Open a new shop or buy existing shop

[carjunkie]

Hi Everyone. 

I have been lurking on this board for a while. I have read a lot of posts and have been shopping for a shop to buy. I have heard and seen so many misrepresentations from existing shops that it's difficult for me to trust any seller's claims.

I would like to have about a six bay shop. So, my question is buy a shop or build a shop? I am very interested to hear any comments from the experienced.

Thanks in advance

[xrac]

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[AndersonAuto]

I agree with xrac, it depends. Like he said, most shop owners have no idea what the business is worth, and believe it's worth whatever their emotional attachment to it is.

If I were looking at a shop to buy, these are the things I would look at:

Why is the owner selling? Is he retiring? If he's not retirement age, then odds are he's just tired of working constantly for pennies. Sometimes both apply.
What's the company net profit, and how clean are the books? If the owner tells you the net is much higher than the books say, don't believe him. The reality is that the net is either what the books say, or lower.
If you can't decipher the health of a business by looking at the books, find someone with auto shop experience who knows how to read it, and pay them whatever it takes to find out.
The value of a business is not in the equipment or the gross sales. The value is in the net profit, sustained over time. You'll want to multiply the net profit by a multiplier, anywhere from 1-4x net profit. There could be exceptions to the 1-4x rule, but the average is 1.6x net.
The lower the net profit percentage, the lower the multiplier you use to determine value.
Never pay for equipment and "blue sky". It's one or the other. Equipment for pennies on the dollar, or the business as an operating entity which includes the means to achieve the net profit.
Never buy someone else's debt. All debt must be paid off either before the sale is made, or as part of the sale.

Plus one million things I didn't think of.

Alternatively, starting an auto shop business from scratch is hard. Really hard. But sometimes not as hard as overcoming a bad previous owner.

[xrac]

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[carjunkie]

Hi Anderson and xrac, 

Looking for a good shop with good books to prove this and with a reasonable valuation seems like I am searching for a unicorn. I have heard so many tall tales about under the table money , I don't report all of my income and on and on. I have been at it for two years now. I have spoken with a couple consultants and didn't feel like they would uphold their fiduciary duty. One consultant had a video endorsement from Gene Simmons and acted like that was a big qualification. Needless to say I have been around. 

I agree with what you fellows have stated about buying a shop. That's what I would prefer to do. Investing several years of my life in getting a shop off the ground with the higher risk of failure doesn't sound like the best option. 

I would be interested in speaking with xrac's business broker. Maybe I am just not meeting the right people. 

I greatly thank you fellows for your experienced respones. 

[AndersonAuto]

Reasonable valuation is subject to the books. It's not unreasonable to pay a couple million for a shop that nets the owner $500K per year, and can prove it. Such a shop would also require that a manager be in place that runs the operation vs having the owner an integral part of the day to day. On the other hand, a six bay shop that nets the owner $60K per year is worth about $100K all in. Maybe not even that much. These figures don't include real estate, which has little to do with the business valuation, unless the owner is his own landlord and is paying himself a higher or lower than market rate for rent. In that case you'll have to take the difference and add to or subtract from the net.

Edited January 22, 2018 by AndersonAuto

[Hands On]

Part of the problem might be I can not imagine selling my shop when we are doing well. When we are not doing well it can be all I think about.

[xrac]

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[carjunkie]

It seems like to find a good shop at a reasonable price is motivating reason such as a health problem, inheritance, retirement or similar. Otherwise, there's no logical reason to sell at a reasonable price.

[AndersonAuto]

22 hours ago, Hands On said:

Part of the problem might be I can not imagine selling my shop when we are doing well. When we are not doing well it can be all I think about.

I'm just the opposite. The better we're doing the more I think about selling. I've got things to do that are not running an auto shop.

 

18 hours ago, carjunkie said:

It seems like to find a good shop at a reasonable price is motivating reason such as a health problem, inheritance, retirement or similar. Otherwise, there's no logical reason to sell at a reasonable price.

It all depends on how you define reasonable. If reasonable is a low price, which is what I suspect you mean, then you won't find a well run shop for reasonable money very often. If reasonable means a good return on your money, there are shops to be had.

If you can put down $200K on a $1,000,000 purchase price for a shop that will give you $200K back in your pocket every year, a million bucks is pretty reasonable. Even if you deduct an 800K loan at 5.5% for 20 years, you're still looking at $135K annual return on a $200K cash investment. But the reality is that a shop doing a $200K net is only worth at best $700K, so your 20% down is now $140K and your net after the loan payment is now $153K. Where else are you going to get 109% annual return on investment? This assumes of course that the $200K net is a real number, doesn't include paying yourself a salary for management, and that you have the ability to sustain it.

[carjunkie]

Hi Anderson, 

I am not looking for a fire sale price, a fair and reasonable price would be good enough for me. After an intial examination of the financials, I have yet to find a shop that performs close to their advertised claims. 

[AndersonAuto]

Of that I have no doubt. What size shops have you been looking at? Bays? Revenue?

[carjunkie]

I have been looking at 6 bays minimum. I am also considering other characteristics such as location, equipment, staff,  etc.I also look for anything that I can improve on.

As far as gross sales, in the $2 million annually, but that's a hard one subjective.

[AndersonAuto]

Honestly, I'm surprised that when looking at shops in the $2M revenue range that you're finding such inconsistencies in the books. The shop owners I know with businesses at that level run pretty clean (as far as I know) operations. How much spread are you finding between annual net they claim vs what's on the books?

[Wheelingauto]

On 1/29/2018 at 5:44 PM, carjunkie said:

Hi Anderson, 

I am not looking for a fire sale price, a fair and reasonable price would be good enough for me. After an intial examination of the financials, I have yet to find a shop that performs close to their advertised claims. 

I agree with Anderson on this one. Shops that are doing 2 Mil are usually well run and have a good grasp on the numbers. To add to Anderson's questions what would you expect to pay for a business the generates 2 mil in gross sales and nets industry benchmark 20% ? Or are you looking for a shop that does 2 mil with almost no net and basing an offer on that and hoping to improve on it. I think if it's the latter it would be near impossible to find common ground. No one who has built sales to that level would agree there is not much value (IMO) but in reality there really is not much value only blue sky.

Edited January 31, 2018 by Wheelingauto
spelling

[carjunkie]

Hello Anderson and Wheeling,

I didn't calculate the discrepancies that I found but I can safely say at least 20%. I am looking at the sellers discretionary earnings (SDE). It seems that the industry standard for a valuation of a business in the $2 million range is 2-3 times the SDE. I am willing to pay this. When the SDE is accurately calculated the asking price is usually far away. I used to think that it was me but having consulted with other specialists the opportunities that I looked at were astronomical in their asking price.

so, if a $2 million gross sales range with a 20% SDE, I would expect to pay $400-$600K. Of course, the financials must be verifiable.

[Wheelingauto]

1 minute ago, carjunkie said:

Hello Anderson and Wheeling,

I didn't calculate the discrepancies that I found but I can safely say at least 20%. I am looking at the sellers discretionary earnings (SDE). It seems that the industry standard for a valuation of a business in the $2 million range is 2-3 times the SDE. I am willing to pay this. When the SDE is accurately calculated the asking price is usually far away. I used to think that it was me but having consulted with other specialists the opportunities that I looked at were astronomical in their asking price.

so, if a $2 million gross sales range with a 20% SDE, I would expect to pay $400-$600K. Of course, the financials must be verifiable.

Define SDE. 2 million sales with 20% net = 400k plus add backs such as depreciation. 400k x 3 = 1.2 mil and that would be low considering what it takes to run at that level again IMO. Where do you get 400k - 600k purchase number?

[carjunkie]

my mistake on the $400-$600K, it should be $800-$1.2. its been a long day. I think that your 20% number is high but each business is different and it depends on what can be verified.

SDE Definition

SDE Formula

Profit on Income Taxes

+ Nonrecurring Expenses

– Nonrecurring Income

+ Non-operating Expenses

– Non-operating Income

+ Depreciation

+ Amortization

+ Interest Expense

+ One Owner’s Total Compensation

= SDE

[Wheelingauto]

My 20% net number is high? In most places I guess you're right. Interesting fomula and one that does not clearly make sense to me. Profit on income taxes???

I have heard 2-3 times EBItDA  Earnings before interest, tax, depreciation and amortization.

Using this formula and from what I've heard the bigger the organization the higher the multiplier. Take a company that is doing 2 mil at 20% net. That means 400k profit plus the addbacks which easily can be a total of 500k (most likely more). If that can be substantiated the purchase price should exceed 1.5 mil. agreed or am I still not thinking right?

Ignore the attachment

[Hands On]

On 1/29/2018 at 9:17 AM, AndersonAuto said:

I'm just the opposite. The better we're doing the more I think about selling. I've got things to do that are not running an auto shop.

I would also think you have to factor in where you are in your life. I figure I have the potential to run my shop for another 20 years easily. If I am doing well I am netting 250k a year from my shop. Why would I trade 250k x 20 for 250k x 3? Why would someone trade 500k x 20 for 500k x 3.  I think it harks back to earlier where someone said you need another factor for the seller, like age, health ect. If that is the case most of those shops may go the way I hope mine goes, in which I put someone in place to run it for me and take a reduced pay while living on all the other investments I made while living humbly off my net. Or giving it to family or a tech/writer that stuck with me towards the end.

[carjunkie]

Hi Wheeling and Hands on,

Wheeeling, I do think that 20% is on the high side. I haven't seen add backs that are as more than the net. I think that you are high on that also. Really, it comes down to what can be verified.

Profit on income taxes refers to the profit shown on the tax returns.

 

Hands on, I am in agreement with you about trading a profitable business for a lump sum payment. Actually, not all of it is lumpsum because the bank usually requires the owner to hold a note for a period of time. With the lumpsum payment comes financial freedom or at least a financial reprieve and quality of life, etc. For some people, enough is enough but we are all different and each person has their idea of happiness and the way they want to spend their days here on the big blue marble. It's difficult or impossible to deal with someone that has no motivation to sell. Also a motivation to buy would be necessary.

I am going to keep looking and when the right deal comes along, I will be ready.

[Wheelingauto]

10 hours ago, carjunkie said:

Hi Wheeling and Hands on,

Wheeeling, I do think that 20% is on the high side. I haven't seen add backs that are as more than the net. I think that you are high on that also. Really, it comes down to what can be verified.

Profit on income taxes refers to the profit shown on the tax returns.

It appears as if I was not clear. 20% plus add backs equals 500k not 500k plus 20%. 

Got it on the profit on income taxes. 

Good luck in your search.

[AndersonAuto]

14 hours ago, Hands On said:

I would also think you have to factor in where you are in your life. I figure I have the potential to run my shop for another 20 years easily. If I am doing well I am netting 250k a year from my shop. Why would I trade 250k x 20 for 250k x 3? Why would someone trade 500k x 20 for 500k x 3.  I think it harks back to earlier where someone said you need another factor for the seller, like age, health ect. If that is the case most of those shops may go the way I hope mine goes, in which I put someone in place to run it for me and take a reduced pay while living on all the other investments I made while living humbly off my net. Or giving it to family or a tech/writer that stuck with me towards the end.

I have other things to do, like sail around the world. The last thing I want to worry about is having to go over a P&L with my manager from some tiny island in the South Pacific with little to no internet. Or worse yet, having a key employee leave and have to fly back to fix the shop and replace those key people. I'll gladly trade the additional net I might receive from being an absentee owner for the freedom to sail away without having to worry about whether the shop is doing well enough to continue funding my adventure. This of course doesn't mean I'll let my shop go for under market value, and I do have a plan in place to make it happen.

[Wheelingauto]

I should have known you were a ragbagger

I have a fuel habit I need to support...

 

 

[carjunkie]

Now, I finally understand why auto repairs are so expensive!

[Hands On]

1 hour ago, AndersonAuto said:

I have other things to do, like sail around the world. The last thing I want to worry about is having to go over a P&L with my manager from some tiny island in the South Pacific with little to no internet. Or worse yet, having a key employee leave and have to fly back to fix the shop and replace those key people. I'll gladly trade the additional net I might receive from being an absentee owner for the freedom to sail away without having to worry about whether the shop is doing well enough to continue funding my adventure. This of course doesn't mean I'll let my shop go for under market value, and I do have a plan in place to make it happen.

I have this same dream. Still not sure if I want a sloop or a catamaran.

[Hands On]

59 minutes ago, carjunkie said:

Now, I finally understand why auto repairs are so expensive!

Now, you finally understand why everything in the world is expensive. Nobody wants to run a business that does not make 20% profit or more. 

[carjunkie]

My remark was made in jest. Lighten up. You might be right because the shops for sale are below 20% SDE.

 

 

[AndersonAuto]

3 hours ago, Wheelingauto said:

I should have known you were a ragbagger

Most fun you can have at 8mph with your clothes on.

Stinkpots..... can't imagine what you were thinking. A week long trip from Florida to the Bahamas, including running the generator so we can have the AC running at night, costs about $200 in fuel. Can you even make it to the fuel dock and back for $200?

 

2 hours ago, Hands On said:

I have this same dream. Still not sure if I want a sloop or a catamaran.

It doesn't matter what you want. Your wife wants a cat.

[Wheelingauto]

34 minutes ago, AndersonAuto said:

Most fun you can have at 8mph with your clothes on.

Stinkpots..... can't imagine what you were thinking. A week long trip from Florida to the Bahamas, including running the generator so we can have the AC running at night, costs about $200 in fuel. Can you even make it to the fuel dock and back for $200?

Yeah, but I can make Florida to the Bahamas and back a day trip.......

 

[stvstbsvc]

Don't know what is more interesting - the discussion on PRICING or the discussion on BOATS!  Thanks!

[DannyFSA]

Ladies and gentlemen... Hello. First post for me lurking always. As I seen it asked at the top of the thread I will give some info. 

Name: Dan

Years in repair business: 9

Dealership background : advisor/manager/director

I am looking at a 2 bay shop. It's really basic at best. It's a rental property that the owner of the property cares little about business as he has a massive business. Rent factor is cheap like first day of the month rents paid cheap. Business does apporx 60k in revenue per month with close to 15-20% net to gross. Not sure what the owner takes home to be honest. Sole owner has had the shop for 20+ years. Has rave reviews because of his integrity and willingness to really help people which is what I'm all about. His son and I grew up together and I am as close to family as another guy gets. I need help on the value. His son wants to grow it and knows he can't do it alone because he doesn't know the business all that well. He's the parts hanger and dad's the brains/diag machine. 

That's where I come in. Son wants me to buy in with him 50/50 and buy dad out so he can go retire. He's broke his back for 30+ year turning wrenches and prior to that was in the military. 

 

Reason to sell: retirement

Reason to buy: dealerships are a big grind just like owning a business will be but I know this one's a winner. 

Things to look out for: need ideas

Goal first 10y: expand 2 bay into 5/6 right away, capture recon work from small dealers, get dealers license, open 2 or more locations. 

I have a very proven track record in recruitment, expense control, customer retention, customer CSI, CP labor growth and manufacturer top honors for the largest German importer. I think I know what I'm doing but it's time for a big leap into a business and grow the heck out of it. 

[Hands On]

I tried a partnership once and it did not work out well. One person will want more of something, control, money, time off ect. Buy them both out. If you can not afford that move on.