Valuing a business essentially means to know the worth of a business. You can value a business to find out what the business would cost exactly if you put it up for sale. One way to do this is to calculate all the assets and liabilities of the company, then you minus the assets from the liabilities.
Of course there are various other methods you can use if you want to value your business except the one mentioned above.
As an entrepreneur, it is very pertinent that you know the value of your business as the business grows especially if you want to invest some more money into the business, bring in a partner, or use it as a leverage to borrow some money.
An auto repair business owner needs to value his or her business from time to time to know if they are meeting up with set goals according industry metrics. Factors you should consider when trying to value an auto repair company, amongst others include; industry performance, vertical market, commodity, company operating experience, stage of growth, management team, plan execution performance, etc.
Table of Content
- How to Value an Auto Repair Business
- Business Valuation Methods
How to Value an Auto Repair Business
Performing an accurate business valuation on auto repair shops requires a thorough understanding of the industry coupled with a solid grasp of the shop’s current performance indices. There are some valuation metrics that you have to follow if you want to get your accurate shop value. These include;
Weekly car count
When valuing an auto repair shop, one of the indices you have to take into account is your car count. The number of cars serviced by the auto shop is an indication of how busy the shop is, the growth potential of the company, and how the current revenues are derived. This would also tell you if you are lacking in publicity.
2. Average Repair Order of the Shop
Repair Order is another thing to be taken into consideration. By comparing the average Repair Order at the auto repair shop in question with that of the industry, potential buyers can gauge the effectiveness of the current service writers and the potential to increase sales.
The revenue generated by the auto repair shop would speak volumes about it value. The higher the revenue, the more desirable the company is. However, there is a magic number (somewhere around $1 million) in which it becomes much easier for the owner to become an absentee owner if the revenues exceed that amount. In other words, the business valuation might be higher if the conditions are present for the potential buyers to become absentee business owners.
4. Labor costs
Labor costs make up a good portion of operating expenses, and should be part of your valuation. Comparing the ratio of labor costs to repair jobs in the auto repair shop would give you a good picture of the performance of the shop.
5. How workers are paid
Are workers in you auto repair shop paid on an hourly system or flat rate system? Auto shops using the flat rate system pay their technicians based on a national standard of how long it should take to perform a particular repair. For instance, if the national standard says a particular job should take 45 minutes to perform, the technician will be paid for 45 minutes of work regardless of whether he finishes the job in 30 minutes or 2 hours. If a technician is good, he might be paid for 70 hours of work while actually only working 40 hours. Utilized correctly, the flat rate system could boost productivity.
6. Parts costs
The cost of auto parts is another expense that should be watched carefully because it affects the bottom line. A business valuation advisor knowledgeable in the auto industry should look at the ratio of parts costs to revenues.
7. Owner’s discretionary income (ODI)
Looking at the net income figure is often insufficient to gauge the performance of the company, because many small business owners intentionally minimize the net income to minimize their tax obligations. An experienced business valuation advisor should take the net income figure and perform a financial recast to calculate the owner’s discretionary income, which is a much better indication of the owner’s true income.
The location of the auto shop also plays a role in the business valuation. If the location is highly visible with lots of drive-by traffic, potential buyers will be more willing to pay a higher price for the business.
9. Number of bays, lifts, and parking spots
The number of bays, lifts, and parking spots provides an indication of the current and future capacity of the auto repair shop. For instance, without enough parking or bays, the growth potential of the shop might be limited.
10. Years in business
Business buyers do not like to see fly-by-night businesses that do not have an established history. This is why business valuation experts often factor in the number of years the business has been in existence. You equally need to know the reputation the auto repair shop has as this is an indicator of if it is going to be getting more customers of value.
11. Current marketing efforts
If the current owner is already doing everything possible with marketing and sales are still suffering, potential buyers might think twice before making an offer. Conversely, if the current owner hardly advertises and customers are rolling in the door, potential buyers might offer a good price for the business with the expectation that they can increase business even more after the purchase.
Other things that can be used as acceptable indices when valuing an auto repair shop
When evaluating the performance of a particular repair shop to the prices obtained by both the industry and in comparable transactions, it is helpful to consider key performance metrics, such as:
- Number of customer complaints
- New customers per month
- Number of hours per task
- Major cost categories as a percentage of revenues
- Industry Organizations and Publications
- Availability of Publicly Traded Guideline Firms
The disclosures of publicly-traded companies are useful in providing information about the industry, as well as possible value indication using the Market Approach. There are few publicly traded companies in the U.S. auto repair industry. The top publicly traded auto repair companies are:
- Monro Inc. (MNRO)
- Midas Inc. (MDS)
- Precision Auto Care (PACI) – a franchisor
- Availability of Private Purchase Transactions
Business Valuation Methods
There are various ways you can value an auto repair garage. It is not just stuck to addition and subtraction of assets and liabilities. These business valuation formulas are as follows;
When using the asset valuation method, the presumption is usually that your business is worth at least the number shown as owner’s equity on your balance sheet. This method is said not to be the most popular nor the most accurate method of business valuation because it generally uses depreciation and historical costs, rather than current market value.
Assets and Earnings Valuation
This is the prescribed method most commonly used by the IRS when they valuate a business with estate and/or gift tax issues, and many accountants gravitate toward it if they feel the valuation may result in an audit.
Assets and Earnings Valuation is done by recasting the business’ financial statements to show the business without the owners salary, perks, and benefits and should probably be averaged over a 3–5 year timeframe. The starting point for this valuation method should be the net value of your assets as they appear on the recalculated financial statement.
Capitalization of Income Valuation
This method of business valuation is more appropriate for service-related businesses like auto repair shops, because it is focuses on a number of variables that are far more intangible in nature than the physical assets of the business.
These intangibles can be listed and then assigned a rating based upon a scale of one to five, with five being the highest rating. The average score can then be multiplied by the buyer’s discretionary cash to establish market value. These factors can range from:
- Owner’s reason for leaving the business
- Years of continuous operation
- Degree of risk associated with this type of business
- Growth history
- Barriers to entry
- Customer base
If you add up the total of the ratings assigned to each topic and then divide by the number of topics, you will have a number that you can use as your capitalization rate. This number is then multiplied by the buyer’s discretionary cash and the result can be considered the market value.
Owner Benefit or Historical Earnings Valuation
The owner benefit method utilizes a standard multiplier of 2.2727, which is based upon a 10 percent return on investment for the buyer, a living wage equal to 30 percent of the owner’s benefit, and a debt service of 25 percent.
Historical earnings valuation is based upon both the assets of the business and the goodwill. Once again, this method is based upon a set of recast financial statements with the owner’s salary, perks, and benefits removed.
These calculations begin with the company’s net earnings, including a reasonable owner’s salary minus capital improvements and working capital increases, with the depreciation figured back into the equation. You then multiply this number, which is generally referred to as free cash flow, by the number of years it will take to pay off the loan required to purchase the business. Subtract the down payment, and what remains is what will be left to make interest and principal payments on the loan, plus a moderate return on investment for the new owner.
Multiplier of Market Valuation
The problem most people have with this method is that it does not reflect just how different two businesses in the same industry can be. It is based upon what businesses have recently sold for and is generally figured as a multiple of gross sales.
The formula can use a multiple of anywhere from 0.75 percent to 1.5 percent of annual net profit plus inventory and equipment in a retail business. To determine what the correct multiplier is for you, call your local association headquarters or a broker specializing in the automotive service industry.