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Case Study – Auto Repair Company

Introduction

This video provides an overview of the actual valuation report for an automotive repair and maintenance company. Regardless of the business you own or the industry you operate within, the fundamental valuation tools and techniques are the same, and all business certified reports are structured in the same way. We also take confidentiality very seriously here at BizWorth, so we’re going to show you an actual report, but we’ve changed the company’s name, the valuation dates and all specific underlying information regarding the company.

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Transcript

Hi, Sheila with BizWorth here. Thanks for joining me for an overview of an automotive repair and maintenance company. Regardless of the business you own or the industry you operate within, the fundamental valuation tools and techniques are the same, and all business certified reports are structured in the same way. We also take confidentiality very seriously here at BizWorth, so we’re going to show you an actual report, but we’ve changed the company’s name, the valuation dates and all specific underlying information regarding the company, but we thought it’d be helpful to show you an actual valuation report and cover the report in some detail.

We start off by identifying the company and the valuation dates. We discuss upfront: what is the percentage of the business that’s being valued? Is it a controlling and marketable ownership interest or is it non-controlling non-marketable? Next is the table of contents, which is the same for every valuation report. We have an executive summary – that’s where we’ll spend the majority of our time in this quick overview. We also have an introduction that goes into detail on the valuation engagement. We have a section focused on the nature and history of the company. We’re also going to spend some time talking about this automotive company and a lot of the pros they had going for them, and then some of the risks. We have an overview of the economy and industry. This is very important because it helps to inform lots of things, one of which is growth rates of the company. Next is financial condition and earnings potential of the business and how they benchmark against the industry. Lastly is the valuation of the company.

Let’s start with the executive summary of this company. It’s laid out in the same way for every company. There is a specific conclusion of value, the business interest that’s been valued, and then we start to provide a high-level overview of the nature and history of the company. We talk about key takeaways of this engagement. This company had a lot of really great things going for it. This company had been in business for almost 30 years, had very high ratings on lots of customer rating tools such as Yelp and Google. They had a very well-developed website. They had a great marketing program. They were continuously reaching out to existing and potential customers in the area. They also had just a few weaknesses such as long-standing membership (a key person that the company was identified with). They which is also approach to some extent as well. Obviously, they had very strong management but there was one key person that was identified with the business in the community. Also, they had other things that provided them with potential upside in the future. This business was closed Saturday and Sundays, which is just fine, but there is potential to increase the valuation if this business was open on any of those days. They had bays within their automotive repair shop that went unused. They had other things that we’re going to talk about in their valuation as well, but overall a very strong company that was in business for almost 30 years.

The industry and economy overview is important regardless of the business and the industry you operate within. It’s very important to understand the geographic region you operate in. This business had one automotive shop, but there are some businesses that have several within a city, county, or state. It’s very important to understand that there’s diversification upside, but there’s also customer diversification and economy diversification (if one region is hit hard with layoffs, others might be sheltered from that). In terms of growth rates, there is time early on in a company’s life, after a remodel, a new project, or a new push campaign that there might be a high growth rate, but over the long term, companies generally do not have a higher growth rate than the general economy or the industry in which they operate.

The financial condition and earnings potential of the company. This company had been around for a long time. We benchmarked them against competitors. For the last several years, this company had almost a plateau to slightly decreasing revenues for a host of reasons. We also make adjustments if necessary. Sometimes owners will either pay themselves more or less than industry and we make adjustments for that. Sometimes there are expenses running through the business that aren’t necessarily important for them to be deemed as business expenses and we make adjustments for those, whether they be for the plus or for the negative.

Next is the valuation itself. For this business we looked at all three approaches. We looked at the asset approach, the income approach and the market approach. Some companies decide to average the valuation, and some choose a particular valuation approach. We generally choose a specific approach and the valuation associated with that approach for a host of reasons, but there are reasons why you may want to average them. This company had been in business for very long period of time and the earnings profile was somewhat predictable, so we went with the income approach and we chose a capitalization of earnings method. However, if this company was going to do a capital expenditure project where they were going to add six more bays or do a huge marketing campaign push in addition to some remodeling and there might be some capital associated with that, we would likely do a discounted cashflow model or a multistage growth method. So, we look at different approaches depending on the specifics of that given company.

The next section is the introduction. We talk about the standard of value chosen. In this case, we chose the fair market value.

The nature and history of the company. This is an automotive company and we talked about the background, how long they’ve been in business, and the services they provide. Again, we looked at the revenues. We spoke in summarized detail about the services they provide from air conditioning to auto alignment, all changes to vehicle inspections, tire replacement and balancing services. We talked about the customers. Generally, this one location automotive repair shop had customers from the surrounding area. They had a lot of repeat customers. They had very few fleet accounts. We look at those different items and how many customers make up your total customer base. For example, if there’s one that makes up 50% of your revenues, there’s a higher risk profile associated with that customer. We also look at fleet accounts. Fleet accounts are generally helpful because in times that you’re not very busy, it keeps your people working. We review marketing and advertising. We look at what marketing a company is doing and this company had a great website, they were on Yelp, and they ran several different tools to garner customers. We talked about their competition and management. We talked about their facilities. This company had several more bays available than what they were using. We also talked about their employees and we talked about how many were master techs and how many were certified technicians. That matters because the knowledge of your technicians differs based on certifications and in turn, their charge rates differ.

Next, we review the economy and industry. We do look at the very specific industry that you’re operating within, but we drill a lot deeper. We look at the regional economy and we summarize all of that. All of the growth rates are important. The health of the economy is important. The drivers of your industry are important (for automotive repair). The more affluent areas you live, it could impact the success of your business for an automotive repair shop that’s not connected with the dealership.

We also look at whether the number of registered vehicles is increasing or declining. We look at gasoline prices. All of those key drivers may impact your business. If you’re in a different industry, (for example, a restaurant, law firm or medical practice) you’ll have different drivers for your industry.

For this company, we also looked at their financial conditioning and earnings. We compare them to the benchmark competitors.

Then we move into the actual valuation of the business. We walk step by step in that valuation and we talk about all three approaches and we talk about the methods that we used in each one of those approaches.

I hope this video blog was helpful. Please reach out if you have any questions. If you go to our web site, www.BizWorth.com, you can schedule an appointment to meet with me or one of our advisors to talk about your business valuation. Even if you’re not sure it’s the right time for a business valuation, hop on a free consultation and let’s talk through that. We’re always happy to help business owners so feel free to reach out. If you like our content and would like to see more, visit our blog or follow us on Facebook, LinkedIn, and YouTube. Thanks so much.

Keywords

  • Business Appraiser
  • Business Asset Valuation
  • Business Valuation Texas
  • Corporate Business Valuation
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  • Professional Business Appraisal
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