Valuing the Net Worth of Your Company

Thinking about buying or selling? Now’s the time to figure it out!

Part of owning a business is knowing how much that business is worth. From the smallest one-man shop to the largest manufacturer, knowing is more than half the battle when it comes to getting loans, buying new equipment (will it pay for itself?) or hiring new employees. Probably the first thing to consider when taking in the value of a business is whether or not the company is owned and paid off. If it’s not, how much is owned on it? If it is owned, can it be expanded? Is the company likely to go up or down over the next 5, 10, 15 years? Also, how much are the lands and buildings worth? This will come into play when borrowing money.

Assets

Other than the actual land and buildings, the other large cost in factoring in how much of a business is worth is its assets. If you’re an online parts retailer, you may have virtually nothing in assets and be drop-shipping everything. If you’re a busy repair shop, you may have $500,000 in tools alone. Most automotive establishments fall between these two extremes. One long-time mechanic we talked to had an account closed with a Snap-On dealer who was retiring. “I added everything up, and I had about $125,000 just from that one dealer over the course of 20 years,” he stated. Hardware is probably one of the most important yet hard-to-calculate aspects of owning a business. Some items, like Scan-Tools, may be expensive yet absolutely needed to work on newer vehicles. Other items like dynos may not add instant cost, yet are useful in the long run, and have a long lifespan. Finally, the pure iron of the auto repair business–sockets, breaker bars, and wrenches, rarely are devalued much, or go out of style.

Overhead

Overhead for auto repair, parts manufacturers or auto re-builders can be an absolute killer. Electricity, mechanic’s pay, equipment for new vehicles, rent, turnover (and therefore lost income) the list goes on and on. Often a company may make only about 20 percent of its annual gross income in actual profits, and even busy companies have their downturns. It should be noted that a shop that has a large workforce generating a large amount of labor is usually higher up on the profit margin scale than companies that specialize mostly in parts.

Multiplier

So in the end, what’s it all worth? Well, the current theory is that an auto repair business is worth about 2.5 to 3 times its net profits, plus whatever property and equipment are owned. This means a company that does 1 million a year in parts and labor sales and would theoretically be operating at about $200,000 in net profit (before taxes), therefore could sell for around $500,000 to $600,000. Keep in mind that this is an extremely rough estimate, and factors like re-investments in equipment can provide tax breaks and knock down the net profit considerably.

And therein lies the rub: auto repair, fabrication, or parts businesses all involve some sort of horsetrading on labor, or parts, or vehicles. What is often considered “net profit” is hard to go off of entirely, because the business may have acquired expensive new equipment, parts, tools, or vehicles. While many people use gross income, there’s just no real way of knowing how a business is valued if you don’t know the true long-term net profit…which is usually kept between the buyer and seller! Stay tuned on this one, determining a companies worth is a very in depth discussion, we’ll dive into each individual aspect in future installments of Diesel World Insider.