Auto Body Shop Due Diligence
Willard Michlin offers a full array of CPA and CFE services related to auto body shops. With years of experience specific to this industry, we’re ready to provide meaningful value-adding consultations to those considering purchasing a body shop and we’re offering services running from cursory reviews of the books all the way to full audits on your behalf as the buyer. For starters, please read the information below. It’s our most basic advise on the subject to help prepare you for the process of having us consult on your purchase of an auto body shop business.
Advice to Prospective Body Shop Owners from Willard Michlin, CPA and CFE
So you think you want to buy a body shop? A body shop can be a great investment, if you are the right kind of buyer. Who is the right buyer? Let’s discuss that in detail. Here is what we will cover in detail.
- What are those skills necessary to make it work?
- Are you willing to do the business actions necessary?
- Do you really want a body shop or is this just an idea?
- What kind of body shop would work best for you?
Do You Have the Skills to Buy a Body Shop Business?
Most successful body shop owners come from inside the industry. They are occasionally a body and/or paint man who worked in the production area as a teenager or as a young adult. This education is extremely valuable and, if you are buying a shop doing less than $1,000,000 in sales per year, it is an absolute necessity.
Some owners learned the business doing adjusting or estimating for either a body shop or an insurance company. Insurance adjusters work out in the field, for an insurance company inspecting cars that have been damaged. The estimators work for the body shop figuring out how much the job is going to cost.
Another group of buyers have had no body shop experience at all, but they grew up around cars and love them. This buyer may be interested in the restoration area, and should only buy a shop where he has a family member or close friend with body shop experience, that will be working with him. Or if the seller can be made to agree to stay for at least one year in order to teach the buyer every part of the business.
Most of the buyers of body shops come from buyers who currently own one or more shops, or used to own a shop and sold it to do something else. These buyers know exactly what they are getting into and know the risks and rewards. There are quite a few prior body shop owners who sold their shops, and went into something else, only to find out that they made more money in the auto body business. They then go back into the industry working for someone else until they can buy another shop for themselves. No matter how much they hated the business they find that they want back in. It gets into your blood. These buyers are what every seller is looking for.
Another category of buyers includes auto mechanics and tow truck owners, who sometimes want to expand into doing body shop work on cars they are currently picking up and taking to other people’s body shops.. These types of buyer have a lot of knowledge and understanding about the business but they still need to buy a shop where the experienced staff will be remaining with the company.
The last group is composed of business people who figure they can run any kind of business. This type of buyer can make it, only if he has at least one family member with experience in the industry and the primary buyer is a very good sales person, who will go out and bring business into the shop.
Are you willing to do the business actions necessary to do the business?
In this section I would like to discuss which actions are absolutely necessary to be successful in running a body shop and if not done will guarantee failure.
The single most important action that must be taken by any new body shop owner is to bring in new business. This is required for three reasons:
- Everyone wants more volume, but some buyers bought the shop based on their belief that they can do more volume than the last owner.
- You must replace the volume that will be lost by the transfer to you the new owner.
- If the shop has DRP Contracts they may not transfer, unless the transfer is handled properly. DRP stands for Direct Repair Program Contracts. These are special relationships with individual insurance companies where the insurance company gets a discounted labor rate and the shop gets all of that insurance company’s clients business, in one or more specified zip codes, routed to them. Most shop owners feel they can not survive without DRP contracts.
You get this new volume from several sources:
- One of those sources is not from DRP Contracts. In fact, please DO NOT BUY A SHOP BASED ON THE BELIEF THAT YOU WILL GET DRP CONTRACTS AFTER THE PURCHASE UNLESS YOU HAVE AN AGREEMENT, BEFORE THE PURCHASE, THAT THEY WILL GIVE YOU THEIR BUSINESS.
- Definition of Direct Repair Program or DRP; These are formal contracts with insurance companies to represent them within a specific zip code. They send you all of their business, in return for you giving them a predetermined discount, and if they are unhappy with you, you agree to kill yourself trying to please them. An insurance company can cancel a contract any time they become unhappy with you.
- Rental car companies. This business is relatively easy to get, but you do not want to rely on this business, over the long term. It is not profitable enough to cover all your fixed costs, even though it will contribute to covering the rent.
- New Car Dealerships. This is great business to get, partly because you get to charge full retail prices, but the dealership will expect you to buy their business by giving them a few thousands of dollars a month, under the table or some other indirect compensation. Remember, if you can steal the business from someone else, then someone else can steal the business from you.
- Used car dealers and auction cars. This is a good source of business with most of the money being made on buying and selling cars. This tends to be stable business if you like this kind of work.
- Referral business. These are national body shop groups that make national deals with Corporate America and for 10-15% of the gross income from each job you get from them, they will send you body work. This is a very expensive way to get business and in the end some find it not profitable.
- Corporation Accounts/Fleet Accounts. This is one of the two best ways to get business. Some companies do self-insurance, and others have insurance. Regardless, a salesman can get them to send you all their local business by offering good service or other remuneration (compensation). Corporate accounts are quite often at full price or some reasonable discount. Some body shop owners offer to drop the deductible or give some other kind of a discount to the corporation or its employees.
- Off the street. This is the best business in the whole world, if you can get them in the door and keep them in the door. This is where location plays an important part in getting the business. Visiting all the businesses in the neighborhood and offering discounts to their employees or other employee benefits for coming to you can get this business. This type of business is what a good salesperson dreams of. Most established body shop owners tell me that they did this originally when they bought their shop; but they stopped going out and selling when they got busy. Funny isn’t it? The action that made them busy cannot be done anymore because you are too busy with work. This is how you build a shop’s volume without DRP contracts.
What Kind of Auto Body Shop Should I Buy?
So you’ve decided you want to buy an auto body shop. There are many types of auto body shops, and the right one for you may not be the same as the right one for the guy next to you. We have compiled some information on types of auto body shops so you can pick the shop that’s right for you. And with the help of a due diligence analysis from us, you’ll know for sure that the business you’re buying is financially healthy and will make you money.
What Kind of Auto Body Shop Would Work Best for You?
Of course you want to determine what volume of activity you plan on doing in order to decide what size shop you need. If you expect the volume to remain the same as what is there currently, then you figure the rent and profit based on the sellers current numbers. If you know you can bring in corporate accounts, dealerships and other business then you can use a bigger shop. If you expect to only have what new business that you yourself bring in then a smaller shop may work perfectly.
If you get too big a shop the rent will kill you. If you get too small you will limit your possible volume unless you put in a second shift and keep an eye on that 2nd shift. There are larger capacity shops doing small volume that can be bought very cheap or reasonably.
There are smaller, very inexpensive shops available to use as a first time shop. Then after you learn the business and prove you can bring in volume, you can buy a bigger shop and sell off the smaller one. The best guarantee of success is to start small and grow bigger. What you do not want is to buy a large shop that you cannot fill, thereby working for the landlord.
DRP Contract Auto Body Shops
If you are an adjustor and feel that your employer insurance company will give you a DRP contract, in a specific area, you might have a high motivation to buy a shop in that area, even if its current volume is low. If you are expecting the existing clients to stay with you, after the sale, you have to do some research on this. If the clients are from corporate accounts, car rental companies, or just off the street, you are probably correct. If the clients come from personal relationships with the seller, then forget it. Keep in mind that people of like nationality and religion have a greater chance of taking over personal relationships.
If you are buying a shop that currently has DRP contracts, do not assume that you transfer them. In fact, you must assume you will lose them the day escrow closes. Do not buy a shop that has DRP contracts unless you already have a relationship with those same insurance companies, at another shop location, you currently own.
How to Keep Clients After Buying an Auto Shop
If you are reading my article, I can safely assume you are not currently a multiple shop owner. Multiple shop owners know everything in this article already. There are a few, little-known ways that I have personally developed, to buy a DRP shop and not lose the contracts.
The body shop business can be a very profitable business for the man who doesn’t mind getting out and selling while making friends with lots and lots of people. If you do not want to do marketing and selling then do not buy a body shop. PERIOD!
What you need to know in order to value an auto body shop
After 20 years of valuing auto body shops, I have determined that from the following information alone an experienced auto body shop owner or an experienced automotive due diligence expert can determine the value of an auto body shop, without ever looking at a financial statement or tax return.
- Size of the building
- Size of the total lot.
- Monthly rent, including the CAM (Common Area Maintenance). If business is owned by seller: What rental amount does the seller want from a buyer? What rent does the seller currently charge himself on his company books?
- Number of spray booths? How many are heated and what type of heated spray booths? (Downdrafts and Side drafts are the two main types of heated spray booths.)
- Number of frame machines and the Make and Model number, if the seller knows?
- Does the business have any DRP (Direct Repair Program) Contracts? If yes, what are the names of each insurance company?
- What % of the volume is DRP business?
- What is the annual gross income of the business?
- What is the real owner’s take home earnings from the business, regardless of the form that it is received” (Salary, personal expenses written off by the business and cash income not reported)
Using this information can help buyers make a good decision about purchasing a body shop, without having to look over financial statements, which do not always give a full picture of the financial health of a company. Contact us today for more information about a due diligence consultation, and how we can help you determine how much a business is worth.
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.)
Keeping all of the above in mind and to not take on more than you can chew. Buy a shop that fits your personality and ability and then move up to the bigger shop when you have proven to yourself that you have done it and can do it again. If I can be of any assistance, I am here to help.
Click here to find which business is the right business for you.
Willard Michlin is a CPA, CFE (Certified Fraud Examiner) and Business Broker. He offers assistance, anywhere in the USA, in the key areas involved in the buying of a business: Due Diligence and Business valuation. He is an experienced, honest and trustworthy consultant. He has published many articles and is in demand as a public speaker in and for the business community. You can write to Willard at Willard@EvaluateABusiness.com and he will always answer your questions. He can also be contacted at his Seal Beach, California office by calling 805-428-2063