Have you ever thought about selling your automotive repair business?
Are you fed up dealing with employee issues?
How about the daunting amount of competitors entering your area?
Is the shop invading your personal life, making it hard to spend time with your family?
Many owners we’ve worked with were in the same shoes as you.
The best way to feel comfortable and accomplished when exiting the business is selling your shop to a buyer who will value your business just as much as you have for all these years.
In this article, we’ll cover how to value and sell an automotive repair shop from start to finish.
Let’s get this show on the road!
How to Value an Automotive Repair Business
You may have been advised that your business is best valued using a percentage or multiple of its revenue. In most cases, this is an unreliable valuation technique.
Here’s why: Company A could be doing $10 million in revenue and make $1,000,000 in earnings every year, while Company B might make the same amount in revenue but only $500,000 in earnings every year.
The percentage or multiple of revenue method would fail to factor in the difference in each company’s earnings.
Therefore, the best way to value an automotive repair business is by using the multiple of earnings method.
Multiple of SDE
Sellers Discretionary Earnings, or SDE, is the most common valuation metric used to value companies with less than $1 million in earnings.
Larger companies are often valued using Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
SDE is calculated by beginning with a business’s net profit and adding back certain expenses to normalize the business’s earnings. Some of these add-backs include:
- Owner’s discretionary expenses (personal vehicle, phone, vacation, etc.)
- Non-recurring expenses (onetime repairs, legal fees, etc.)
- Owner’s salary
- Owner’s payroll taxes
- Interest expenses
- Depreciation expenses
Once these add-backs have been made, you’ll arrive at your business’s SDE. Now, multiply your SDE by a multiple to come up with a price for the business.
But how do we figure out what number to use for your multiple?
The best way to do this is to find comparable sales of other auto repair shops with similar features. For example, auto shops within a two-state radius doing <$3 million in revenue with SDE of at least $150,000.
We use a number of databases to pull data from. Take the lowest and highest multiple of earnings those shops sold for and apply them to your SDE.
MIDSTREET TIPDo your best to take out any outliers. If you see something in the sale data that looks a bit off, there's probably a reason. This part of the valuation is more of an art than a science.
For example, if you own a shop doing $500,000 in SDE, comparable sales reports may show that the average SDE multiple for businesses similar to yours are between 2.2-3.1. This would give you an asking price between $1.1-1.5 million (2.2 x $500,000 = $1.1 million, 3.1 x $500,000 = $1.5 million).
Multiple of EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA, is more commonly used when valuing a larger company doing more than $1 million in earnings.
The main difference between SDE and EBITDA is that SDE is generally used to show a buyer the financial benefit to stepping in as an owner-operator, whereas EBITDA is meant to value companies in which a manager or officer would be hired to replace the previous owner.
Because of this, rather than adding back a full owner’s salary, a fair-market manager’s salary is added back to the earnings to show how much the company would make with a manager or officer in place.
Other than this difference, all other add-backs are the same as an SDE valuation.
MIDSTREET TIPMany people get confused by the difference in SDE and EBITDA multiples. Think about it this way: if a company is valued using the multiple of SDE method at $1 million, the multiple of EBITDA method should generate a similar value, close to or equal to $1 million. Because EBITDA is usually lower than SDE due to the salary add-back difference described above, EBITDA multiples are often higher than SDE multiples. But again – both methods should produce a similar value.
In general, the higher your company’s earnings are, the higher the multiple you’ll receive for the company.
But what else affects the price you’ll receive for the business?
Automotive Repair Shop Multiples
Below, we’ll go through several factors that affect the multiple you will receive when selling your automotive repair business, including:
- Quality Technicians
- Location/Curb Appeal
- Owner Involvement
- Size/Scale of the Shop
- Clean Books and Records
- Established Processes in Place
- Online Presence
- Fleet Work
- Specialization of the Shop
Let’s do a deeper dive into these factors and explain how they can affect the multiple you’ll receive.
The automotive industry is notoriously short on qualified technicians.
Having great technicians in the shop is one of the most desirable features of an automotive repair shop.
Not only can inexperienced technicians hurt the business’s performance, they can also create concern for someone interested in an acquisition.
Hiring is one of the most common issues business owners face on a daily basis, and the automotive industry is notorious for competitors poaching employees from each other using ruthless tactics.
The location of an auto repair shop has a huge impact on its earnings.
If you’ve established yourself as one of the top automotive repair businesses in a growing metropolitan area, a buyer will be more likely to pay a premium to acquire your business.
Buyers will care a lot about your proximity to nearby development projects, the AADT count of the road your located on, market growth, and more to determine if your location is one that they’re willing to invest in.
It’s also important to keep your shop looking clean and well-maintained from the road and in the waiting area. The physical appearance of your business will remain in the buyer’s memory as they review your financials and conduct due diligence.
If they didn’t like what they saw, it could make the difference between moving forward or walking away.
The less involved you are in the day-to-day operations of your business, the higher a multiple you’ll likely receive.
It’s common for the owner of an auto-repair business to be extremely involved in the business. You may be responsible for performing more advanced work, ordering parts, managing customer complaints, in addition to your administrative responsibilities as an owner.
It’s important to think like a buyer here. Which would you pay more for? A business that requires you to work 50-60 hour weeks managing employees and performing difficult repairs, or one in which you work 20 hour weeks overseeing the business at more of a high level?
Assuming the earnings of these two businesses are similar, you’d probably go with the second option, and so would most buyers.
If you’re an extremely involved owner, buyers will also be concerned that once you leave, the business will leave with you.
If you know your business would have a hard time continuing if you left it, you should consider dialing back your responsibilities and finding or developing a good second-in-command
Size/Scale of the Shop
Larger shops with the capacity for a greater volume of repairs will be valued higher by most buyers.
Some buyers will even have bay counts in mind for the shop they want to acquire. A shop with one to four bays usually signals that the shop has an owner-operator, which could be appealing to an individual buyer with limited capital.
A shop with six or more bays is often more appealing to buyers seeking a larger scale operation, and could earn premium multiples.
NOTEThe ratio of service bays per technician is also something buyers will consider. 2 bays per technician is often preferred because if one vehicle is on a lift waiting on parts, the technician can continue to service another vehicle.
Clean Books and Records
Clean books and records paint the most reliable, believable picture of your business’s earnings. The cleaner and easier to understand they are, the easier it will be to sell your business.
Having clean books and records with clearly explainable and provable expenses can help expedite the due diligence process. It can also help to defend any add-backs you’ve shown to the buyer, increasing the earnings that they base their multiple off of.
Established Processes in Place
As a business owner, it can be hard to realize that several of your business’s processes and procedures are more like “ways of doing things” that you and your employees have simply gotten used to over time.
When this is the case, it can be hard for a new owner to feel comfortable buying your business. They see more risk in transitioning processes over to their ownership. This weakens the multiple.
Having a quality ERP system in place can make the processes associated with your sales, servicing, human resources, scheduling, etc. much more efficient. Some examples are AutoFluent, Fullbay, and Shopmonkey.
It’s also good to be a part of networks and groups such as iATN, AMI, and ASTA. These networks help professionalize the business and help you know what metrics to track, such as monthly repair orders, average hours per repair order, car count, and more.
I’d highly recommend joining one of these groups, as their advice can help you improve several of the factors mentioned in this article that will increase your multiple.
In the past, when something went wrong with a customer's vehicle, they would either turn to a shop they'd used before, or ask a friend for a recommendation.
While people still rely on the shop they trust or their friends for automotive services, it's becoming more and more popular for customers to find an automotive repair business online.
In fact, 65% of automotive repair customers say they check online reviews before going to a repair shop or service center. Anecdotally, I’ve never been to a repair shop for my vehicle without first researching them online.
So, if you don’t have a Google Business Profile, get one ASAP. It’s free and will improve your position in online searches, which will lead to more calls.
If you do have a Google Business Profile but don't have many reviews, it’s a good idea to encourage your customers to leave positive reviews when they have a positive experience. There are many resources online to help with this. Just Google “how to get google reviews for an auto repair shop.”
This can boost the likelihood your shop will be found by people searching for things like “repair shops near me” or “best automotive repair in Raleigh.”
Beyond having positive reviews, auto repair shops with user-friendly technology like online scheduling software can also be appealing to a buyer. This indicates that a business has streamlined processes and more access to customers.
Since fleet work is a recurring source of revenue, having a good amount of earnings made up of fleet work can drive up the multiple you receive.
If you don’t currently have customers who regularly use your shop to service their fleets, take some time to work it into your strategy moving forward. Many buyers see fleet work as a positive when looking at purchasing an auto repair shop.
Specialization of the Shop
Some shops specialize in particular types or makes of vehicles. Depending on the type of buyer, specializing in repairs for European vehicles, fleet work, tire sales/service work, semitruck service/repair, etc. could be more appealing.
This is hard to plan for and difficult to factor into a valuation when you don’t yet know who the buyer will be.
MIDSTREET TIPAlways remember that a business is worth what someone is willing to pay for it. This is especially true of strategic or private equity buyers, who could be trying to expand their services to include your specialization.
Buyers for Your Automotive Repair Business
The buyers your automotive repair business attracts will depend entirely on the size of your operation, and if it presents a better opportunity for an investor or an individual who wants to take over as owner-operator.
Individual buyers are a likely candidate for automotive repair shops, especially if they are also buying the real estate.
There are several financing options available for individuals depending on if there is real estate involved and how motivated you are to sell your shop. Buyers might have the ability to pursue some combination of an SBA 7(a) loan, a loan through an asset or cashflow-based lender, and seller financing.
Oftentimes, individual buyers will choose to maintain the status quo for a long time after the sale. If this outcome is your preference, an individual buyer may be your best candidate.
Depending on the size, specialization, and location of your operation, a strategic buyer may be willing to offer you the highest purchase price for your business.
Strategic buyers are businesses that achieve growth by acquiring other businesses. They can be competitors in your industry, or businesses in a related industry seeking to expand their offered products and services. They may or may not be interested in acquiring the real estate.
These buyers see unique synergies associated with an acquisition and are often willing to pay a premium if the synergies they’ve identified are likely to increase revenues.
MIDSTREET TIPSince strategic buyers are often familiar with your industry just as you are, make sure you are prepared to answer their informed questions, especially during due diligence. They will want to know more about every aspect of your business, from what point of sales software you use and why to how your org chart is structured.
Private Equity Buyers
Private Equity Buyers are the least likely candidates to acquire your automotive repair business.
This isn’t to say they never would never express interest.
Private equity buyers are involved in automotive repair businesses, and could become interested in yours if you own multiple locations, provide unique services, or your business’s EBITDA is greater than $1 million. The exception to this rule is if you’re being considered by a Private Equity Group as a strategic add-on acquisition to an existing platform company.
Selling to a private equity buyer is akin to bringing in an equity partner. They’ll purchase a majority stake in your business and negotiate a fair salary to keep you in the business over the next few years.
A common structure when selling to private equity is a “majority recapitalization,” in which you sell a majority of the business (ex: 80%) and retain 20% ownership in the new business.
Then, after a period of perhaps several years of growth and more acquisitions, the private equity group will sell the combined platform business, and your 20% share will hopefully be worth more. This topic is complicated and further explained in our article, “What is a Majority Recapitalization?”
How to Sell Your Automotive Repair Business
Selling your automotive repair business can be a difficult endeavor, and in our opinion, you shouldn’t do it alone.
Utilizing the services of an experienced business broker or M&A advisor can help you receive a much higher purchase price for your business, and allow you to continue operating the business as usual as you look for a buyer.
Business brokers usually help the owners of smaller businesses doing less than $1 million earnings. They primarily source individual buyers for businesses and may charge a flat percentage of 10% of the purchase price to sell your business.
M&A advisors generally sell businesses with more than $1 million in earnings and may have more experience with strategic and private equity buyers.
The way M&A advisors structure their work and success fees varies, but according to FirmEx, many charge either a flat percentage of the purchase price (typically a lower percentage for higher purchase prices) or a percentage that increases if the purchase price breaks the target threshold set forth in the listing agreement.
To learn more about business broker pricing and fees, check out this resource.
For more info about M&A advisor fees, click here.
What’s the process of selling an auto repair shop?
For a full breakdown of the selling process, check out our blog “What is the Process of Selling a Business?”
But, if you’d like a quick overview of the process, it looks something like this:
- Decide to sell and determine your reasoning for doing so.
- Assemble your deal team (CPA, attorney, business broker/M&A advisor)
- Get a business valuation
- Sign a listing agreement
- Market the business on websites like bizbuysell.com, businessesforsale.com
- Receive offers and choose a buyer
- Fulfill due diligence requests
- Negotiate the purchase agreement
- Close the deal
- Train the buyer
Should I sell the real estate of my automotive repair shop?
If you or an entity that you own also owns the real estate that your shop operates in, you can choose to either sell or lease the real estate to a new owner.
In my experience, most buyers will prefer to purchase the real estate. Some deals are structured with an option to purchase the building in the future if it isn’t bought at the time of the deal.
For many auto repair shops, the real estate the business operates on is more valuable than the business. Work with a licensed commercial real estate agent in your state to determine how to price your real estate.
Phase 1 environmental reports are often required by lenders when buyers are looking to purchase a business. These reports are designed to reveal if any environmental remediation might need to take place on site. The report may suggest that a phase 2 report should be performed. This report is more involved and expensive and can take anywhere from 3-6 weeks to complete.
MIDSTREET TIPI recommended sorting out any environmental issues as early in the process as possible. Having the buyer to pay for the report is preferable, but could delay your timeline if you're in a rush to sell. If you know there is contamination on the property, it may be a good idea to skip the phase 1 (if possible) and move to a phase 2 report.
Contamination is likely for sites that had in-ground storage tanks or in-ground lifts. It’s important to verify that these were properly cleaned up, and if not, you should take the necessary steps to get them cleaned up.
Preparing to Sell
Now that you know a little more about how your automotive repair business will be valued and sold, you can start to prepare.
Remember, the basic rule of thumb for what impacts your multiple is:
Lower risk = higher multiple
Greater risk = lower multiple
Anything you can do to reduce the risk of acquiring your business and guarantee earnings will help you receive the best possible offers.
Formalize those agreements, clean the place up, and keep your focus on increasing your earnings. If buyers see stability in earnings and growth before an acquisition, they’ll often be willing to pay a higher multiple.
It’s important to interview a few different brokers or advisors to help you sell your business. Yes, they will charge a fee for their services, but their expertise will help you achieve a successful sale, and their ability to pit buyers against each other to bid the price up usually more than makes up for their fee.
If you’re ready to sell, or if you’d like some advice on how to prepare your business to be sold, contact us today. We’ve helped hundreds of business owners successfully exit their businesses, and would love to do the same for you.