I’d like to congratulate you on owning a successful automotive repair, parts or service business. It takes a considerable amount of sacrifice to be successful in today’s heavily saturated market. Now that you’ve put forth the work, perhaps you’re thinking about selling your business, but are unsure if the profits that you would make from selling your business would be greater than, or even equal to, your investment. That is the purpose of this article. A guide, so to speak, on your business' valuation.
When it comes to actually selling a small business, the process can seem daunting. But being in a service-based business gives you an advantage compared to a retail business. Your business does not rely solely on the profits derived from the sale of tangible products: It relies on profits derived from human interaction. These types of businesses tend to attract a variety of buyers because of the intangibles your business possesses, like a loyal customer base or brand trustworthiness in the market. But before you consider the sales process, you must first answer the question: “What is my auto repair, parts and services business worth?” In order to know the true value of your business, we suggest initially hiring a professional broker who is experienced in business sales in your particular market. However, to help get you started, this article will help you get some insight into the process of valuing a business.
What Goes Into a Valuation?
A business valuation might come across as ostensibly complex, but it is simply a set of techniques and procedures that are used to determine the value of a business such as your auto repair, parts and service business. Each of the three valuation methods rely on the exact same economic principles. Under each of the three core valuation methods, there are quite a few different sub-methods that will be used to determine the business value. However, they are based solely on the three core methodologies:
- Asset Methodology – The process of assessing anything from your business to your property, or any other thing that is considered valuable. The valuation of assets can be based on comparable valuation metrics, transaction value or cash flows.
- Future Earnings Methodology – An assessment to estimate the value of a business. Forecasts are made on the earnings of a business and its ending value within the future.
- Comparable Sales Methodology – This method takes your property and compares it to sold properties that have similar characteristics as your business.
And the Average Multiple Is?
Note: The term, multiple, referenced in this infographic refers to the multiplication of net earnings (profit) a business sells for.
The average multiple measures the aspect of a business’ financial prosperity. By dividing one performance metric by another, you will come up with the average multiple. Within an auto repair, parts and services business the average multiple is 2.20.
An automotive repair service business is consistently busy from keeping up with today’s new techniques. It’s a research-intensive project as you have to be up-to-date with the fast-paced production of new car models, along with their ever-changing advancing parts to keep your company running. An automotive business usually will make above $100,000 a year. For argument's sake, let’s say your company is making $120,000 a year. Within the data below, you will see an estimate of the projected profits and sales over the next four years:
- Year 1 – Sales of $65,000 and profit of $24,000
- Year 2 – Sales of $100,000 and profit of $25,000
- Year 3 – Sales of $143,150 and profit of $55,232
- Year 4 – Sales of $605,000 and profit of $91,000
The data below shows the assumed value of the business for the upcoming years:
- Year 1 – Profit of $24,000 @ 1.5X multiple = $36,000
- Year 2 – Profit of $25,000 @ 2.3X multiple = $57,500
- Year 3 – Profit of $55,232 @ 3.1X multiple = $171,219
- Year 4 – Profit of $91,000 @ 3.7 X Multiple = $336,700
How Does Your Business Compare?
Our team has taken data of auto repair, parts and services businesses that have been sold from the years 2010 to 2015 and graphed it in order to show the breakdown of the analysis of 1,726 auto repair, parts and services businesses sold. You can see by looking at the graph that businesses that have sold with higher multiples have a better return on your investment:
Our next graph is the representation of the valuation multiple for transactions in the valuation ranges. For example, in 2014 (light blue line), transactions between $500,000 and $1 million received an average multiple of 3.07. So, if your business sold for $500,000, it was likely making $168,866 per year in net profit. This is found by dividing what your business sold for by the 3.07X yearly net profit, which equals $168,866 (based off a $500,000 sale).
What If I Want to Sell My Auto Repair, Parts and Services Business?
Broker – It’s best to use a broker if you own a small business (under $1 million in sales per year).
- bizbuysell.com - A marketplace for buying and selling businesses.
- tworldadvisors.com - A marketplace for buying and selling businesses.
M&A Advisor – Best for medium-sized businesses ($1 million to $50 million in sales per year). He/she will help with finding a buyer, negotiating and structuring the sale.
What Factors Increase Valuation?
There are a multitude of factors that can maximize your business valuation which would ultimately increase your return on investment. Potential buyers will peruse every detail that goes into buying your business, as they should. Therefore, being able to present your company or business with a great amount of legitimate and well-established information will in-turn lead to a very successful transaction. Below is a list of things you should think about when going to sell your business.
- What kind of sales does your business make?
- What are the profits?
- What are the growth trends within the company?
- What drives new sustainable sales?
- What are the consumer demographics?
- What is your market position?
- Is the location favorable?
- How involved does the owner need to be within the business?
- What systems are in place and what procedures go into running your business?
Are You Ready to Sell?
Selling your business is not an easy decision and the process can be overwhelmingly complex. Make sure you have read as much information about how the process works and understand what your company is worth before you start the selling process. Hopefully you found this article to be a big help in taking the first step to starting that process.