Shop Owners: Do you have an exit plan?

[Joe Marconi]

Premium Member Content 

This content is hidden to guests, one of the benefits of a paid membership. Please login or register to view this content.

[autoguy]

@Joe Marconi here's a pretty good article from last year in tire review that lays out some points and things to think about:

Setting Your Auto Shop Up for Your Retirement

[Hands On]

I am hoping to have enough rental properties that I do not care what happens to the business for my own personal financial reasons. Then I hope to pass it on to a young person In the industry that wants to make a go of it. I will work out a deal that will make it easy for that person to succeed and wish them the best. I will then sail the world.

[Mark Johnson]

@Joe Marconi 

For all the shop owners who are looking to exit their business through sale of the business. Please ensure to do tax planning before you sign off on the sale. There are strategies which can totally eliminate your transfer taxes but it can only happen if the strategies are implemented before the sale.

If you don’t wish to sell now, you can take cash out of the value of the business. There are compensation and profit sharing strategies that will.

1. Give you cash from the business 
2. Keep employees loyal and they will feel like a part of the business.
3. This will allow you more time outside of the shop.
4. You don’t have to pay for it out of your shop’s cash flow.

[Transmission Repair]

Great topic for us baby boomers.  I've already exited but I thought I would share what I learned from the process.  I'm not purporting to follow my experience, but do take away whatever lessons that may apply to your unique situation.  I need to preface this by saying I sold our transmission repair specialty shop.  We did only clutches, transmissions (auto & stick), differentials, transfer cases, and drivelines.  85% of our work was automatic transmissions.  

Our building looks much bigger than it really is.  It has a very small shop space of only 3K sq. ft. w/ 4 lifts sitting on a fully paved .9 acre lot with an abundance of parking.  However, very few people believe the traffic count numbers let alone the sales numbers.  I consider our situation an anomaly and not the transmission industry average.  The traffic count was 203K/day (see picture) and we had a consistent $1.2M/yr. for the last 3 years of operation.  No wonder the buyer send a CPA in, to audit our books, bank records, state & federal tax returns both corporate & personal, all for the last 3 years.

First and foremost, the last 3 years of record-keeping will make or break your retirement.  You must show a positive cash flow and avoid hiding personal expenses in the shop expenses.  The same holds true for unreported income (skimming cash).   Don't do it.  Report everything legit and pay all necessary taxes as proof of sales of EVERYTHING.  Did I say everything enough?
For most automotive businesses, the customer list has a high value also.   For a transmission-only specialty shop like ours, it had little value.  What transmission shop owner wants a list of people who recently had their transmission rebuilt when that's all you do?

Our transmission shop's location had built up a reputation as "that transmission shop on the freeway" and to a much lesser degree, the name of our business, "Certified Transmissions".  The few times we received checks for payment, it wasn't out-of-the-ordinary for people to ask "Who do I make the check out to?" or "What's the name of this place?"  Anybody could hang any name on the building like, "So-N-So Transmissions" and it would be no different.  I can't count the number of times I've told people the name of our shop and it doesn't ring a bell.  When I tell them we're down the street from "The Jet On A Pole" (see picture) they ALWAYS go, "Oh yeah, that transmission shop on the freeway."  Everybody knows what we do at our location, but few know our name.

In most (if not all) instances, it benefits the seller to carry the note in two ways.  First, you can ask for more when you're carrying the note.  Second, it reduces taxes so you don't have to show a big chunk of income all in one tax year.  We are still carrying the $303K note which will end in May 2020.  We didn't sell anything but the assets.  No customer goodwill, no customer list, no name, no nothing, just assets.  We were only able to get 3X the new replacement value of the assets because we carried the note.  If you own the building, that's a separate matter.

IMO, monthly rent should be at least 1% of the current value of the building.  We started charging $11K/mo. but by the time the lease is up in 5 more years, it will be $13K/mo. NNN in real estate talk which means "triple net" or that the tenant pays for the building's insurance, property tax, and maintenance.  Our building is our retirement, not the sale of the business.  It will be paid off in 4 more years.  (  whew! [̲̅$̲̅(̲̅ ͡° ͜ʖ ͡°̲̅)̲̅$̲̅]  )

For those of you who didn't plan your retirement like my wife and I, let me explain.  My wife and I married 13 years ago and at which time, neither one of us had much in retirement to bring into the marriage.  We started the business in Oct. 2008 and when the 5-year lease came up for renewal in 2013, we bought the building through a mortgage company, though it was an owner financed mortgage.  I, being 58 at the time decided to do an accelerated mortgage which meant a 10-year mortgage = $High Payment$.  We are currently not making a dime on the rent, but are driving down the principal.  Between now and Nov. 2023 we are still working (more on that later) and plan to fully retire at that date.  So, my advice is to beg, borrow, or steal to buy your building because that's the only real retirement (except in rare cases) you'll have with a single-location shop.

If you have any questions or need further clarification either respond to this post or my contact info is below:

J. Larry Bloodworth, CMAT

12529 Minuteman Dr.

Draper, Utah 84020-9541

[email protected]  (214) 347-7788 [O]  (214) 473-5563 [C]

 

[Transmission Repair]

I typed my above post in WordPad and copied and pasted it to the forum.  After Alex's response, I went back and looked to see what he wrote and I noticed the entire opening paragraph was not included. 😞  Sorry for my mistake.   I noticed I can't go back an edit it like I did before, either.  I'm guessing there's some sort of timer mechanism in play.  Here's the preface to above mentioned post:

==============================================

Great topic for us baby boomers.  I've already exited but I thought I would share what I learned from the process.  I'm not purporting to follow my experience, but do take away whatever lessons that may apply to your unique situation.  I need to preface this by saying I sold our transmission repair specialty shop.  We did only clutches, transmissions (auto & stick), differentials, transfer cases, and drivelines.  85% of our work was automatic transmissions.  

Edited November 18, 2019 by Transmission Repair

[Alex]

@Transmission Repair I added your preface to your original post. 😀

[rpllib]

I started looking at exit plans almost a decade ago. I approached my 15 year manager with a 15/20 year "manage to own" plan. It was better structured then some, but still woefully lacking in key ingredients. It did not speak to his needs, only mine. After all, if i am going to give him the "business" (no real estate), why should i have to worry about his needs? Right? Not right...   He declined and made it clear that he was not interested in ownership. 

I did not give up and brought a much stronger plan back, a few years later, designed to use with potential candidates from outside my organization. That offer culminated in a 10 year plan that allowed a candidate the ability to own the business and the real estate with a 10 year commitment. It basically involved paying the rent(we own the real estate outright), minimal salaries for myself/my wife, and health insurance for myself and my wife.  It also involved strict guidelines for financial viability of the business and a 30% "bank letter of credit" as collateral.  That one peaked some interest, but in the end, we could find no one with enough confidence in the location and/or their ability. 

Unlike Larry, we have 2000 cars a day driving by our shop. The main highway one block away(which we do not face) has 10,000 cars a day. The county has 2 traffic stop lights and several caution lights. We have a 10k sq ft building which includes 8 service bays, a two bay quicklube and two tire bays. We are general generalists. We work on most things that don't eat us. We have done 1.3-1.4 million in sales for the last several years. We have generated an average of 180k in discretionary cash flow a year, for the last 4 years.

A few years ago I had multiple good fortune opportunities. First i hired a 30 year old as a quick lube manager, who is hungry and anxious to be a business owner. Second, I meet a gentleman whose passion is assisting small business owners in transitioning their business to the next generation, usually by working with individuals from within the organization. 

We will be signing a legal Letter of Intent" on a several year plan shortly after the new year, 2020. 

I am seldom impressed. I am exceptionally impressed by the process and the documentation that Bob Ward from Perpetual Business ( https://www.wardden.com/#/home ). The letter of intent is exceptionally well done, his preparation of the mindsets of the buyer and the seller has been key to the success of this  transaction, and he is sincerely consumed by the success of the transactions he works on, for the life of the agreement.

This post is not about being a testimonial for Bob.

It is a testimonial for the possibility of exit opportunities for profitable automotive service shop owners. Like everything with our business's, it doesn't happen by itself . It starts with you.

 

[Mark Johnson]

@rpllib Have you ever thought about a Phantom Stock Plan?

This is a deferred compensation plan where you can allocate stocks in your shop to employees if they meet certain predefined growth or sales targets.

The beauty of this strategy is that, you don’t have to give up ownership of your business, the stocks are vested some time in the future therefore you can buy insurance or do investments to make the payments when they become due and most of all the employees will be working towards something ie. a part of the business.

Quick case study. Say your shop is valued at $10M. You would say for example, if the shop increases revenue by 20% over five years the employee will get say 12% (this will be decided by you). Now during those five years you can buy insurance or investments to pay for the shares when they become due or if you want him to take over the business he can take it in actual shares. This plan comes with a lot of tax benefits and at the end of the day the employee has an incentive to help grow the business. 
 

To learn more about Phantom Stock Plans you can send me a private message or visit my website.