Smog Shop Due Diligence
Buying a smog shop can be a good investment, or it can be a bad choice. How can you tell which smog shop is a good idea?
State of CALIFORNIA law requires smog testing of gas driven vehicles. Department of Consumer Affairs/Bureau of Automotive Repair (BAR) determines which vehicles are more likely to fail. Called High Emitter Profile or Gross Polluters, these vehicles are directed to a Test Only Center. Two percent of the vehicles that are driven on California roads are directed to test only centers. New cars do not need a smog check for the first 6 years. Thereafter one is required every two years.
What is High Emitter Profile?
All the gasoline powered vehicles driven on California roads are required to get an emission test every two years or when there is a change of ownership. All the data collected from smog inspections goes into a database called Vehicle Identification Database (VID) The VID is used by the Department of Motor Vehicles (DMV), BAR, and other government agencies. Also stored is general vehicle data such as:
- Vehicle miles traveled. Notes about high mileage or very low mileage for the age of the car.
- Emissions-related recalls.
- Technical service bulletins.
- A history of failing smog tests along with the with the technician/station that received a citation.
- Pattern problems and engine size.
Due Diligence for Smog Test Only Shops in California
Every State has different rules regarding how they test for auto emissions. California has privately owned test centers.
Private business owners can be licensed by the State of California, Department of Motor Vehicles to do testing of automotive emissions. A buyer, if he wants to do his own testing, must pass the ASC, California State Smog Test, to get a license. The time frame to take the course, pass the test and get the licensed issued is 6 months. A non-licensed owner can hire a smog check person for $2,500 to $3,000 per month net (after payroll deductions and income tax withholding).
One smog test only shop I did due diligence on for a business buyer, paid the smog technician $70,000 per year. Another location only paid $40,000 per year but did give bonuses.
Examples of buying a smog shop
Prospective business buyers have had a lot of interest in Smog Test Only shops because the published profit numbers are impressive. A lot of these shops on the market appear to be making a lot of money. The truth is some are and others are not. When looking to buy a Smog Test Only Center in California, there is a lot more to be known about the business besides the profit number. Let me give some examples.
Some smog test only shops have fixed prices. Others offer $10.00 coupons or accept the coupons issued by their competitors. I just heard about one Smog Test Only Shop located in Northern California that has a posted price of $99.00 and negotiates a different price with every customer. The owner does not work at the business, so the tester has complete flexibility in his negotiations. This makes it difficult for an owner to control employee theft.
Another variation between shops is how many employees there are. Some have a service writer and a technician on site at all times. Others let the technician also do the order write ups.
Some places have two smog technicians each working 40 hours a week. Other smog test only centers have the smog test technician work 60 hours per week, with the technician making time and half on the extra 20 hours per week. It is important to make sure that all overtime is paid properly, where required by law, and payroll taxes are being paid on 100% of the wages. Some smog test only centers illegally pay their staff a portion of the wages under the table. A business buyer has to be very careful to determine if this is being done or not. The sellers sometimes forget to mention this little important fact, so you must ask.
Other big considerations when buying a smog shop, or any business, is the location, the competitor’s locations, the location’s rent-including the CAM (Common Area Maintenance) and the other lease terms. CAM fees help cover the landlord’s direct expenses for internal (hallways, elevators, lobbies, public bathrooms, etc.) and external expenses (parking lots, landscaped areas, etc.) The lease terms and conditions can affect half the value of a business. Never sign or assume a lease without having an attorney or an experienced real estate broker look at it carefully.
Two smog test only centers can be doing the same volume, charge the same prices and have completely different profit numbers. This can be because of how they run the shop and handle their payroll. That means that the value of these two similar locations could be the same or they could be drastically different.
What You Need to Know About The Law
Smog Test Only Centers are regulated by the State Legislature and Dept of Motor Vehicles of the State of California. Government agencies change the rules periodically. You must be aware of what rules there are and what changes have been made and will be made. Then you must determine the future effects of any rule changes that will be taking affect. As part of doing my due diligence on any industry I study the industry carefully. That is one of the actions that a good due diligence expert does to protect his clients.
When buying a smog shop, the listing broker will always advise you, in writing, to hire an outside CPA or other due diligence expert to assist you with the business review. There is a specific reason that agents do this. If you do not hire an outside adviser and you later are unhappy with your purchase, his attorney can tell you “My client told you, in writing, to get outside help, and you didn’t listen to that advice.” Take that very good advice, even if he gives you verbal suggestions to the contrary. Buying a smog shop without a CPA or other experienced due diligence expert assisting you is bad business. If the adviser has experience in the subject industry, he is worth his weight in gold. In my case, I am a big man so the weight is higher than smaller men. Due diligence usually costs less than two percent of the purchase price and is always worth 20 times what it costs. Since no one can know everything about every type of business, it is important to note that any buyer, especially a novice, should never buy a business without at least one outside adviser. I myself have experts on my staff for my client’s use, but also so that I have advisers advising me. One definition of an educated individual is a person who knows where to go to get the answers to questions. Let me know if I can be of help.
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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