Setting up and making your auto repair shop profitable is no easy feat.
As an owner, you may soon turn your full attention to retirement. Or perhaps you’re thinking about other investment opportunities. Selling your business might help you get there.
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In order to do that, you need to figure out how to value your business’ worth.
To help you get started, we need to focus on what goes into business valuation.
What you need to know
The three most important ways for valuing your business are:
- Your discretionary income
- Net profit
Pro tip: Industry experts say property and tools aren’t your business. The real business is your customer base, your business name and the services you provide. Those are the real assets to focus on for valuing the business.
First things first, you could enlist a few professionals’ help. Consider speaking with the following people:
- A professional automotive business broker who has experience with sales in your market.
- A banker or accountant, who will review your P&L and balance sheets
- A financial advisor
- A business valuation expert.
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Each of these professionals will help you review your business’s current assets and financial standing. Use each piece of information to understand your shop’s value.
The valuation approach
This is the methodology used to determine the equitable market value of your business.
The three market approaches are:
1) Market approach
Through this method, you value your business by referencing the sale prices of other auto repair shops. Specifically, you should focus on shops with a similar revenue size. This information will help you determine the fair market value of your business.
This process is done by reviewing transactions of comparable companies and assets. Stock market and M&A activity are used to derive various value measures to apply to your business entity.
2) Income approach
Through the income approach, you estimate the value of your property based on the income the property generates.
Net present value is the difference between the present value of cash inflow and the present value of cash outflows over a period of time, according to Investopedia. You will balance this net present value with the future benefits of the businesses equity assets/interest. If your shop generates consistent profits, the valuation can be based on a multiple of sales or earnings.
An investor will consider the amount of income generated and other factors to determine how much the property may sell under current market conditions. This is countered with the assessing risks such as the potential risk of repayment if it extends a mortgage to the investor.
In essence, you take the dividends you get from the stock depending on its time frame. Then discount these future dividends by the interest rate to bring back all the values to the present value of money. Because money today is worth more than money in the future. Then you subtract your cost of purchase from it.
This is called the cash flow methodology and the discounted cash flow methodology.
3) Asset-based approach
In this case, your auto shop’s assets (land, building, equipment, tools) are adjusted to a fair market value. This includes any liabilities, including bank loans and amounts owed to vendors.
An asset-based approach uses the shop’s current tangible net value as the key determinant of fair market value.
How to complete your shop evaluation process
Once your business is valued with these expert insights and market approach, you can turn your attention to these three questions:
You can critique and improve weak spots based on these answers. Some suggestions include:
- Hiring a shop coach
- Researching industry articles on the topic
- Listening to informative podcasts
- Visiting and networking at popular industry shows
The more exposure you give yourself, the more you will learn. This shop valuation topic is complex with many moving parts. Information can only help!
Other ways a broker can help
Create a marketing plan
Knowing the market well, a broker can help you put together marketing materials for potential buyers. These materials will cover all the factors that the buyers might consider.
It’s important to note, in today’s tech-based world, you need to ditch traditional marketing efforts. Instead, focus on running digital marketing campaigns. With email, social media, organic and paid SEO, you can get the right info in front of the right people. Effective marketing will reduce your time to find a buyer.
Many business owners invest a great deal of time trying to find buyers, and the process can be frustrating. It’s difficult to know if an investor has the financial means to make a serious offer, and owners may end up spending a lot of time speaking with unqualified buyers.
To start, chat with other shop owners in your area. Gauge their interest in growing. Would they have interest in a potential acquisition? It won’t be easy, but you need to continue networking among the industry. Build up these valuable relationships. Ask non-interested buyers to at least mention your shop to other investors.
Preparing for due diligence
You will need to provide a host of documents as part of a due diligence process. This can be time-consuming if doing it on your own, especially if the buyer makes additional requests.
A broker can manage all this for you. They already know what documentation is required.
Negotiating the right price
Your broker will work with your attorney and close the sale on the best price they can get for you. They will use the valuation and determine the most reasonable price.
An objective advisor
Selling your auto business can be emotional. This is when you lean on your broker to give you the best possible advice, without any attachment. As one of the largest financial decisions you will make, you need to do it with your head and not your heart.
Shop valuations aren’t easy. However, a thorough process with good support from professionals can get you the best possible sale price you can find.
Use the tips from this blog post to get that process on the right track.
If you offer the right services with a good hourly/flat rate, your auto repair shop can definitely be profitable.
To run a successful auto repair business, be sure to offer the most profitable auto repair services, invest in estimating software and provide good customer service.
With a projected auto industry revenue at $58.7 billion by 2024, mechanic shops are a worthwhile investment.