How rent can disrupt your shop’s sale

Improperly valuing how much rent you charge to yourself as the landowner and shop owner can mistakenly impact your financials when looking to sell your business.

Rent considerations are essential when looking to either buy or sell an auto repair shop. It could be the make or break of a deal.

A shop owner who also owns the land is likely giving themselves a large break on rent. This can cause significant issues, warned Hunt Demarest, accountant and business valuator with accounting firm Paar Melis, which deals exclusively with the automotive aftermarket.

The shop owner could be charging rent at a land value that was done 10, 20 or 30 years ago. When was the last time the shop owner had an appraisal done? Land values have shot up in recent times so that rental payment that was figured out decades years ago may be out of whack today.

Because if a shop owner is serious about selling, they need to figure out the fair market value of renting that property if they keep the land in the transaction. The buyer’s rental payment could double. So that information needs to be in the financial documents, Demarest said during the session Transitioning Your Business at the Midwest Auto Care Alliance’s Vision Hi-Tech Training & Expo in Kansas City.

“So even though it looks like his business was profitable … it was severely, severely diminished” once the proper rent calculations are added in, he explained.

If it ends up that rent should be doubled, the buyer will now be paying that new amount. The shop’s profitability going forward isn’t what was thought to be believed from the onset of negotiations.

“From a tax perspective, nine times out of 10, how much you pay yourself in rent does not save money on taxes, does not make you money on taxes, it has no bearing in mind,” Demarest said. “You are literally taking money out of your right pocket, putting it in your left pocket.”

What a shop owner should be doing is paying rent at fair market value at all times. This is more attractive to the buyer because they see what the rent’s been for the last five years and have a good idea of what their expenses will be.

Furthermore, shop owners typically build their businesses to make enough money to cover their expenses. So if a shop marks down its rent as $150,000 when it should be $300,000, there’s a gap that’s not being covered.

And if the rent is kept low for the new buyer, the seller isn’t getting proper value for their shop.

“So if I’m a new person, I’m coming into the shop, I’m buying a shop that does $1.5 million a year that I have to commit $300,000 of that to rent, [that’s] 20 per cent,” Demarest said.