Preparation Improves Valuation of Auto Repair Shops
Preparing to sell an auto repair shop or auto body shop may take months or even years in order to improve the business model and make the shop more attractive to potential buyers. The reward of a premium valuation when it comes time to sell often more than makes up for the time and costs involved in preparation. Key areas of preparation include maintaining an organized and transparent set of historical financial records, ensuring the physical assets and equipment included in the sale are itemized and in good working condition, and reducing the level of owner-dependency. The role of the owner is critical since auto shops that are less reliant on the role of the owner in attracting customers and servicing vehicles generally receive a premium valuation. Whether a small ‘mom and pop’ shop or a chain with multiple locations, auto repair shop owners should retain an experienced business broker to keep the sale confidential and strategically target the right buyer.
Transparent Financials
The first step in preparing an auto repair shop for sale is maintaining a transparent and organized set of financials (tax returns or profit and loss statements) for the last three years. Some shop owners may not report all of their income in the financials or may have financials with a large amount of personal expenses flowing through as business expenses. The harder it is to make sense of the financials, the less credible the financials will be to a buyer. As a result, the seller may not get full value for their shop since their actual sales and profits may not be provable to a buyer’s satisfaction. Additionally, an incomplete or non-transparent set of financials prevents a buyer from obtaining SBA-backed external lending since lenders require full and transparent financials for appraisal purposes. Maintaining an organized set of historical financial records that clearly reveal the actual sales and profits of the auto shop establishes credibility with buyers and facilitates a faster sale for a better purchase price.
Itemize and Improve Physical Assets
Prior to putting an auto repair shop for sale, the owner should itemize all of their equipment and inventory in a physical asset list. The asset list should describe major pieces of equipment and give approximate current valuations for each item. Inventory (valued at cost) includes any parts or supplies that are sold to customers. The tangible or physical assets of most auto repair shops – especially body shops – are often quite valuable and serve to enhance the overall business valuation. In many cases, serious buyers will require a physical asset list prior to even making an offer in order to have certainty with respect to which physical assets are included in the sale. If possible, shop owners may upgrade or modernize their equipment in order to make their shop more attractive to buyers. At a minimum, the equipment should be in working condition and the shop itself should be well kept, clean, and orderly when shown to qualified buyers.
Reduce Owner-Dependency
A critical part of preparing for the sale of an auto repair shop is reducing the day to day operational role of the owner. Buyers will not assign a premium valuation to a shop where the owner’s personal mechanical skills and customer relationships play a significant part in generating customers and revenue. Whether the owner works ‘under the hood’ as a mechanic or strictly in a managerial role, the buyer will need to somehow replace the owner’s role with themselves or with paid staff members. Either way, the buyer will incur replacement costs and will face the risk of lost revenue from customers who frequent the shop because of the owner. Auto repair shop owners with large corporate accounts similarly should remove themselves from dealing directly with commercial customers. By instituting policies and procedures into their business model which delegates mechanical work and customer relationships to staff, auto shop owners will receive a premium valuation multiple when it comes time to sell.
Set Asking Price and Confidentially Target Strategic Buyers
- The final part of preparing an auto shop for sale is meeting with an experienced business broker in order to set the optimal asking price and to lay out a confidential marketing plan targeting strategic buyers.
- Most auto shops are valued between 2-4 x the annual adjusted owner benefit or Seller’s Discretionary Earnings (SDE).
- The business broker must evaluate the historical financials, physical assets, level of owner-dependency, growth rate, lease, location, and customer base in order to determine a proper valuation multiple.
- Then the broker must aggressively market the auto shop confidentially by employing ‘blind ads’ that shield the actual identity of the shop from the public.
- Potential buyers must sign a Non-Disclosure Agreement (NDA) and show proof of funds prior to receiving the confidential listing information about the shop.
- The broker’s strategic marketing plan should identify which type of buyers would be the best fit for the particular shop being sold.
- Auto shops with strong historical financials and a long-term lease in place are more likely to qualify for SBA financing or serve as an acceptable business for an overseas buyer seeking an E2 business Visa.
- Auto shops with multiple locations or chains operating under the same brand name make excellent strategic targets for private equity groups or large regional competitors.
- Smaller ‘mom and pop’ auto shops with little or no staff other than the owner are often a good strategic fit for local auto mechanics or entrepreneurs with automotive experience.
- The strategic plan should ensure that marketing efforts focus on reaching all potential strategic buyers in order to create a liquid market (with buyers competing against each other) and maximize the ultimate purchase price.
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.