industries, Allstate Co. and State Farm Insurance Co., which together supply more than 80% of IAA's vehicles. "They can take care of all the paperwork and all the red tape that goes with disposing of the vehicle," said Tom Muraski, regional property claims manager for Allstate, which has been selling cars to IAA for six years.
20th Century, which does most of its business in Southern California, sells 95% of its total-loss and recovered-theft vehicles to IAA, said Ron Brown, assistant vice president of claims. "We come out much better selling to them and letting them auction it off" as opposed to selling through a salvage pool, he said.
IAA holds auctions once a week at each of its storage yards in North Hollywood, Gardena, Colton and San Diego. The events typically draw about 400 to 500 people and are advertised through flyers listing vehicles to be auctioned and their conditions.
IAA's yards include total-loss cars that are undrivable heaps, as well as vehicles that just need some minor bodywork. At a recent auction in North Hollywood, IAA sold a 1979 Honda Accord for $175, Kenmore said. The car's right front side had been heavily damaged in an accident, he said. But at another recent auction in Gardena, a 1990 Mercedes-Benz 300E that had some damage to its left rear fetched $18,200, Kenmore said.
Although IAA's car auction business has been growing, the company faced some financial roadblocks because of the heavy debts that the company held after an $8.5-million leveraged buyout by an investor group headed by Kenmore, who at the time was also chairman of Krause's Sofa Factory, based in San Jose. So in November, IAA raised $13.2 million in an initial offering of stock.
IAA has used the stock offering proceeds to pay off the $7.7 million in debt remaining from the buyout, and now the company plans to open at least two new auction sites each year in Northern California, Oregon, Washington, Texas and Nevada, among other states, Kenmore said.
Investors have bid up the stock since it was offered six weeks ago at $11 a share--and it closed Monday at $19.75.
Kenmore has profited too. He invested about $750,000 in the 1990 buyout but now his 21% stake in the company is worth almost $25 million.
Kenmore said IAA expects to post a profit in the fourth quarter after it lost $11.7 million in the three quarters ended Sept. 30 due to onetime charges, including $9.4 million to convert founder Scott's 21% stake to 1.25 million shares of IAA common stock.
Indeed, the LBO and now the stock offering have also made Scott, 42, rich.
Scott, a longtime car enthusiast who was a former national sales manager for Technicolor Audio Visual Systems Inc., started his company in 1982 after he tried unsuccessfully to buy a wrecked Chevrolet Corvette from a body shop. The shop was working on behalf of an insurer and didn't sell to the general public, Kenmore said.
Eventually Scott bought the car from a wrecker but it cost him about $1,000 more than if he had bought it directly from the insurance company, Kenmore said. "He said, 'There's something wrong with this system' . . . and sort of took advantage of the inefficiencies of the market and developed this business," Kenmore said.