Valuation Guide: Auto Repair Shops
May 16th, 2011
Summary of Valuation Approaches
There are three different types of valuation methods that can be used to value auto repair shops, these methods are:
- Asset-based valuation
The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity.
- Income approach to value (capitalization of earnings)
This method is most the accurate for restaurants, which usually have a constant growth of earnings.
- Income approach to value (discounted cash flow)
The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business.
- Market approach to value
This method utilizes market indications of value such as publicly traded comparable auto repair company stock and acquisitions of privately held auto repair companies.
Description of the Industry
The U.S. auto repair industry (SIC codes 7538, 7539) includes approximately 170,000 firms and brings in about $90 billion in revenues each year. The industry is very fragmented and the largest 50 companies hold less than 10% of the market. The industry is very labor-intensive and is separated into two segments: Mechanical repair and Collision Repair. Mechanical repairs are usually maintenance repairs to the “undercar” or “underhood” systems of the vehicle. Collision repairs include damage to the exterior such as paint and body work.
- Fewer Car Crashes
With new technology and the auto industry focusing on safety features for vehicles, there have been fewer accidents occurring. This means fewer collision repairs for auto shops and if collision repairs decline they will have to rely on maintenance repairs to bring in more revenue.
- Poor Economy Increases Business
With the economy down, fewer people are buying new cars. Instead, they are keeping the ones they have and doing more maintenance repairs to make sure their cars last longer. Repairs are cheaper in the short run than buying a new car and currently consumers are trying to save money anywhere possible
Auto Repair Shop Performance Metrics
- Number of customer complaints
- New customers per month
- Number of hours per task
- Net Income
- Free cash flow
- Operating Margin
The following average benchmarking data is based on studies from various auto repair shops:
Industry Organizations and Publications
Some organizations and websites that publish helpful information include:
- Automotive Service Association (ASA)
- California Service Station and Automotive Repair Association
Availability of Publicly Traded Guideline Firms
There are approximately 8 publicly traded companies in the U.S. auto repair industry. As of 5/27/09, the auto repair industry’s public companies have an average P/E ratio of 9 and an average price to free cash flow value of 7. Sales values for these 8 companies range from $1 million to $2 billion dollars. Market capitalization ranges from $3 million to $1.6 billion.
The top five publicly traded auto repair companies ranked by sales are:
- PEP Boys Manny MOE and Jack
- Kirby Corp
- Monro Muffler Brake Inc.
- Midas Inc.
- Miscor Group Limited
Availability of Purchase Transactions
The size of private auto repair companies that were bought and sold recently varies greatly, both in terms of their sales, and the purchase price paid for the companies. From 2000 to 2008, the ratio of:
- MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 0.6 to 8 times.
This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which affect auto repair shops as investment opportunities.