When Scott Hillery did projections for the under-performer of his three Los Angeles-area body shops, he saw that he would quickly start to lose money on it. That’s when Hillery, along with his business partners, decided to sell that shop.
“I saw that the costs were going up every year, but that sales were fixed,” says Hillery, an owner of Superior Auto Collision in Escondido, Calif. “The cost was more than it generated.”
The new owner closed on the shop in March of this year, but not before Hillery learned some lessons about what a challenge it is to prepare his shop for sale, market it, and close the deal.
“It’s a tough business,” Hillery says. “The numbers are an illusion. Something that looks good on paper might not be the case in real life.”
Here we explore some of the basic elements of preparing a shop for sale, from how to value a body shop, to transferring Direct Repair Programs (DRPs) to a new owner, to dealing with apprehensive buyers and employees, to the different types of financing available right now.
The bottom line is that the better prepared you are, the easier it is to transfer your shop to a new owner. And that takes time, planning and the ability to seek help from the right people.
SALES SALES SALES
There are as many ways to value a shop for sale as there are shops out there. Probably the most common method of valuation for any business is EBITDA—”earnings before interest, taxes, depreciation, and amortization.”
“EBITDA is typically used as a good starting point to valuations,” says Mark Ayers, a CPA and director of the automotive consulting group at Macdonald Page & Co. in South Portland, Maine.
Another common method includes calculating a certain multiple of sales. Sales are more important than profit to potential buyers because they’ll have different business plans than you. So the most important way to start preparing your shop for sale is to get your sales up, says Willard Michlin, president of Kismet Business Brokers in Moorpark, Calif.
“The value of the shop is really only in the sales,” says Michlin, who has brokered the sale of about 40 body shops during his time in the industry. “The question really is: How do you get more sales?”
After being in business for years or even decades, many shop owners forget to go out and market their shop for new customers, Michlin says. It’s not about the DRPs, because those may or may not transfer to a new owner. It’s about the individual customers.
“The most successful way to get business is to walk the streets and get your name out,” says Michlin, who relays the story of a shop owner who was trying to get his sales up by visiting local businesses. The owner happened to walk into a commercial building that housed a medical drug supply company that had a fleet of 50 cars. He got the contract for that company’s entire fleet.
—Larry Edwards, chairman, Edwards & Associates Consulting Inc.
“People tell me that when they went into business 20 years ago, they went up and down looking for customers,” Michlin says. “But when the shop gets busy, you forget to keep going out.”
And you have to think ahead regarding sales, says Ayers. Most potential buyers are going to want to see between three and five years worth of numbers on your shop, so it’s important to plan the sale of your shop well in advance. The most recent numbers are more important than the older numbers, says Ayers. “It reflects a good customer base and your market position.”
It’s also important to be realistic regarding the value of your shop, says Larry Edwards, chairman of Edwards & Associates Consulting Inc. in Harrisburg, N.C., and a specialist in the automotive industry.
“People either value their shop at too much or not enough,” Edwards says, adding that most companies on the New York Stock Exchange sell for about seven times annual earnings, while body shops typically sell for three-quarters of one year’s revenue. “There’s a huge disparity there. And it really depends on how well you prepare your shop for sale.”
FINANCING OPTIONS
There are typically three types of buyers for body shops: family members, employees, and outside parties. The type of financing you do depends on the type of buyer you’re looking for. Because of tightened underwriting standards at banks and a lower volume of lending overall, it’s almost impossible for any buyer to come in and take the shop off your hands outright. The sad truth is that, even after you “sell” your shop, you’re probably still going to have to worry about how well it’s performing because you’re going to have to finance the sale in some way.
“You’re not out of the woods,” says Hillery, who did seller financing to an outside party on the shop he sold. “It does put some constraints on your plans because you can really lose your shirt.”
Edwards says that while 80 percent of business owners say they want their company to stay in the family, less than 30 percent actually make that happen. So it’s important to know the different options for the different types of buyers to be prepared for anything—and anyone—that might come along.
If you decide to sell your company to either a family member or loyal employee, it’s possible to create a stock purchase program to transition the company to the next person over the course of many years. This, of course, takes much planning. And you’re probably not going to make as much money as if you sold it to an outside party, says Ayers, but you get the peace of mind of knowing you’re selling it to someone who knows the business.
“If it’s a long-time employee, they know the business and they’ve probably been a big part of making it what it is,” says Ayers. “You may not get as much, but you don’t have to go to a broker, so you save that money.”
If you sell to a family member like a son or daughter, you’re probably going to want to give them a pretty good deal. But if you undervalue the shop too much, or gift it outright, it’s important to remember that the Internal Revenue Service can come in and value the shop itself and demand taxes based on its true value. Edwards says he once gave his daughter 5 percent of stock in a business and two years later she got a huge tax bill from the IRS.
If you sell to an outside party, you have to be prepared that your DRP contracts might not transfer to the new owner, which could affect the value of the shop. Since you’re still going to be financially tied to the shop, you’re going to want to feel very comfortable that the new owner is competent to run your business. You definitely don’t want to sell to someone who doesn’t have experience running body shops, says Michlin. “No one should finance a buyer from outside the industry,” he says. “You’re just cutting your own throat.”
Seller-financing to an outside party definitely requires a certain level of trust in the buyer, says Edwards. “I always tell people that seller financing means that someone gives you a piece of paper in exchange for your business,” he says. “You’re really bringing two owners into the business when most businesses have difficulty even supporting one.”
So far, Hillery has had a good experience with the buyers of his old shop, which include one person with experience in the industry. While his DRPs didn’t transfer to the buyers, the new owners have been able to make a good go of it, and they keep up on their monthly payments to Hillery.
“Sometimes they’re a few days late, but they seem to be doing well,” he says.
TO LEASE OR NOT TO LEASE?
Much of the value of a shop on owned land is in the real estate, says Edwards, so it’s possible for that type of shop to be marketed as building and land and not as a body shop. “They can close the doors and leave,” says Edwards of shop owners who also own their real estate.
When you want to sell a shop and the real estate, you typically value the land and the shop separately, says Ayers, adding that the real estate is often more valuable and it’s possible to sell it at more favorable terms than the shop.
You can also sell the business but retain ownership of the real estate. In that case you collect both rent and the monthly financing payments, although Ayers says most buyers will want the option of buying the real estate at some point.
Companies that rent real estate and are selling only the business normally have more than one location, so their business might be more deeply established than many single-location shops. This could make them attractive to buyers, as could certain tax advantages that come along with renting, says Edwards.
INVOLVING THE RIGHT PEOPLE
Whether you rent or lease, are selling to a family member, employee or stranger, have DRPs or not, one of the most important parts of getting your keys into the hands of a new owner is finding the right people to help you. A broker is key if you’re selling to an outside party, says Edwards, but you can avoid that extra expense—usually a couple thousand dollars—if you’re selling to an employee or family member.
An accountant and an attorney are key no matter who you sell to, and getting them involved earlier rather than later helps, says Edwards.
It’s also important to have a solid plan in place for what you’re going to do next, says Michlin. “They need to think about what they’re going to do when they get out,” he says. “That’s a big deal, too.”
