Determining the Value of Your Business
Whether you’re considering selling your business, looking to acquire financing, keeping your insurance up to date, or simply want a better grasp of your business, shop owners need to know the value of their facility, equipment, tools, employees, operational infrastructure and customer database.
Hal Janke is the president of Sunbelt Business Brokers of San Diego. With more than 30 years of experience in business and franchise sales, Janke is a specialist in the automotive repair industry, and has helped sell more than 120 automotive service centers. He also holds certified business intermediary status, the highest industry designation.
Janke discusses how to determine the value of your business and how to add more goodwill value.
The best way to determine the value of the business is to have a professional do a business valuation. The way you do that is to complete a broker’s value of opinion.
For example, if somebody called me, I would go out there, meet the owner, go through the financials and then I would do a broker’s opinion of value based on the cash flow analysis. Usually in that case, I would use a multiple of anywhere from two to three times against the seller’s discretionary cash flow or discretionary earnings.
I also take into account the following considerations, which help determine the income multiplier, which is a combination of a shop’s earnings and other variables that might help to increase the overall value:
1. Good books and records that equate to the yearly tax returns. A shop owner should have the proper profit-and-loss statements and balance sheets for up to three years. Having the tax returns that match up with the balance sheet and the profit-and-loss statement for those three years is also important.
2. A good staff, including managers and technicians. You want to make sure that there’s a manager in place besides the owner. There should also be at least two or three techs, an apprentice, and a receptionist or administrative assistant.
You should have a list of your employees, which should include their duties and responsibilities within the business, and their monthly salaries.
3. An honest and well-respected company name.
4. A good rent factor and at least a five- to 15-year lease. You also want information about your property, or if you rent the property, the leasing information. Try to get as long of a lease as possible.
5. Database of customers. It plays a big role in value. It needs to be computerized and have a professional software program in place with all the customers and clients in the database.
6. Desirable location is a plus.
7. An exit plan or strategy in place.
8. A clean and orderly shop. The building needs to look fresh and not used, so you want to make the building itself as appealing as possible. Some relatively quick fixes include putting a fresh coat of paint on the building, updating the signage, or adding nice landscaping to the exterior.
After assessing those factors, we would calculate earnings before interest, taxes, depreciation and amortization, or EBITDA. To do that, we take the owner’s profit-and-loss statement or cash flow statement. Then, we subtract the expenses (besides interest and taxes) from the income to find operating profit. Next, add back in depreciation and amortization expenses. The total is your company’s adjusted net profit or discretionary earning.
Next, we will multiply that total by a multiplier. In the mechanical repair industry, those multipliers usually run from 1.5 times to 3 times. The multiplier you get will depend on a few factors. Generally, the industry’s multiplier is the starting point and is adjusted based on specifics of the company.
Examples of positive factors that raise multipliers include predictability of sales from year to year, diversified customer base, strong management and strong financial ratios. Factors that negatively affect multipliers include strong competitors, major equipment investments needed, pending legal action and weak finances.
To add more goodwill value to a shop, I recommend maintaining a good set of books and records, a good staff of employees, increasing sales revenue and earnings through adding commercial and fleet accounts, and becoming more active in local PR events and community sponsorship. You could also diversify your services or plan for slower days of the week by scheduling major service work.