Body Shop in Butte
Many smaller body shop owners have asked, “How do I appraise my shop?” In the last month, I have been asked to do two appraisals on body shops. The first appraisal was to assist in partnership dissolution; the second appraisal was for marriage dissolution (that is what the attorneys call a divorce). Would you like to know how to appraise the value of an auto body business?
Before we begin, I would like to make one comment. Whenever a CPA has done an appraisal of a body shop, I find that their opinion of value is much greater than the actual value the marketplace will pay. This is not because the CPAs do not know what they are doing, because they do, it is just that the marketplace places a much higher risk of buying a body shop than the accountants do. The following is an excerpt from one of those appraisals.
The Three Ways to Appraise a Business
The Asset Valuation Method. This method is basically used when a body shop does less than $400,000 a year in gross income and the seller is making wages, but no real profit above what he would be paid if working for another. On this size business, a buyer is willing to pay for the assets of the business but little or nothing for goodwill. The equipment is usually worth between $50,000 and $100,000 depending on how many frame machines the business owns and how nice a spray booth the business owns.
I have seen some specialized shops sell for more than the above number because they have a truck spray booth or another business attached to the main business. Examples of attached business might be an auto repair shop or towing operation. Also, the location, size and real estate rental amount will influence the value of any business, to some degree.
The second method, I call the Gross Sales Method. This is used when the sales are over $1,000,000 a year but the profit is unknown or financials are not available or reliable. Because of experience, a body shop buyer can make reasonable estimates of future profits, if they have some basic information. The basic information includes rent, a source of business (DRP, Street, or a Car Rental Agency), and the desirability of the location.
When this method is used, the value appears to be about 3 months sales or 25% of the last 12 months sales. This method is not very reliable on businesses with sales of less than 1 million dollars, because the question of being profitable is very questionable. Why is this breaking point $1 million in annual sales? Multi-store buyers will have well-paid managers, so many figure their breakeven point is around a million.
Less than $1,000,000 in sales is not even worth their time. Of course, we know that there are exceptions to the rules. Some of the exceptions are 1. When a new location will be a satellite store to a bigger location. 2. The buyer must have a location in a specific area to please a DRP. 3. To get rid of a competitor.
The third and most used method of evaluating any business, including body shops, in the Net Profit Method. This method is based on the idea that a business is worth what it generates, in profit and benefits, for an owner. These shops, like so many other small businesses, often do not show a profit, at the end of the year. Strange, how so many businesses of different sizes all just happen to end up with little or no profit. What I find really amazing is that the IRS doesn’t audit more businesses than they currently do.
Before we begin, I would like to make one comment. Whenever a CPA has done an appraisal of a body shop, I find that their opinion of value is much greater than the actual value the marketplace will pay. This is not because the CPAs do not know what they are doing, because they do, it is just that the marketplace places a much higher risk of buying a body shop than the accountants do. The following is an excerpt from one of those appraisals.
The Three Ways to Appraise a Business
The Asset Valuation Method. This method is basically used when a body shop does less than $400,000 a year in gross income and the seller is making wages, but no real profit above what he would be paid if working for another. On this size business, a buyer is willing to pay for the assets of the business but little or nothing for goodwill. The equipment is usually worth between $50,000 and $100,000 depending on how many frame machines the business owns and how nice a spray booth the business owns.
I have seen some specialized shops sell for more than the above number because they have a truck spray booth or another business attached to the main business. Examples of attached business might be an auto repair shop or towing operation. Also, the location, size and real estate rental amount will influence the value of any business, to some degree.
The second method, I call the Gross Sales Method. This is used when the sales are over $1,000,000 a year but the profit is unknown or financials are not available or reliable. Because of experience, a body shop buyer can make reasonable estimates of future profits, if they have some basic information. The basic information includes rent, a source of business (DRP, Street, or a Car Rental Agency), and the desirability of the location.
When this method is used, the value appears to be about 3 months sales or 25% of the last 12 months sales. This method is not very reliable on businesses with sales of less than 1 million dollars, because the question of being profitable is very questionable. Why is this breaking point $1 million in annual sales? Multi-store buyers will have well-paid managers, so many figure their breakeven point is around a million.
Less than $1,000,000 in sales is not even worth their time. Of course, we know that there are exceptions to the rules. Some of the exceptions are 1. When a new location will be a satellite store to a bigger location. 2. The buyer must have a location in a specific area to please a DRP. 3. To get rid of a competitor.
The third and most used method of evaluating any business, including body shops, in the Net Profit Method. This method is based on the idea that a business is worth what it generates, in profit and benefits, for an owner. These shops, like so many other small businesses, often do not show a profit, at the end of the year. Strange, how so many businesses of different sizes all just happen to end up with little or no profit. What I find really amazing is that the IRS doesn’t audit more businesses than they currently do.