How to Value an Auto Parts Store
For new enterprises, it can be difficult to build a successful auto parts store. This is for various reasons including increased consolidation activity and growing competition. According to IBIS World, nearly 60 percent of the market share in this industry is dominated by major players like Autozone. As such, the auto parts industry has experienced slight profit decline, especially for smaller players. However, this industry generates over $81.1B dollars in revenue. We can expect this number to increase moving forward. With a careful approach, you can build a profitable auto parts store. The first step is to understand how to value an auto parts store. This is beneficial whether you are buying, expanding, or selling an auto parts store.
The best way to learn how to value an auto parts store is to receive a business valuation. Peak Business Valuation, business appraiser, is happy to help! Peak Business Valuation works with many auto parts stores throughout the nation. We are passionate about helping auto parts stores succeed! Peak is happy to provide you with a business valuation for an auto parts store you are buying or selling! We can also answer any questions you may have about valuing an auto parts store. Schedule a free consultation with Peak Business Valuation today!
How to Value an Auto Parts Store
At Peak Business Valuation, our business appraisers often use the market approach and/or the income approach when valuing an auto parts store. The approach the business appraiser uses depends on various factors such as the business transaction and the reason for the appraisal. Our valuation experts receive extensive training. As such, they will use their expertise to determine which approach is most suitable for your auto parts store. This may include using a combination of valuation approaches.
Valuing an Auto Parts Store Using the Market Approach
When valuing a small business, valuation experts often use the market approach. The market approach is similar to how real estate appraisers value a house. The real estate appraiser considers comparable properties that recently sold on the market. Doing so helps them determine an accurate value of the property. With the market approach, the business appraiser compares your auto parts store to similar stores that recently sold. If it is a private business, the appraiser gathers information from private transaction databases.
Then, the valuation expert considers factors such as risks, financial statements, and value drivers for an auto parts store. By taking these steps, they can determine which valuation multiples are most applicable to your auto parts store. With the right valuation multiples, the business appraiser can determine the fair market value of an auto parts store. In this article, we discuss common multiples business appraisers use to value an auto parts store.
Multiples for an Auto Parts Store
Business appraisers utilize valuation multiples when valuing an auto parts store with the market approach. To determine which multiples are suitable for your auto parts store, valuation experts use the proper NAICS or SIC code. The following are basic multiples that are commonly used to determine the fair market value of an auto parts store.
REVENUE or SALES Multiple for an Auto Parts Store
- REV multiples measure the total amount of revenue an auto parts store generates. Valuation experts apply the multiple to the revenue of the auto parts store to determine its fair market value.
EBITDA Multiple for an Auto Parts Store
- The EBITDA multiple helps auto parts stores calculate the expected return on investment (ROI).
SDE (Seller’s Discretionary Earnings) Multiple for an Auto Parts Store
- The SDE multiple is common in business valuation. Business appraisers apply the SDE multiple to an auto parts store’s seller’s discretionary earnings to determine its value.
For more information, read Valuation Multiples for an Auto Parts Store, Value Drivers for Auto Parts Stores, and Valuing an Auto Parts Store.
Valuing an Auto Parts Store Using the Income Approach
Another common valuation method is the income approach. When using the income approach, Peak Business Valuation assesses the risks of the auto parts store. Below, we discuss a few common risks associated with buying, expanding, or selling an auto parts store.
- Location: Peak Business Valuation will likely consider the location of an auto parts store. With a prime location near key markets, auto parts stores can increase profit.
- Supplier Relationships: It is vital for auto parts stores to develop strong supplier relationships. Doing so may help reduce expenses and boost profitability.
- Competition: Many small auto parts stores face intense competition from both internal and external players. As such, it is vital to take steps to differentiate your auto parts store.
- Financial Strength: In the auto parts industry, it can be difficult to remain profitable. Financial planning is crucial for the success of an auto parts store. A business appraiser analyzes the financial performance of your auto parts store when valuing an auto parts store.
Methods to Value an Auto Parts Store Using the Income Approach
Under the income approach, there are two methods business appraisers often use to value an auto parts store. The first method is the capitalization of cash flow method and the second approach is the discounted cash flow method. The following paragraphs discuss how a business appraiser uses each method when valuing an auto parts store.
Capitalization of Cash Flow Method
This method is ideal for auto parts stores with long and stable histories. When using the capitalization of cash flow method, an appraiser calculates an appropriate measure of economic income for a specific period. Then, this period of time is divided by an appropriate capitalization rate. The capitalization rate reflects a reasonable rate of return an investor can expect. This method also assesses any risks that may hinder the success of the auto parts store. We discuss a few of these risks above.
Discounted Cash Flow Method
The discounted cash flow method is best for auto parts stores with strong financial histories. It is also suitable for stores that have built reliable forecasts. When using this method, valuation experts use 3-5 years of projections to determine the value of future cash flows at an auto parts store. The expert then applies a discount rate to the future cash flows rather than a cap rate. This process allows the valuation expert to determine the fair market value of an auto parts store. Keep in mind, this method is not as common because it uses future cash flow estimates which can be unreliable.
Summary
When determining the value of an auto parts store, there are various methods and multiples for an auto parts store a business appraiser may use. It is important to understand which methods and multiples are applicable to an auto parts store you are buying or selling. The first step is to receive a business appraisal. As part of a business appraisal, you will learn how to value an auto parts store. Additionally, a business appraiser can help you understand how to increase the value of an auto parts store.
Peak Business Valuation is a professional business appraiser that works auto parts stores often. We are happy to help you understand how to value an auto parts store. Peak can provide you with a business valuation and answer any questions you have on valuing an auto parts store. Start now by scheduling a free consultation with Peak Business Valuation!
