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Meeting with owner, about to buy his shop


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You guys really provided great insight on my last question, so I'm coming back for more. I'm meeting with the owner of the shop I'm considering buying this week. What should I ask? What should I look for? I have a laundry list of questions prepared, but I'm sure you all will give me something I wasn't thinking of.

 

Quick background:

Shop is going on 30 years, only 5 with current owner. He also owns smaller shop.

Grossed $400k in 2013. Adjusted cash flow of $80k.

Two techs and a service writer, all about 40 years experience.

Good location, leased building.

All around repair, from imports to small RV.

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Yes, that is the first question, Why is he selling?

 

This is a very important step, and I strongly recommend getting the advice from a pro. Talk to an accountant that has experience in this matter. Another source is a commercial loan officer at a bank that does commercial loans. Also, a lawyer that specializes in real estate. There are business brokers, but be carful with that route.

 

Here are a few things to consider and to discuss when you meet:

You are going to have to see all his financials, any loans he has on equipment, inventory, what equipment stays, NON-compete agreement, if there are any liens, lease, and information on his customer data base.

 

I wish you all the luck in the world, but you need to go into this armed with the right people asking the right questions.

 

Lastly, and this is the advice I give to all: Learn about business, REPEAT, learn all you can about the business side of running a shop. Too many of us spend all of our time in the bays, you need to understand the other side of business: The numbers, business management and leadership skills. This will help you more than you know.

 

Best of luck, I like to see people venture out on their own.

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Thanks for the quick replies. I'm pretty sure he wants to downsize, but that is the first question that will be asked. This deal is working through a broker. I actuallthave the 2013 P&L statements and it looks OK and I have a great accountant who I can trust.

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Here are a few things to consider and to discuss when you meet:

You are going to have to see all his financials, any loans he has on equipment, inventory, what equipment stays, NON-compete agreement, if there are any liens, lease, and information on his customer data base.

 

If he has a second shop, then how would a non-compete agreement work? He'd be automatically competing.

Even with a non-solicitation agreement, I'd be worried that many of the "good" (A and B customers) would go to his other shop anyways, even without him making first contact after the sale.

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Both of you bring up good points. In my opinion, at least one of the two techs and the SA won't be around for long. I don't think his smaller shop is big enough to compete, but both of these are concerns. A lot of our discussion will center around these concerns.

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If he has a second shop, then how would a non-compete agreement work? He'd be automatically competing.

Even with a non-solicitation agreement, I'd be worried that many of the "good" (A and B customers) would go to his other shop anyways, even without him making first contact after the sale.

This is the reason to take it slow, one step at a time and work the details. Great replies from everyone!

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Meeting went well. Very old school shop, cluttered in a bad way. Shop area is very dated. 8 lifts with enough room for at least twice that many cars. Waiting area is clean, but again, very dated and not women/family friendly at all......which is a priority of mine. Only two techs, both paid flat rate because the owner acknowledged them being slow. One is 67, other is just over 60. The younger being the master tech. Owner works the front and acts as the SA. He does own a 2 bay smog/very light repair shop and wants to fall back to running that place by himself only. Doesn't want the stress and hours anymore, basically wants to wind down to retire in the next couple years. My biggest concerns are learning the SA side enough quickly, feel I have the business/customer service side covered already. Also the techs are a big concern. Last concern is updating everything to bring it back to 'modern', especially the waiting area. Going to stress on this decision for awhile.........

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I would like to clarify my above post a little. When I said “outdated”, I meant that it looks like a cluttered shop with parts and small equipment (oil pans, hoists, creepers, etc) laying around everywhere. There are many benches, but you can barely see them through the clutter. The equipment itself is in good shape. The lifts look good and fairly new. There are two Accu-turn bench lathes. There’s a Bear analyzer/smog setup. Equipment wise it looks good, it’s just the shop is a mess. The building is leased, 8000 square feet at less than $3 per foot. He has ZERO marketing (phone book ad only) and is still gaining market share, his gross is up about 14% from last year. He’s part of the Napa Program, using Mitchell software. Shop is only open Mon-Fri 8-5:30. Treats customer’s very well and is getting 2-3 new referrals per week (according to him). He doesn’t offer an pickup/drop-off services or loaner cars, which I think would help.

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Only 2 techs and their slow. So if you assume 50-60 hrs/week that's not much money at all. Plus you won't have any techs. Looks like all you're getting is equipment which unfortunately won't make you money. Looks to me like the guy wants out and would like to make some money on way out.

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Here's several ways to calculate the value of an auto repair shop:

25-30% of annual sales + inventory

2 times SDE* + inventory * Sellers Discretionary Earnings, also known as Sellers Discretionary Cash Flow, SDCF.

1.5 to 2 times EBIT (earnings before interest, tax)

2 to 2.5 times EBITDA (earnings before interest, tax, depreciation, amortization)

2 to 5 times monthly net revenue

1 to 3 times owners annual cash flow

3 times monthly gross + inventory

2 times hard assets + owners salary

33% of annual gross revenue

 

As you can see, most of these are based on the owner's cash flow and tangible assets such as inventory. The EBIT and EBITDA ones are probably more for larger shops with higher then 1mil in sales.

For the SDE one, google how to calculate SDE, it's somewhat complicated, but very realistic for small businesses, because most of the value is directly related to the owner, rather then the assets. This is probably one of the most important formulas in the list.

I'd calculate every one of these on the guy's business, see what adds up and what doesn't. You might find that his offer is low and you're getting a deal, or maybe way out to lunch and you need to renegotiate or walk away.

Edited by bstewart
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Thanks for all the help so far, of course now I'm asking for more. I'm trying to put a value on the equipment, knowing of course that it's not an exact science and it's only for the purposes of basing an initial offer on the business. Keep in mind the building is leased. Here's what I'm looking at:

 

8 two post lifts, which I estimated the value at $2000 each. Total of $16k.

2 Accu-turn bench lathes, which I estimated the value at $2500 each. Total of $5k.

1 Bear analyzer, with smog options, which I estimated the value at $7500.

That's all the "major" equipment I saw, but I added another $6500 for the misc equipment for a total equipment value of $35k.

 

Does this sound out of line? Shop doesn't do alignment, diesel engine work, tires or anything other than just a "general repair shop" stuff. I took last year's P&L to my accountant last week and he said the numbers look legit.

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It sound like you have estimated the equipment a little high. That may work in you favor. Pay more for the equipment and less for the business. Remember, any equipment that you purchase you will be able to depreciate. I know a guy that bought a shop and way inflated the equipment and reduced what he paid for the goodwill (business). Tax advantage later on.

 

You need to look at the sales numbers. What is happening on a weekly basis?

2 Techs should produce 80 hours chargeable per week

parts sales is usually 50% of gross sales

80 hrs X shop labor rate + parts sales, less parts cost, less loaded cost of Technicians will give you Gross Profit for the week. Gross profit should be above 50%

Good luck

Mike

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Thanks for all the help. Thanks to someone sending me a great spreadsheet, I can see there are some easy opportunities to trim some costs. It looks like the opportunity I've been waiting for. Decent customer base already established, great location with cheap lease, well equipped and opportunity to clean things up and increase business. I'm probably going to stick with around 2 times discretionary cash flow for an offer and see what comes out of it. That's under his asking price, so we'll see.

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$400k gross in a 8 bay shop is terrible. Something is wrong. Look back 10 years if you can, maybe he slowed down. 8 lifts can accommodate at least 5-6 techs and should be grossing well over 1m. There might be a problem with 1. Equipment isn't usable, 2. Good help isn't available? 3. Customer base too small , 4. Customer base too poor. 5. Some other reason. The utilities remain constant, so the reason the current owner is under-utilizing the space should concern you .

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I completely agree that the shop is under performing. I respect all of your opinions 100%. But it seems most of you are concerned or cautious, and I'm seeing huge opportunity. Great location. Great lease. Equipment is in good shape. Zero marketing. No brand identity. Competent, but slow techs. All this and still profitable. Am I seeing a huge opportunity that's not really there? I'm ready and willing to put in the time, effort and money. Am I far off base?

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I completely agree that the shop is under performing. I respect all of your opinions 100%. But it seems most of you are concerned or cautious, and I'm seeing huge opportunity. Great location. Great lease. Equipment is in good shape. Zero marketing. No brand identity. Competent, but slow techs. All this and still profitable. Am I seeing a huge opportunity that's not really there? I'm ready and willing to put in the time, effort and money. Am I far off base?

IMHO yes. Not sure about your area but here it's easier to find unicorns than good techs.
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Not that I am scared enough....... anyone else feel like buying this shop is a bad idea? There's a Big O Tire that sells 1.6MM with 275k cash flow, but I can't even come close to the 650k he wants for that. Isn't this better than starting from nothing?

Edited by Rambiss
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Not that I am scared enough....... anyone else feel like buying this shop is a bad idea? There's a Big O Tire that sells 1.6MM with 275k cash flow, but I can't even come close to the 650k he wants for that. Isn't this better than starting from nothing?

may not be a bad idea but the old employee part could sink you immediately. I just took over over a $2.4 million dollar shop in the best location in our town after being open for 2 years. It started out as ammco and after a year and a half the shop lost the franchise name so they changed their name and 6 months later I moved in. This business's failure was solely due to the employees.

 

My point is location and equipment absolutely do not make a shop. It's ALL about your people. I'd rather see you prepared before you open and find out the hard way.

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Rambiss,

It sounds like there is opportunity to improve everything in this shop a great deal. It sounds like the current owner has lost his fire. I am curious as to your background. Have you been in the auto repair industry? I did not see your previous post. When I purchased my shop I had been the service manager for 10 years. The transition was so smooth the client base did not know that ownership had changed. The first thing we did was clean up and get rid of all the old clutter, junk engines, old dead inventory, old obsolete equipment. We spruced up the image by painting, cleaning and installing a computer system. The techs were happy and were enthusiastic as well.

If you need new staff this is a company I have used http://www.actautostaffing.com/default.asp

 

Mike

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Again, thank you. The techs were my biggest concern in the beginning of this and still are. Makes me feel good that at least I'm on the same page as you experts on that. I'm a millwright by trade, but been a maintenance manager for the last 10 years. I feel like that gives me a few advantages, I know the mechanical side, the business side and most importantly the customer service side. I've been in this town for 15 years, so I feel like I can replace the techs. My plan was to do exactly as you described, clean things up and build my own brand. I plan on finding the right master tech with the full purpose of building this together with him so he can take over for me in the future. I was going to start looking for techs right after my offer was accepted, if we can come to a deal. That gives me at least two months to get a few good techs in place before I take over.

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I don't anyone is saying not do to it, it's more about making sure you take one step at a time and minimize the risk. Many people have taken over low producing shops and turned it into a gold mine. If this your dream and your goal, go for it. Just create a plan and look at all things objectively. It sounds as if you are doing all your research and that's great. Again, all of us who have been there are extra cautious because of what we have been through.

 

Keep us updated and ask for help. We need new blood in the industry. Remember, don't be shy about asking questions, your fellow ASO members are there to help.

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Breaking news update.........deals off. I offered him just over 2 times cash flow,with him carrying about 25% and he countered with 3 times cash flow and zero carry. I guess some things just aren't meant to happen. I truly appreciate all the advice and guidance.I'll keep looking, but for now I'm stuck making money for a corporation.

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  • 1 month later...

Thanks for all the help. Thanks to someone sending me a great spreadsheet, I can see there are some easy opportunities to trim some costs. It looks like the opportunity I've been waiting for. Decent customer base already established, great location with cheap lease, well equipped and opportunity to clean things up and increase business. I'm probably going to stick with around 2 times discretionary cash flow for an offer and see what comes out of it. That's under his asking price, so we'll see.

Rambiss, you said someone sent you a great spreadsheet.

Can you post a link, or send it to me? I might be in a position to get my first shop and I'm going to start jumping through the same hoops you did.

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  • 1 year later...

The point of the matter is this...nothing is guaranteed. You already soundready to sign on the dotted line. So now is just a matter of trying to set yourself up for success. Firstthing I'd do is be sure I have the budget for at least 1 more A tech and clean up crew. The old guys are on the way to retiring real soon so unlessyou plan on turning your own wrenches, getanothertech first! Clean upcrew can work on yourbeauty projects while yourun your business. Plan on losing a good portion of clientele....to previous owner. Think of your expandability. What elsecan youoffer that previous owner didn't? Tires? Exhaust? ALeo if I was goingto makea investment of that size, I wouldn'tplanon putting myselfin a position...like register. Put in budget for experienced service advisor. This will allowyou to float andbe more effective at increasing your businessinstead of getting . Over whelmed and can't see theforest for the trees. . ,

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  • 3 weeks later...

I agree with Alfred Auto on this one. I had a local shop owner make me an offer to buy his 10 year+ business for 750K. I'm not gonna go into all the details, but ultimately, I felt that it was a better decision to start from scratch (avoiding the debt) and build my own brand instead. Good luck to you!

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$400k gross in a 8 bay shop is terrible. Something is wrong. Look back 10 years if you can, maybe he slowed down. 8 lifts can accommodate at least 5-6 techs and should be grossing well over 1m. There might be a problem with 1. Equipment isn't usable, 2. Good help isn't available? 3. Customer base too small , 4. Customer base too poor. 5. Some other reason. The utilities remain constant, so the reason the current owner is under-utilizing the space should concern you .

 

i agree, that was so far off that it screams the reason he is selling.

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