How to Value an Automotive Repair Shop
The automotive repair industry has struggled in recent years. An industry report on IBIS World notes that automotive repair shops in the United States have seen a decline in revenue and profit. If you are looking to buy, grow, or sell an automotive repair shop, this may be alarming. However, we can expect growth in the coming years as car usage increases and demand for automotive repair shops rises. As such, you can find success whether you are entering or exiting the automotive repair industry. One of the first steps is to understand how to value an automotive repair shop.
To learn how to value an automotive repair shop, it is best to receive a business valuation. As part of a business valuation, a valuation expert can help you understand how to maximize the value of an automotive repair shop. In addition, they will calculate the fair market value of an automotive repair shop and discuss its strengths and weaknesses.
Peak Business Valuation is a professional business appraiser. At Peak, we work with automotive repair shops on a regular basis. As such, we can provide you with a business valuation for an automotive repair shop. Additionally, Peak can answer any questions you may have about how to value an automotive repair shop. Get started now by scheduling a free consultation with Peak Business Valuation, business appraiser.
How to Value an Automotive Repair Shop
There are several valuation approaches to consider when valuing an automotive repair shop. Often, business appraisers rely on the market approach and/or the income approach. Each approach determines the value of an automotive repair shop using a different basis of valuation. As part of the valuation process, the business appraiser determines an appropriate valuation method for your automotive repair business. This often involves using a combination of valuation methods to value an automotive repair shop.
Valuing an Automotive Repair Shop Using the Market Approach
The market approach is popular when valuing an automotive repair shop. This valuation method is similar to the approach that a real estate appraiser uses to value a house. Real estate appraisers compare the house to similar properties that have recently sold in the same area. This helps them accurately determine the value of the house. When using the market approach to value an automotive repair shop, a valuation expert compares similar businesses that recently sold on the open market. If the business is private, the valuation analyst refers to private transaction databases to gather information.
Multiples for an Automotive Repair Shop
Valuation multiples are a key component of the market approach. Valuation multiples are financial ratios that measure an automotive repair shop’s value in relation to a financial metric. These metrics often include cash flow, earnings, and sales. To determine the appropriate valuation multiples for an automotive repair shop, business appraisers use the proper NAICS or SIC code. Below, we discuss basic valuation multiples for an automotive repair shop.
SDE (Seller’s Discretionary Earnings) Multiple for an Automotive Repair Shop
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- The SDE multiple is popular when valuing an automotive repair shop. Business appraisers apply the SDE multiple to the seller’s discretionary earnings of an automotive repair shop to determine its value.
EBITDA Multiples for Automotive Repair Shops
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- The EBITDA multiple helps automotive repair shops calculate the expected return on investment (ROI).
REVENUE or SALES Multiples for an Automotive Repair Shop
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- REV multiples measure the total amount of revenue or sales an automotive repair shop generates. Valuation analysts apply the multiple to the revenue of the automotive repair shop to determine its fair market value.
To learn more about valuing an automotive repair shop using the market approach, see Valuation Multiples for an Automotive Repair Shop.
Valuing an Automotive Repair Shop Using the Income Approach
Another popular valuation approach for valuing an automotive repair shop is the income approach. The income approach assesses value based on the future earning potential of an automotive repair shop. In addition, the income approach analyzes the risks a buyer may encounter when buying or selling an automotive repair shop. We discuss a few of these risks below.
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- Competition: The automotive repair industry is extremely fragmented and competitive. As such, automotive repair shops must find ways to differentiate from competitors to succeed.
- Location: The location of an automotive repair shop has a significant impact on its value. To secure a prime location, it is beneficial to do a thorough market feasibility study.
- Financial Performance: Many automotive repair shops struggle to increase profitability. As such, operators must incorporate thorough financial planning and budgeting.
- Key Personnel: Without skilled mechanics and an effective management team, automotive repair shops will likely struggle. These factors have a significant effect on the business’s quality and reputation.
Methods to Value an Automotive Repair Shop Using the Income Approach
There are two common methods under the income approach valuation analysts use when deciding how to value an automotive repair shop. They are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss these valuation approaches for valuing an automotive repair shop.
Capitalization of Cash Flow Method
Valuation analysts generally use the capitalization of cash flow method for automotive repair shops with long and stable histories. When using the capitalization of cash flow method, the valuation expert determines an appropriate measure of cash flow for a certain time period. This cash flow is then divided by an appropriate capitalization rate. The capitalization rate represents an appropriate rate of return a buyer can expect from the business. This method also assesses the risks an investor may encounter.
Discounted Cash Flow Method
The discounted cash flow method is best for valuing automotive repair shops with strong financial histories. This approach is also ideal for automotive repair shops with reliable forecasts. When using the discounted cash flow method, business appraisers rely on 3-5 years of cash flow projections. Then, the expert discounts future cash flows using a discount rate rather than a capitalization rate. Keep in mind, this method is less common since it relies on future cash flow estimates which can be inaccurate.
Summary
The income approach and the market approach are both effective valuation methods for valuing an automotive repair shop. Each method provides important insights into the fair market value of an automotive repair shop. However, the valuation method a business appraiser uses depends on various factors. To learn which method is best for an automotive repair shop you are buying, receive a business valuation. Obtaining a business valuation can help you understand the risks and opportunities of an automotive repair shop.
As a professional business appraiser, Peak Business Valuation works with many automotive repair shops throughout the country. We are happy to provide you with a business valuation and answer any questions you have on valuing an automotive repair shop. Start now by scheduling a free consultation with Peak Business Valuation below!
