Many smaller body shop owners have asked, “How do I appraise my body shop?” In
last month I have been asked to do two appraisals on body shops. The first appraisal was to assist in partnership dissolution; second appraisal was for marriage dissolution. (That is what attorneys call a divorce.) Would you like to know how to appraise value of a body shop business?Before we begin, I would like to make one comment. Whenever a CPA has done an appraisal of a body shop, I find that their opinion of value is much greater than actual value market place will pay. This is not because CPA’s do not know what they are doing because they do; it is just that market place places a much higher risk on buying a body shop than accountants do. The following is an excerpt from one of those appraisals.
THE THREE WAYS TO APPRAISE A BUSINESS 1. The ASSET VALUATION METHOD. This method is basically used when a body shop does less than $400,000 a year in gross income and seller is making wages, but no real profit above what he would be paid if working for another. On this size business, a buyer is willing to pay for assets of business but little or nothing for goodwill. The equipment is usually worth between $50,000 and $100,000, depending on how many frame machines business owns and how nice a spray booth business owns.
I have seen some specialized shops sell for more than above number because they have a truck spray booth or another business attached to main business. Examples of attached business might be an auto repair shop or towing operation. Also location, size and real estate rental amount will influence value of any business, to some degree.
2. The second method, I call GROSS SALES METHOD. This is used when sales are over $1,000,000 a year but profit is unknown or financials are not available or reliable. Because of experience, a Body shop buyer can make reasonable estimates of future profits, if they have some basic information. The basic information includes rent, source of business (DRP, STREET, or a CAR RENTAL AGENCY), and desirability of location.
When this method is used, value appears to be about 3 months sales or 25% of last 12 months sales. This method is not very reliable on businesses with sales of less than $1,000,000, because question of being profitable is very questionable. Why is this breaking point $1,000,000 in annual sales? Multi-store buyers will have well paid managers, so many figure their breakeven point is around a million.
Less than $1,000,000 in sales is not even worth their time. Of course we know that there are exceptions to rules. Some of exceptions are A. when a new location will be a satellite store to a bigger location. B. The buyer must have a location in a specific area to please a DRP. C. To get rid of a competitor.
3. The third and most used method of evaluating any business, including body shops, is NET PROFIT METHOD. This method is based on idea that a business is worth what it generates, in profit and benefits, for an owner. Body shops, like so many other small businesses, often do not show a profit, at end of year. Strange, how so many businesses of different sizes all just happen to end up with little or no profit. What I find really amazing is that IRS doesn’t audit more businesses then they currently do.
