As a result of showing poor profits, on books, it becomes very difficult to use NET PROFIT METHOD for appraising many small businesses. Luckily for me, I can quite often find hidden profits, of a business, by adding to books, items we call owner’s benefits. These include: Owners salaries, if a corporation. Personal autos and all related expenses used by owner and his family that are written off against business, fife insurance and health insurance for owners.

Depreciation is also a hidden profit that is usually added back in to taxable profit to help build up total owners benefits. And lastly, personal utilities, phones, trips, etc. that are deducted on tax return but are not really costs to run business.

After saying all this, what is value of a business based on Net Profit Method? Automotive businesses, especially auto body shops appear to sell for between 1.5 to 2 years adjusted profit (book profit plus owners benefits added back in). Larger body shops doing over $2,000,000 in annual sales may sell for much more, because owner is making much more money, than just his salary and a buyer will consider part of profit a return on his financial investment.

Very large body shops that are being bought by public corporations are evaluated primarily on their return on investment (Percentage profit that is being made on cash purchase price of business.) These big buyers can afford to pay between 5 times and 10 times annual net profit, after deducting all officers’ salaries and perks.

Often these, public corporations, high purchase prices include two important restrictions, which is really why they are buying business in first place. First: The business is bought for little or no real money. They use restricted corporate stock that is not negotiable for two years. And second: The management is required to stay and run company for some period of years.

The bottom-line, as I see it, is that you sold your soul, not your business. One last comment on selling to large corporations; heaven help seller who sells his business for corporate stock or buyers bonds and buying company goes broke or stock market crashes. I had a close friend sell his company for mostly cash and some seller carry back financing in Dec 1997. By Feb 1998 buying company was in bankruptcy, making paper my friend held worthless. CONCLUSION: Appraising a business, especially body shops, is an art not a science. No two people will appraise value of a business same. I am amazed that same thing one buyer thinks is a great asset is what another buyer thinks is a major negative. Differences of opinion are what make life interesting.

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