I run a small auto repair shop, been in business 18 years. Thinking about selling next year but I keep hearing horror stories about brokers lowballing owners. I want to know how to calculate what my business is really worth so I don't get cheated. Where do I even start? I have decent books but not perfect. Any advice on the actual math or methods brokers use would help.
Valuation
How to calculate your real worth so brokers can't cheat you
Start with seller's discretionary earnings. That's your net income plus owner's salary, perks, one-time expenses. Then apply a multiple based on your industry and size. Auto repair shops often go for 2-3x SDE. But don't trust a single multiple. Get three different broker opinions and compare.
The math is one thing, but your add-backs need to be defensiwble. If you're claiming personal vehicles or family payroll as add-backs, a buyer's accountant will tear that apart. Clean up your P&L for at least two years before you even talk to a broker.
Honestly the the best defense is a proper business valuation from a certified appraiser. Costs a few thousand but it gives you a baseline. Brokers hate when you have your own number that's backed by a real report.
Certified appraisal is fine but overkill for a small shop. You can do the SDE calculation yourself and then sanity check it against online listings. Just don't rely on the broker's number alone.
What multiple are you seeing for auto repair? I'm in a different service business and my broker quoted 4x but I think that's optimistic
4x is high for most service businesses unless you have recurring contracts or very strong management. For auto repair, 2-3x is more typical. Some go higher if you own the real estate, but that's a separate asset.
Get your add-backs documented and be ready to explain them line by line. I sold a landscaping Company last year and the buyer's due diligence was brutal. Every personal expense I'd run through the business got questioned. Having receipts and a clear explanation saved me.
Also watch for brokers who want to list low to get a quick sale. They make their commission either way. Ask them to show you comparable sales, not just listings. Sold prices matter, not asking prices.
One more thing: normalize your revenue. If you had a one-time big job or a lawsuit payout, take it out. Buyers wxant to see what the business will reliably earn going forward, not your best year ever.
Agree with GravelRoader. I'd also add that you should calculate your working capital needs. A buyer will want enough cash flow to cover the first few months. If your business is thin on working capital, that can reduce your valuation or kill a deal.
What about inventory? My shop carries a lot of parts. Do brokers include that in the valuation or is it separate?
Usually inventory is valued separately and added to the purchase price. It's often sold at cost. Make sure you agree on how it's counted before signing anything. I've heard of disputes over whether old or obsolete inventory should be included.
This is all helpful. I'm going to pull my last three years of P&Ls and start identifying add-backs. I'll also look into getting a professional appraisal as a baseline. Appreciate the input.
Good plan. One last suggestion: talk to a business attorney before you share any financials with a broker. Some brokers will want an exclusive listing agreement that locks you in for a year. Read the fine print.