Meeting with owner, about to buy his shop

Only 2 techs and their slow. So if you assume 50-60 hrs/week that's not much money at all. Plus you won't have any techs. Looks like all you're getting is equipment which unfortunately won't make you money. Looks to me like the guy wants out and would like to make some money on way out.

Here's several ways to calculate the value of an auto repair shop:

25-30% of annual sales + inventory

2 times SDE* + inventory * Sellers Discretionary Earnings, also known as Sellers Discretionary Cash Flow, SDCF.

1.5 to 2 times EBIT (earnings before interest, tax)

2 to 2.5 times EBITDA (earnings before interest, tax, depreciation, amortization)

2 to 5 times monthly net revenue

1 to 3 times owners annual cash flow

3 times monthly gross + inventory

2 times hard assets + owners salary

33% of annual gross revenue

As you can see, most of these are based on the owner's cash flow and tangible assets such as inventory. The EBIT and EBITDA ones are probably more for larger shops with higher then 1mil in sales.

For the SDE one, google how to calculate SDE, it's somewhat complicated, but very realistic for small businesses, because most of the value is directly related to the owner, rather then the assets. This is probably one of the most important formulas in the list.

I'd calculate every one of these on the guy's business, see what adds up and what doesn't. You might find that his offer is low and you're getting a deal, or maybe way out to lunch and you need to renegotiate or walk away.

Thanks for all the help so far, of course now I'm asking for more. I'm trying to put a value on the equipment, knowing of course that it's not an exact science and it's only for the purposes of basing an initial offer on the business. Keep in mind the building is leased. Here's what I'm looking at:

8 two post lifts, which I estimated the value at $2000 each. Total of $16k.

2 Accu-turn bench lathes, which I estimated the value at $2500 each. Total of $5k.

1 Bear analyzer, with smog options, which I estimated the value at $7500.

That's all the "major" equipment I saw, but I added another $6500 for the misc equipment for a total equipment value of $35k.

Does this sound out of line? Shop doesn't do alignment, diesel engine work, tires or anything other than just a "general repair shop" stuff. I took last year's P&L to my accountant last week and he said the numbers look legit.

How new is the equipment, and does he have receipts for what he paid for it when he bought it? This will really help you figure out what it's worth.

Here's a link for how to calculate depreciation on a piece of equipment:

http://www.ehow.com/how_7624348_calculate-depreciation-equipment.html

It sound like you have estimated the equipment a little high. That may work in you favor. Pay more for the equipment and less for the business. Remember, any equipment that you purchase you will be able to depreciate. I know a guy that bought a shop and way inflated the equipment and reduced what he paid for the goodwill (business). Tax advantage later on.

You need to look at the sales numbers. What is happening on a weekly basis?

2 Techs should produce 80 hours chargeable per week

parts sales is usually 50% of gross sales

80 hrs X shop labor rate + parts sales, less parts cost, less loaded cost of Technicians will give you Gross Profit for the week. Gross profit should be above 50%

Good luck

Mike

Thanks for all the help. Thanks to someone sending me a great spreadsheet, I can see there are some easy opportunities to trim some costs. It looks like the opportunity I've been waiting for. Decent customer base already established, great location with cheap lease, well equipped and opportunity to clean things up and increase business. I'm probably going to stick with around 2 times discretionary cash flow for an offer and see what comes out of it. That's under his asking price, so we'll see.

$400k gross in a 8 bay shop is terrible. Something is wrong. Look back 10 years if you can, maybe he slowed down. 8 lifts can accommodate at least 5-6 techs and should be grossing well over 1m. There might be a problem with 1. Equipment isn't usable, 2. Good help isn't available? 3. Customer base too small , 4. Customer base too poor. 5. Some other reason. The utilities remain constant, so the reason the current owner is under-utilizing the space should concern you .

I completely agree that the shop is under performing. I respect all of your opinions 100%. But it seems most of you are concerned or cautious, and I'm seeing huge opportunity. Great location. Great lease. Equipment is in good shape. Zero marketing. No brand identity. Competent, but slow techs. All this and still profitable. Am I seeing a huge opportunity that's not really there? I'm ready and willing to put in the time, effort and money. Am I far off base?

I completely agree that the shop is under performing. I respect all of your opinions 100%. But it seems most of you are concerned or cautious, and I'm seeing huge opportunity. Great location. Great lease. Equipment is in good shape. Zero marketing. No brand identity. Competent, but slow techs. All this and still profitable. Am I seeing a huge opportunity that's not really there? I'm ready and willing to put in the time, effort and money. Am I far off base?

Not that I am scared enough....... anyone else feel like buying this shop is a bad idea? There's a Big O Tire that sells 1.6MM with 275k cash flow, but I can't even come close to the 650k he wants for that. Isn't this better than starting from nothing?

Not that I am scared enough....... anyone else feel like buying this shop is a bad idea? There's a Big O Tire that sells 1.6MM with 275k cash flow, but I can't even come close to the 650k he wants for that. Isn't this better than starting from nothing?

My point is location and equipment absolutely do not make a shop. It's ALL about your people. I'd rather see you prepared before you open and find out the hard way.

Rambiss,

It sounds like there is opportunity to improve everything in this shop a great deal. It sounds like the current owner has lost his fire. I am curious as to your background. Have you been in the auto repair industry? I did not see your previous post. When I purchased my shop I had been the service manager for 10 years. The transition was so smooth the client base did not know that ownership had changed. The first thing we did was clean up and get rid of all the old clutter, junk engines, old dead inventory, old obsolete equipment. We spruced up the image by painting, cleaning and installing a computer system. The techs were happy and were enthusiastic as well.

If you need new staff this is a company I have used http://www.actautostaffing.com/default.asp

Mike