Auto Body Shop Due Diligence

Is This a Good Time to Sell Your Body Shop Business?

Have you ever asked yourself the question? “Is this a good time to sell my business?” That is a question every business owner asks himself, everytime he has a bad day. I once received e-mail from the editor of the Auto Body News, asking me that key question. “What is happening in the market today? Is this a good time to sell? ” My quick answer was “These are very interesting times.”

Of course that answer doesn’t tell you anything that you can get your teeth into. So! Let me clarify my answer. Since I have been selling auto body shops since 1992, I have seen many changes in the body shop industry. One thing that hasn’t changed is that there have always been an abundance of both sellers and buyers. The buyers have always been, and still are picky about what they were looking for.

What is a Buyer  Shopping for an Auto Body Shop Looking For?

The perfect shop in the eyes to the buyers is (A) one that has a customer base and a revenue stream that is reliable and isn’t dependent on the owner being there to retain each individual customer, and. (B) doing a volume of at least $100,000 per month, but really much more. Large volume sellers think that if they have a DRP (Direct Repair Program), the world is wonderful. A DRP is where the insurance companies set up a relationship with the body shop to do all their clients business. Much like an HMO in health insurance. Both buyers and sellers think that having a DRP contract is the only way to go.

DRP Contracts: Not the Only Way to Go

This may be true but the contracts are not automatically transferable, and a buyer will be very unhappy if the DRP leaves after the buyer though he was paying money for this “reliable revenue stream.” Smaller volume sellers, on the other-hand, not having corporate accounts, dealerships or other contracts still have hopes of getting a lot of money for their shops. The average shop I run across is only doing about $300,000-$500,000 annual gross income. So what we have is a situation where a lot of buyers are looking to buy a shop, but there are not a lot of shops available, that fit what they are interested in.

This year, (1997) one change has occurred. There are fewer shops available than at any time in my career. Not fewer of the large volume shops for sale, that is fairly stable, but fewer of the small mom and pop repair shops that have not been in heavy demand. The reason, I believe this has happened is because of the booming economy. Low volume shops are doing better than they have in years. They are making money, and do not feel as much pressure to close down. They still would like to get out, but when they find out that their 5,000 sq. foot shop which is making them a $100,000 net profit, is only worth $100,000 on the open market they decide to keep on working. (In 2015 that price might be between $125,000-$150,000)

As always, the shops doing $1 Million to $3 Million or more, per year gross income is still in demand. The price alone still is the main factor, in determining if these shops will sell. A good example of this is what is happening in lower Orange County. There are currently a couple of shops in Lower Orange County that are for sale, by the owners. They appear to be very profitable but the asking price is too high and the buyers all know it. Even the fact that these are the only shops available for sale in this prime area has not changed the fact that buyers just refuse to over pay.

Is There a Profit to Be Made From Buying Your Auto Body Shop?

Last year I was marketing a high volume shop, in Ventura County. The buyers refused to pay the asking price, even though the volume was there. Why? The profit wasn’t. In this situation, the buyers would not pay for the volume and stability of income unless the net profits were there. They didn’t assume that they would make a profit where the current owner was not making a big enough return. It appears that buyers of today are very careful. I believe they do not trust their own ability to get new business in the door and are too careful.

To clear up any confusion about what kind of buyers we are talking about, let’s break the buyers up into categories. The first category is the consolidators. There are two large ones in Southern California (1997) but they are not the whole market. I have also talked to out of state and Canadian consolidators that have inquired about moving in to the So California market. Consolidators want shops that fit their model. That model sometimes changes but basically they will buy a shop if it fits their model.

If it doesn’t, they will not touch it. The price by itself doesn’t turn their interest on or off. We do not have enough space to discuss what this group will buy, in this article. It is enough to say, “ If your shop fits their criteria they would have contacted you and expressed interest. If they haven’t contacted you, they are not interested.” Period! They know their market place and who is in it.

By the way, if I owned a shop that a consolidator wanted, I would never sell to them. Being a professional negotiator for 40 years, I find the requested seller financing terms totally unacceptable. When I have found out about these sales, after the fact, I am amazed. I had individual buyers ready to purchase for the same money, or more, without the seller being at risk, but no one asked me.

Multiple Location Shop Owners

The second category is the multiple location shop owners. Usually with one or more DRP contracts these owners want to expand into more areas. They are very interested in the sq. footage of the shop, and its ability to handle over $2 Million Gross Income per year. This buyer only looks in limited areas. The areas being where they have been offered a DRP contract. When they are looking, they need it now, while the window of opportunity is open to them. If they can’t find it quick, they will not need it at all. Recently I had a multiple shop buyer who had made an offer and was negotiating a shop in West Los Angeles. By the time we finished the negotiations, the DRP contract was gone and so was the buyer.

Other Types of Auto Body Shop Buyers

The third category is the buyers who have worked in the industry before, but do not currently own a shop. Also in this group are the buyers who have family in the industry, and money is no problem. This buyer believes “ If it doesn’t have a DRP, forget it. If it has a DRP and isn’t making much money, also forget it”. If it has a DRP, and it is making money, they are interested but only at what they consider is a fair price (In their eyes).

I have on occasion successfully changed this group of buyer’s mind at how they analyze what a good shop looks like and on occasion they have bought shops with “a steady reliable income”, other than insurance contracts.

The fourth category is the person that just wants a shop. They will do what they have to, to afford a shop that will work for them. This group is the working body man or auto repair shop mechanic. Because of their limited funds, this buyer will only pay what he or she feels the equipment is worth. They will pay nothing for goodwill because they believe that the seller’s customers are not stable and will leave when the ownership changes. Are they wrong?

There are a lot of buyers out there. My database has over 250 current names of body shop buyers. There is currently a shortage of shops for sale but mostly in the properly priced category. Most days I feel like a marriage broker with a lot of plain brides and a few beauties. The dowry for the beauties is more than most good-looking boys will pay. The balance of the girls may not be pretty, but some of them can sure cook. Anyone want to get married? “Have I got a girl for you?”

One Final Note on Buying and Selling Auto Body Shops

(It is now 2018, and some of the numbers in this article have changed. I did not want to change the original article because the basic information has not changed. Prices in some cities in the USA are really pricy. I just appraised a shop in Seattle Washington, where the economy is booming. Two shops, one of which I valued, sold for 80% of the annual sales. On the other hand, since wages and prices are up from 25 years ago, in California, values have not changed too much. The rust belt around the Great Lakes are not selling very often and prices are very affordable, subject to how much the rent is as a percentage of gross income. Things constantly change in my experience, but they also stay the same.)