This is part 1 in a series of 6 to be released in consecutive weeks every Friday.
I have been asked to write a series articles about selling your shop. I am happy to share my thoughts and insights. I am working with more and more clients who are putting a plan together to sell, or who are looking to buy existing shops, so it’s time we talked about this important topic. Many of you are approaching retirement and are ready to put some serious thought and energy into selling your shop and moving to your next chapter in life.
One of the most frequent questions you might find yourself asking is, "What will my shop be worth when I decide to sell?" This question isn't just for those looking to sell to external buyers, but it also holds true if you intend to sell your business to your employees or if you're planning to pass the business on to your kids. It's important to value your business to plan for potential tax and financial implications. Regardless of the exit strategy you have in mind, understanding your business's value is essential.
The challenge comes in understanding what a potential buyer would be willing to pay for your business, especially when there could be multiple interested parties. It's time to do some homework and understand the industry standards regarding the sale prices of auto repair shops. The value is typically represented as multiples of adjusted EBITDA (Earnings Before Interest, Taxes and Amortization) or SDE (Seller's Discretionary Earnings). However, it's important to remember that these numbers are averages; they might not reflect the potential selling price of your specific shop.
It's not uncommon to hear about shops that have received vastly different offers upon being put up for sale. This is because the motivations of different buyers can vary widely, and these motivations can significantly impact their perceived value of your business. Location and demographics will also play a large role in value.
Here are a few motives that can influence a potential buyer:
- Geographic Expansion. Your auto repair shop could be an opportunity for a buyer to establish a presence in your location. Your shop's services may complement a buyer's existing offerings. For instance, they might want to add tire services or transmission repairs to their portfolio.
- Diversification. More and more shop owners I work with are looking to have a general repair shop, a euro shop and now more want a truck and diesel shop in their portfolio as well. The reality is that it’s easier for them to buy one than start from scratch.
- Wider Reach. Acquiring your shop could increase a buyer's market share and profitability by adding your existing clients to their database. The team you have built might be the main reason for a buyer to acquire your shop. I recently worked with a buyer who bought a shop to remove it as a competitor and prevented another person from acquiring it.
The motive among potential buyers is likely to produce a wide range of offers. It's not uncommon for the highest offer to be significantly greater than the lowest one. For instance, if your shop has an adjusted EBITDA of $333,000, one buyer might offer $660,000 (two times EBITDA), while another might offer $1.3 million (four times EBITDA). Another interested party might walk away without making an offer at all. These differences can vary based on the buyer’s motives rather than business valuation results.
Remember, if all potential buyers valued a business based purely on multiples of adjusted EBITDA, all offers would be relatively similar. However, different buyers have different motives, which leads to different multiples. As a shop owner, it's crucial not to get too caught up trying to anticipate these motives, as buyer needs can be quite unpredictable and change over time. Instead, focus on preparing your business for an eventual sale and be ready for inconsistent offers.
You're emotionally tied to the value of your shop and the hard work you put into building what you have. Don’t let your emotions get in the way of a business transaction, and don’t take it personally if a buyer does not place the same value on your business as you do. Math is math, and they must see that buying your business will provide the return on the investment they are looking for.
Please share your thoughts and experiences with me at [email protected]
More on this important topic next week.