What is your shop worth? If you’re like many owners of smaller, single-location facilities, your answer is likely too optimistic, says veteran industry coach Gary Gunn of Turnaround Tour. While many owners reflexively answer, “$1 million,” Gunn says the truth is often much lower.
“You hear it every day of the week: ‘I’m going to sell this business for a million bucks,’ and I say, ‘Great—who’s going to pay you a million dollars?’ The reality is, it’s [often] not worth a million,” he says.
While many shop owners end up selling for less than they originally expected, Gunn says still more just wear out and sell the business for pennies on the dollar. To maximize its value, avoid a “selling emergency” and increase the pool of potential buyers, he recommends taking time to clean up the books, establish procedures that minimize the role of the owner and set a realistic price for the business.
It doesn’t matter if you’re looking to retire now or in 30 years, Gunn says it’s never too early to make sure your business is steadily building value and ready any unforeseen circumstances.
“We’ve got to structure the business where we open the door to multiple buyers—that’s what you have to start thinking about when you’re selling your business,” Gunn says. “If I’m only going to sell it for cash, someone’s got to walk in, pay me $750,000 and I’ll title everything over to them. How many people have you just taken out of the equation?”
Valuation Disparities
There are many supplemental factors that impact the price of a business, like nonbusiness expenses sneaking onto the balance sheet, but Gunn says a basic formula for calculating your shop’s value is multiplying net profit by 2.5 plus assets like the building and land. With multiple locations, he adds, that multiplier increases.
Marc Gudema, owner of BayState Business Brokers in Boston, agrees about the amount of misinformation for business owners considering a sale.
“People pick numbers out of the air,” he says. “They think: ‘I’ve got to have a million dollars to retire, so that’s what I want to get for my business.’”
Rather than setting a random price, Gudema recommends talking to s financial planner who can calculate your future financial needs, and use that information as a guide to determine the difference between your needs and the estimated value of your business.
If its value is less than what you’ll need to live through retirement, preparing for a sale three to five years in advance gives owners space to build up the business and increase its value or attractiveness to potential buyers.
Cutting unnecessary expenses and boosting marketing are two sure-fire moves. Examples of expenses to purge include business trips that morph into vacations, retirement or health benefits for the owner, company cars and other bills for family members. Every expense cut, Gudema says, will immediately improve the cash flow numbers of the business.
“I’m flabbergasted that sometimes people are almost proud they don’t spend any money on marketing, then you look at the sales and they’ve been going down 10 percent a year for the last three years, and now they want to turn around and sell the business,” he says. “A bank looks at that, and that’s a red flag that can make it very difficult for a buyer to get a loan, when it’s a declining business.”
Before contacting a broker, Gudema says shop owners should assemble internal financial statements including at least five years of tax returns, which he says are the most legitimate proof that a business throws off income. Other key pieces of documentation include payroll, a list of assets, additional expenses (ideally after purging)‚ and details of the owner’s salary.
Gunn also recommends examining the demographics within a three- to five-mile radius of the business, which can provide short-term marketing opportunities as well as valuable information for any tire-kickers.
Widening the Pool
Gunn calls it “fishing in multiple ponds”—widening the pool of potential buyers who might consider your business.
Just as a well-rounded marketing campaign included TV, radio and direct mail, planning to sell a business should include a thorough analysis and plan for attracting as many candidates as possible.
Talking to other past owners who have sold, being open to creative forms of payment including owner financing, and creating a detailed operations manual with standard operating procedures, he says, will show that the business is a turnkey option for somebody lacking experience in the auto repair industry.
“If an owner really wants to make a business like that, then he’s building a business from day one that’s sellable, because an investor can buy that business or someone can walk in without the knowledge of the auto repair business and buy that,” Gunn says.
Working with a business broker will also pull in potential buyers that you, as the seller, likely don’t know or wouldn’t have considered, he adds.
Owner Financing
While some owners would rather end their involvement with a clean, bank-financed sale, owner-financed deals where the seller puts money down and makes recurring payments for X-number of years can provide advantages to the seller while opening up the business to buyers that might not be able to secure a $1 million loan, for example.
“Sometimes people will want a little bit of seller financing, like 5–10 percent is not uncommon, so they have some skin in the game,” Gudema says. “It also shows that the seller is confident about the business.”
For the seller, financing a deal over many years spreads the tax burden over the years, and can provide a higher interest rate than sticking the money in a bank.
Gunn says the primary benefit to owner financing is that it can attract a much larger pool of potential buyers for the shop.
“If you sell the business for half a million dollars, take $200,000 down and finance the balance of $300,000, now how many buyers have I opened the door to?” he asks. “To me, that’s the best scenario that opens the door to … a massive amount of buyers.”
A Strange Arrangement
A self-proclaimed student of the industry, Richard Schiff owned a 10-bay La Car Porte body shop in LaPorte, Texas, for 28 years.
He loved his work and was passionate about the industry, but a life-changing medical event spurred him to start planning an end-game.
After meeting with Gunn, his business coach, fellow 20 Group members, a business broker, an attorney and his CPA, he recast the shop’s financials to remove any owner perks or non-business items from the balance sheet. He also remodeled the shop to improve its visibility, created self-sustaining in-house procedures and drastically increased the marketing budget to 5 percent of gross sales.
Before listing the business, his accountant, Travis Eiland, offered to buy it in partnership with his brother, Michael. His broker helped Schiff set the value, which was agreed upon with the buyers in an owner-financed deal with $100,000 down, and the remaining $900,000 divided between monthly payments of $7,000 for 15 years.
“If we had sold it for a million dollars, the tax consequences … would have been almost 50 percent,” Schiff says. “We get paid $84,000 a year, so we pay taxes on $84,000 minus our deductions, so it’s not a big hit like it would be if we took it all at one time—it’s like the difference between the cash payout on the lottery.”
By financing the deal himself, Schiff will also receive an additional $400,000 in interest payments if the buyer exercises the full 15-year term. While there are inherent risks in such an arrangement, his attorney assured him the worst-case scenario is him regaining control of the business—a scenario that’s largely ameliorated by the sizable down payment.
As he and his wife embark on a dream retirement traveling the globe as long as they “don’t get tired of each other,” Schiff’s advice to other business owners is to think proactively, hire a business coach and take solid steps to sell the business before an emergency or other scenario leads to a fire-sale price.
“They call us independent auto repair shop owners, and there’s a reason for it—everybody does it a different way,” he says. “You have to be open to new ideas.”
