Because the starting financial statements often contain important transactions with owner/operators and other related parties, the financial statements will need to be scrutinized and probably adjusted. Once reliable adjusted financial statements are available, the following valuation methods are most commonly used to value auto repair shops:
- Asset-based valuation – Particularly for a company that is not profitable, the fair market value of a company’s assets less the fair market value of its liabilities may control the valuation.
- Income approach (capitalization of earnings) – This method is most the accurate when past and expected future earnings are stable.
- Market approach – This method utilizes market indications of value using acquisitions of privately-held auto repair companies. Although multiples vary widely based on economic considerations, representative multiples are provided below.
Description of the Industry
The U.S. auto repair industry is fragmented, with the majority of firms being privately held by owner/operators. The industry is 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.
Notable industry trends include the following:
- Fewer car crashes – With new technology and the auto industry focusing on safety features for vehicles, there have been fewer collisions occurring. This means fewer collision repairs for auto shops.
- Generally, cars are being kept longer and have a longer useful life. This increases the need for maintenance that allows the cars to last longer.
When evaluating the performance of a particular repair shop to the prices obtained by both the industry and in comparable transactions, it is helpful to consider key performance metrics, such as:
- Number of customer complaints
- New customers per month
- Number of hours per task
- Major cost categories as a percentage of revenues
Industry Organizations and Publications
Organizations that publish helpful information include:
- Automotive Service Association (ASA)
- California Service Station and Automotive Repair Association
Availability of Publicly Traded Guideline Firms
The disclosures of publicly-traded companies are useful in providing information about the industry, as well as possible value indication using the Market Approach. There are few publicly traded companies in the U.S. auto repair industry. The top publicly traded auto repair companies are:
- Monro Inc. (MNRO)
- Midas Inc. (MDS)
- Precision Auto Care (PACI) – a franchisor
Availability of Private Purchase Transactions
Private company purchases of auto repair shops identify a wide range of purchase multiples, thus requiring further analysis and comparison. A proper value for the company that you are assessing should be based on the performance of the subject enterprise, compared to the performance of others in the same industry.
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. Because most of these enterprises are run by owner/operators, an analysis of the reasonableness of the owners’ compensation is an important valuation step. Other personal expenses and related-party expenses may also need to be adjusted. Generally, after adjustment for such items, one can expect the market multiples of profitable enterprises to be approximately as follows:
- MVIC (market value of invested capital) to Sales – 25% to 50% of revenues
- MVIC to earnings before interest, taxes and depreciation (EBITDA) – Two to five times
Larger operations generally have favorable economies of scale, and will be worth more proportionately (i.e., receive a high multiple).
From each of these MVIC indications, debt and other meaningful borrowings that would not typically be assumed in the purchase should be subtracted
Because of improved delivery of needed parts, auto repair shops tend to carry less inventory than occurred in past years. An example of an exception are repair shops specializing in tire replacement. If the carried inventory is modest, inventory may be included in the purchase price. Larger inventories as a percentage of revenues (e.g., tires) could be an addition to the value initially identified using the above metrics, particularly if the pricing comparisons involve companies/transactions with less inventory.
The length of the remaining lease term is an important consideration for any retail business, including auto repair shops.