Automotive repair is a $62 billion industry annually in the United States with over 260,000 businesses and an annual growth rate of 2.2% over the last 5 years.  The industry has several important segments.  When a car breaks down or needs service, the consumer has several options.  One, the consumer can go to the dealership where the vehicle was purchased, and the auto repair facility at the dealership tends to be the most expensive.  Two, the consumer can go to an independent auto repair shop.  There are shops that specialize in European vehicles, domestic vehicles, or Japanese vehicles, etc.  There are also shops that specialize in fast oil changes, tires, mechanical repair, or collision repair.  Three, the consumer can visit an auto repair facility attached to a gas station.  And finally, the consumer can call a mobile auto mechanic (who might simply be a friend or relative) who comes over to the consumer’s house and fixes the car on-site.

Performing an accurate business valuation on auto repair shops requires an understanding of the industry coupled with a solid grasp of the shop’s current performance.  In particular, it is important to evaluate the following metrics:

• Weekly car count.  The number of cars serviced by the auto shop is an indication of how busy the shop is, the growth potential of the company, and how the current revenues are derived. 
• Average RO (Repair Order). By comparing the average RO at the auto repair shop in question with that of the industry, potential buyers can gauge the effectiveness of the current service writers and the potential to increase sales.
• Revenues.  The higher the revenues, the more desirable the company is.  However, there is a magic number (somewhere around $1 million) in which it becomes much easier for the owner to become an absentee owner if the revenues exceed that amount.  In other words, the business valuation might be higher if the conditions are present for the potential buyers to become absentee business owners.
• Labor costs.  Labor costs make up a good portion of operating expenses, and should be monitored carefully.  Comparing the ratio of labor costs to sales with that of the industry plays a role in the valuation of the business. 
• How the auto technicians are paid.  Are the auto technicians being paid on an hourly system or flat rate system?  Auto shops using the flat rate system pay their technicians based on a national standard of how long it should take to perform a particular repair.  For instance, if the national standard says a particular job should take 45 minutes to perform, the technician will be paid for 45 minutes of work regardless of whether he finishes the job in 30 minutes or 2 hours.  If a technician is good, he might be paid for 70 hours of work while actually only working 40 hours.  Utilized correctly, the flat rate system could boost productivity. 
• Parts costs.  The cost of auto parts is another expense that should be watched carefully because it affects the bottom line.  A business valuation advisor knowledgeable in the auto industry should look at the ratio of parts costs to revenues. 
• Owner’s discretionary income (ODI).  Looking at the net income figure is often insufficient to gauge the performance of the company, because many small business owners intentionally minimize the net income to minimize their tax obligations.  An experienced business valuation advisor should take the net income figure and perform a financial recast to calculate the owner’s discretionary income, which is a much better indication of the owner’s true income. 
• Location. The location of the auto shop also plays a role in the business valuation.  If the location is highly visible with lots of drive-by traffic, potential buyers will be more willing to pay a higher price for the business.
• Number of bays, lifts, and parking spots.  The number of bays, lifts, and parking spots provides an indication of the current and future capacity of the auto repair shop.  For instance, without enough parking or bays, the growth potential of the shop might be limited.
• Years in business.  Business buyers do not like to see fly-by-night businesses that do not have an established history.  How long has the shop been in the community?  What kind of reputation has the shop achieved? 
• Current marketing efforts.  If the current owner is already doing everything possible with marketing and sales are still suffering, potential buyers might think twice before making an offer.  Conversely, if the current owner hardly advertises and customers are rolling in the door, potential buyers might offer a good price for the business with the expectation that they can increase business even more after the purchase. 

All of the above factors can play a role in the business valuation of an auto repair shop.  When obtaining a business valuation on your shop, be sure to seek advice from a professional who has the experience and understanding of auto repair shops.

Advantage Business Valuations provides business valuation services for small to mid-sized business owners in the United States. Founded by Aaron Muller who has valued thousands of companies as a business broker, Advantage Business Valuations helps small to mid-sized business owners determine the value of their business with ease and confidence. To discover the value of your business, visit www.AdvantageBusinessValuations.com.