Oct 4, 2022

How to Value an Auto Repair Shop

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Considering selling your auto repair shop but unsure of how to calculate how much it’s worth? Or perhaps, you’re trying to understand the market value of your auto body shop as you prepare your exit?

As a marketplace focused on helping small business owners sell to the next generation, we value dozens of auto shops each quarter, ranging from small shops with two techs and two bays to eight-bay shops with a large team of techs, service writers, and support staff. 

Luckily, you’re on the right track. Too many owners delay understanding how a shop’s market value is determined until they’re in negotiations with a potential buyer of their business. If you’re ever curious about getting an accurate business valuation of your shop, feel free to take advantage of our complimentary business valuations. We can typically turn them around during the same week. In the meantime, read on to learn how to value an auto shop.

What is a Business Valuation?

As we discuss in more detail in the Seller’s Guide to Small Business Valuation, the purpose of a business valuation is to break down a business’s history, wellbeing, and profitability to determine the fair market value.

In other words, what is the market price that a buyer will pay to take over ownership of the business. The purpose is not to determine the maximum value, nor the price that will sell the business the quickest. 

As any person knows, you could sell a house for $100K over the market value, but it may take you years. On the other hand, you could give away a house for pennies on the dollar in a matter of days. 

The fair market value is designed to represent the average buyer of a business in a normal market. Sure, each business is somewhat distinct, but generally there are rules of thumb for pricing a business, just as there are rules of thumb that a lender will evaluate when working with a buyer to finance a transaction.

How Much Is My Auto Shop Worth?

To calculate the value of your auto repair shop, start by analyzing the past three years of your tax returns. Once you’ve consolidated these financial documents, the next step is to calculate Seller’s Discretionary Earnings for each year. For a quick refresher, seller’s discretionary earnings is a proxy for how much earnings an owner-operator could receive from owning the business. 

In SDE, we add up the following:

We then need to normalize the SDE for common “edge” cases in a small business:

Lastly, we need to determine a fair summary of the SDE that a future owner can expect. Typically, this is a weighted average. In other words, we can’t simply pick the year with the highest SDE. We should average the last three years and weight the most recent year the heaviest, as things can change and typically the most recent year is the best depiction of where the business will be when a buyer takes over.

At Beacon, we use a somewhat complex weighted average formula, but we recommend owners performing a “back-of-the-envelope” valuation to weight the most recent year 50%, the second most recent year 37.5%, and the third most recent year 12.5%.

At this point, you’ll have a weighted average of SDE. Once you’ve calculated this, you’ll need to apply a multiple to your earnings to determine the value of your business when ignoring cash on the balance sheet.

What Affects The Valuation of My Auto Repair Shop?

Typically, an auto shop is valued at 2 to 3.5x seller’s discretionary earnings. The exact multiple used is based on a number of factors. At Beacon, we take into account over 150 data points.

For those performing a valuation at home, we recommend the following approach:

Curious about what can affect the value of your shop?

How Do I Increase The Value of My Auto Shop?

There are a number of ways to increase the value of a business. For personalized advice, we recommend getting a complimentary valuation and speaking to someone on our team who specializes in the auto repair industry.

Absent that, here are a few common pointers for increasing business value:

  1. Clean up your books: At the end of the day, income reported to the government is valued higher than “discretionary expenses” that a buyer won’t have to pay. Why? It’s easy to prove income reported to the government. It’s hard to prove that a phone bill is really for your family member who doesn’t work in the business.

  2. Retain technicians: Even if it costs more to the business, long-tenured technicians are highly valued by buyers. They help de-risk the impact of a well-respected owner leaving the business. They help train the buyers up on “how things are done.” It’s important to invest in building a strong team with an average tenure over three years.

  3. Build a strong reputation: Part of the allure of buying an existing automotive repair shop, whether glass and auto body work, inspections or general repair, is the reputation the shop has in the community. Low ratings on the internet are a red flag for buyers and can impact the multiple of the business.

Not quite ready to sell?

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Sam Domino
Sam Domino
Transaction Advisor

Sam is an exit planning expert, combining years of experience working with small business owners with extensive knowledge of traditional and SBA financing.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.