Prepare for Selling Your Shop
Retirement, consolidator offers, expansion, new business opportunities—there are several reasons why shop owners might want to put their business up for sale. Whatever the reason, for many shop owners, there comes a time to put the business on the market.
And it’s something that shop owners should always be preparing for, says Dave Mitchell, president and CEO of Car Guys Automotive, who has bought and sold several collision repair shops. There is a lot of documentation you need to prepare for prospective buyers, so you want to be organized when the time comes. After all, you never know when the right opportunity will present itself.
Marc Gudema, managing broker of BayState Business Brokers, who has also helped sell multiple shops, offers a look at the things you should start arranging if you’re considering listing your shop. He details 12 key pieces of business and financial information that need to be compiled in an organized business portfolio when you’re ready to pull the trigger—a set of documents covering the past five years of business performance that interested buyers will assess.
#1 Income Statement: The income statement, also known as a profit and loss statement, is a report that details your shop’s sales, cost of goods sold, overhead expenses, gross profit and net profit. Shop owners generally need to provide buyers with annual income statements for a three-year period. However, some buyers may also want to analyze monthly reports for a three-year period, so shop owners should make sure to have both the monthly and annual reports prepared.
#2 Balance Sheet: The balance sheet is a document that lists the assets, liabilities and equity of your company at a specific point in time. It is used to calculate the book value of the business, Gudema says. Buyers will be interested to see what business debts currently exist, and any changes in the balance sheets from one year to the next, to identify whether the business is making or losing money.
#3 Cash Flow Statement: The cash flow statement shows where the cash in the business came from, and what it was used for over a one-year period of time. The information is categorized into business operations, investments and financing activities.
#4 Business Assets: Compile a list of every major asset that exists inside your shop. Although this information is included on the balance sheet, it’s still recommended to list them out separately. Only list the large investments you have made, such as spray booths, frame equipment, welding equipment, compressor systems, computer systems and software. Include the cost and date of purchase for each item.
#5 Bank Statements: Buyers who perform proper due diligence will ask to assess your bank statements, Gudema says. They will review your deposits and expenditures to verify that your business is generating the revenue you have reported, and that your expenses are in line with the costs outlined on your income statement.
Make sure that the deposits outlined on your bank statements, in combination with any accounts receivable, match your declared revenue numbers.
#6 U.S. Tax Returns: Although tax returns provide similar information as income statements, buyers, accountants and lenders use tax returns to analyze the business.
Gudema says tax returns are considered more credible documents than income statements for a few reasons. First, there are penalties for filing a false tax return.
Second, since a seller has to pay taxes on profits shown on the tax return, the profits are more believable. Although it is common for business owners to expense as much as possible, it is still recommended to show some taxable income on your tax return.
#7 Seller’s Discretionary Earnings (SDE) Worksheet:
The SDE worksheet identifies the total cash flow available to the shop owner. The amount of money owners report for net income is not always a true reflection of what they ultimately earn from the business.
Shop owners might make extra “discretionary” expenditures that aren’t necessary for business operation, such as taking a large salary, putting money away in a pension plan, a company car, or sports tickets for customer and employee giveaways.
All “discretionary” expenditures are added up to determine the total cash flow available to the business owner. Buyers want to assess the seller’s discretionary earnings number because that illustrates how much actual income is available to generate profit and provide an owner’s income, Gudema says.
#8 Payroll Reports: Shop owners must provide payroll reports for the full previous year and the current year. Buyers assess those reports to verify the exact amount you reported for employee payroll.
Generally, shop owners only need to demonstrate the total amount of money they spent on payroll overall. But as the selling process progresses, buyers will also want more details specifying the amount of money paid to each employee. Gudema says to break the information out in addition to providing an aggregated number.
#9 Personnel List: Compile a list of each of your employees. Explain the number of employees you have, their training and certification achievements, pay rates and job descriptions.
#10 Business Partnerships: Highlight any business relationships you have that represent large portions of your company’s sales. List any direct repair programs (DRPs), fleet or dealership partnerships you have. Explain each company you have a relationship with, how long the partnership has existed, and the amount of annual revenue generated from those initiatives.
#11 Property Deed/Leasing Agreement: If you own your facility and property, make sure you have the deeds available in order to transfer ownership. And if you’re renting the facility, provide buyers with a copy of the lease.
Buyers need to assess the leasing agreement to ensure they can obtain a multi-year lease. Buyers who are making the purchase using a loan are required to have leases that extend as long as the life of the loan.
#12 Franchise Agreement: Shop owners must provide buyers with franchise agreements if they operate a franchised shop—such as a MAACO location, Gudema says. The buyer needs to assess that agreement so they clearly understand their operational and legal rights as owner of a franchised collision repair location.