Auto Service World
News   April 9, 2024   by Adam Malik

Valuing your shop: Understanding multiples

Private equity firms, however, had their eyes on the industry and threw traditional expectations for multiple for a loop

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When looking to sell, there may be some confusion as to valuation, especially in recent years as non-traditional buyers eye the industry as an opportunity.

For shop owners looking to sell — even those looking to buy — it’s important to understand what a shop can be properly valued at. That includes understanding the transaction multiple.

A typical multiple when selling a repair shop is about two-and-a-half to three times net income — meaning a buyer will typically pay three times your net income for your business, which generally includes non-monetary intangibles, explained Hunt Demarest, accountant and business valuator with accounting firm Paar Melis, which deals exclusively with the automotive aftermarket.

The multiplier on net income is what has been set as the top industry standard for a shop. So if your shop nets $300,000 a year in income, you could reasonably expect a selling price of about $900,000.

This is an area in which Demarest gets the biggest pushback. But a top multiplier is one where the business runs well, the owner is not involved in the day-to-day, the staff is great, the equipment is fairly new and things of that nature.

On the bottom end — and what could push your multiple even lower — is when you have none of the above, you’ve just lost a tech and the owner needs to sell rather than wants to sell.

Think of it as a sliding scale of desirability. The more desirable the shop, the higher the multiple, Demarest said.

“This is where you can kind of factor in intangible non-financial stuff that add value to a business,” he explained of the rationale behind the multiple.

Higher multiples are reserved for startups and fast-growing companies, he added.

“Now we see more and more people coming from outside the industry and buying auto repair shops.”

With the potential profitability of shops, private equity firms are seeing the opportunity to make their money back quickly and then some.

“Now we see more and more people coming from outside the industry and buying auto repair shops,” Demarest said during the session Transitioning Your Business at the Midwest Auto Care Alliance’s Vision Hi-Tech Training & Expo in Kansas City.

He’s asked private equity folks what made them interested in owning a shop, They don’t have a particular affinity for cars, they’ve never worked in a shop before and they don’t know about auto repair. So why?

“Most common thing people say it’s the highest return on investment of a small business,” Demarest said.

But they’ve also messed with what shop owners believe they can get for their business.

“I have seen some deals and some of these private equity companies have paid, where it’s like, holy cow,” Demarest said.

He’s seen private equity offer multiple times above what he figured would be the top end. And it’s been continuing.

“Over the last three years, we have had more shops sell than any time ever before,” Demarest noted. And for a good price.

It was essentially a domino effect where one group got in and the other feared they’d be missing out. But that seems to have slowed down now.

“It was really hot for a while and they were actually generally finding people” compared to shop owners looking for buyers, Demarest said.

It still doesn’t make too much sense to him.

“The private equity one is still one that I can’t really figure out because of these multiples that they’re paying,” Demarest said.

Private equities are not the buy-and-hold types where they’re saving it for their next generation. They buy something, pretty it up and look for the next buyer willing to pay top dollar.

“So if you’re going out, and you are paying double triple what the retail amount of these are, who’s going to be the next person that’s going to buy those?” Demarest wondered.

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1 Comment » for Valuing your shop: Understanding multiples
  1. Robert Nurse says:

    Sorry I am not buying it. Hunt Demarest is stating there are private equity firms outside our industry willing to pay 3 times the price for our top lucrative shops in our industry. In doing so they are going to take those already beauty pageant winning shops and “pretty it up”, to flip them onto the next buyer for profit. Awe the American dream. He gives a shop example of a $300,000 a year in net income not revenue. Please, do you think this industry is that dumb and gullible. For my shop to produce a $300,000 net income above my wage. I would have to add and tool twenty more bays, hire 11 more technicians, 3 advisors, a couple of managers and multiply my customer base by 6. Not to mention removing myself from the bay to manage that mess. All to give Trudeau or who ever else is in power more money to waist. If I run a consistent 10% net income yearly, the first person to tell me what my yearly revenue is will get a free oil change at my shop the next time your in Peterborough.

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