Auto Body Shops Have Special Niche
An auto body shop is a vehicle repair center that exclusively focuses on fixing a vehicle’s exterior and non-moving parts. Common repairs in body shops include restoring a vehicle after an accident or collision, dent repairs, paint restoration, bumper repairs, auto body panel repairs, and windshield repairs. In contrast, regular auto repair shops focus on fixing the moving parts of a vehicle such as brakes, engine components, and exhaust systems, as well as simple repairs such as oil changes. Auto body shops occupy a special niche in the vehicle service industry, and can be quite lucrative for savvy owner-operators.
Valuing Auto Body Shops
There are many possible reasons why auto body shop owners may choose to sell their business. Often times, the owner is simply burned out from the daily grind of dealing with employees, customers, or insurance companies. Whatever the reason, the first step in valuing an auto body shop is determining the owner benefit or Seller’s Discretionary Earnings of the business. This refers to the true economic profit that the owner derives from the business. Calculating the owner benefit begins with determining the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of the body shop, and then adds the owner’s salary, unrecorded sales, the owner’s personal expenses that are expensed through the business, and possibly other adjustments to reflect the true owner benefit.
Apply Multiple to the Owner Benefit
The typical multiple that buyers are willing to pay for South Florida auto body shops is about 2-4x the annual owner benefit of the business. Applying the correct multiple is an art rather than a science. Many relevant factors play a part in determining the correct valuation. Overall, buyers will want to ensure that their owner benefit is equal to or greater than the seller’s owner benefit. If that is the case, and especially if the buyer thinks that their owner benefit will increase in subsequent years after the sale, then the buyer will be willing to pay a premium valuation.
How Do Auto Body Shops Obtain Customers?
- First and foremost, the most important factor in valuing body shops is the retention of the customer or referral base after the sale.
- Some body shops are referred most of their customers by auto insurance companies.
- The jobs are performed for contracted rates, and the shop collects most of the payment from the customer’s insurance company.
- The valuation may be adversely affected if the insurance contracts are not fully or easily transferable to the buyer.
- Additionally, the valuation may suffer if the contracted rates with the insurance companies do not allow the owner to make a satisfactory profit after all expenses are paid.
- Owners of auto body shops may increase the valuation of their body shops by taking pro-active steps to improve the quality of their insurance contracts prior to the sale.
- Conversely, other body shops do not accept insurance rates at all, and simply deal directly with the retail customer.
- These body shops obtain most of their customers through reputation, goodwill, location, leasehold rights, quality of equipment, as well as referrals from other auto shops or auto sales centers.
- The buyer of the body shop must determine how exactly the customers are obtained and must determine the transferability of the customer or referral base.
- A body shop where the owner is mostly absentee and not involved in day to day operations typically has a customer and referral base with a higher degree of transferability.
- This is because the owner’s personal relationships with customers or referral sources do not play a role in the business and thus will not be missed after the sale.
- Thus, the more absentee the owner is in a body shop, then the higher the valuation will be.
How do Auto Body Shops Obtain Technicians?
The other critical factor in valuing auto body shops is the quality and transferability of its technicians. Any successful body shop needs sufficiently trained technicians to properly service its customers. Recruiting well trained and well motivated body shop technicians is no easy task. Their special and unique skill-sets usually means they are very much in demand, and must be well treated and well paid in order to retain them. Well qualified auto body technicians are naturally attracted to successful body shops with stable and pleasant working atmospheres. When it comes time to sell, having a well trained staff of technicians who are willing to stay after the sale is of enormous importance to its valuation.
Buyers May Want ‘Stock Purchase’ Deal for Auto Body Shops
Because of the importance of insurance contracts in many auto body shops, buyers often prefer to structure the acquisition as a ‘stock purchase’ deal. A ‘stock purchase’ deal is where the buyer of a business purchases the seller’s actual corporate entity (via purchasing the actual shares of stock or membership interests). In contrast, most business sales are accomplished via ‘asset purchase’ deals where the buyer forms their own corporate entity and merely buys the assets of the seller’s corporate entity (the seller then dissolves their corporate entity after the sale). A major drawback for a buyer of a ‘stock purchase’ deal is inheriting the liability of the seller’s corporate entity. When it comes to assuming the insurance contracts of a body shop, however, it is far easier for a buyer to simply take over the seller’s corporate entity. Otherwise the buyer may be forced to re-negotiate the insurance contracts (or be prevented from doing so at all) after the sale if they are using their own corporate entity.
Competitors Make Great Buyers of Auto Body Shops
Many auto body shop owners often expand and become multi-unit chains over the course of many years. These multi-unit chains often purchase other body shops as a way to further their growth over time in new markets. Selling an auto body shop to a competitor has advantages for both the buyer and the seller. The multi-unit chain will enjoy synergies from savings on overhead and supplies while enhancing their prestige in the industry. This will more easily attract high quality technicians and possibly help their bargaining position with the insurance companies. Those body shop owners who sell to competitors often realize a higher price with quicker closing terms.
Auto body shops occupy a very specialized and lucrative niche in the South Florida business community. As long as the customer base and technicians will remain after the sale, a successful body shop should enjoy a premium valuation.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.