Are you looking to open your first auto repair shop, add to your growing portfolio, or just want to buy an existing auto repair shop? No matter your motivations, a thorough business evaluation is the way to go to avoid buying a dud.
With the right approach to evaluating the business, you can ensure the auto shop will work for your needs. Beyond that, your efforts will help you zero in on the perfect price point for the acquisition.
Wondering just what approach to take? To help you out, here’s a look at 14 key areas we explore during business evaluations performed by our team at AutoFix Auto Shop Coaching.
1. Auto Repair Shop Reputation
A bad auto repair shop reputation is a hard thing to overcome. Although not impossible, undoing the damage could take years, costing you big in the long run.
So, do yourself a favor and perform a reputation check by:
- Looking at the Google star rating and checking out the reviews
- Reading even more online reviews on Yelp, Google, and Facebook
- Viewing the website and any testimonials provided
- Checking out all the comments on their social media pages
Don’t forget to send out a mystery shopper (or two!) to see how the shop operates, day in and day out.
2. Approach to Marketing
Word-of-mouth referrals are powerful, for sure. But to be truly successful, auto repair shops must have a strategic marketing program in place. So, check out their marketing approach by asking about their website, social media presence, and ads.
Also, ask if they run any radio ads, send out flyers, or advertise their company any other way throughout the year. Don’t forget to inquire about their typical ad spending and overall return on investment.
3. Company Financials
You need to dig deep when it comes to the company’s financials. If you don’t, you could end up buying a shop without enough money coming in to stay afloat.
Things to look for include:
- Year-to-year profits
- Monthly revenues
- Parts and labor margin
- Labor cost
Figure out if they’re following the best practices in creating their labor rate. Plus, determine if they took out a PPP loan, EIDL loan, and such, and if any is still outstanding. If yes, you need to have them maintain ownership of the loan or work that figure into your calculations.
4. Cash Flow
When buying an auto repair shop, you have to look beyond profits and other basic financials by exploring cash flow. Without proper cash flow, the auto shop may end up destitute by month’s end, leaving them little money for operating costs.
To avoid running a shop with that big problem, get your hands on their bank info to see if they are running out of cash. Also, look at if they’re racking up late fees every month, which is another red flag.
5. Accounts Receivable
Taking over the accounts receivable might sound like a good idea on paper—who doesn’t like money coming their way—but it’s anything but.
In the end, buying their accounts receivable puts the risk of nonpayment on you, turning their loss into your loss. Don’t buy it, no matter how lucrative the figure seems at a glance.
6. Current Labor Rate
The current labor rate gives you a glimpse into how the shop operates and its potential for improvements. You just need to ask what their current labor rate is and how they calculated it.
Did they use the Oreo method of asking nearby shops and then picking a figure smack dab in the middle? Or did they use the industry’s best practices in calculating the rate?
Then, look at how many bays they have and calculate their ideal labor rate on your own. The resulting figure will tell you instantly if there’s a potential for a profit increase across the board.
7. Point of Sale System
Point of sale systems has improved by leaps and bounds in the past few decades. Despite that, many auto repair shops continue to live in the past by using paper estimates, work orders, and receipts.
Others upgraded to QuickBooks but then stopped trying to keep up with the times after that. There are much better methods nowadays, like cloud-based POS systems. Check if the shop has upgraded to gauge their willingness to change.
8. Use of Technology
The auto repair shop’s overall use of technology matters, too, in optimizing workflows for improved profits.
You might want to check if they’ve taken advantage of the magic of digital vehicle inspections or DVIs. Or they continue to scratch out their findings on paper and then call the customer with the news. Also, see if they invest in training for their auto techs and service advisors.
9. Shop Equipment
Auto shop owners often use their equipment as a selling point when it’s nearly out of commission. Avoid that scenario by taking the time to learn about their equipment types, condition, and ages.
For example, check if their lifts are less than ten years old. See if their scan tools are all up to date. Look at the condition of their tire machine, scopes, and all the other items they want you to buy. If they’re past their service age or in poor condition, they have no value.
As for inventory, keep it short and sweet. The answer is no. It’s seldom a good idea to buy inventory.
Instead, set its value at zero or ask them to return the items. Otherwise, you could end up with many things you cannot use.
11. Owner’s Role in the Business
High-performance employees add value to the auto repair shop. But if the shop owner or their spouse is doing the bulk of the work, you may end up with big shoes to fill in the end. You can prepare for that by asking how much work the owners take on daily.
12. List of Employees
To accurately value the employees, you need a list of who’s on board and their job functions. Look at what they do to help the shop perform at its best. Ask about who’s leaving as well. See if the auto shop owner will honestly answer who they would hire again if given a chance to rebuild their team.
13. Employee Performance
Even with the insights from the previous step, you need to weigh employee performance for yourself objectively. To do that, ask for a look at their HR records.
During your review, look at:
- Annual reviews
- Key performance metrics
Check for repeat warnings about the same behaviors, especially if they’re breaking the rules in the handbook. Does the shop hold them accountable? If not, why?
14. Processes and Procedures
To finish your auto repair business evaluation, ask about their processes and procedures. Ideally, they’ll have them written down for your review. Otherwise, you’ll just need to go over them verbally.
As you do such things, use your newfound understanding of the shop environment to see if they’re consistently following all those processes and procedures.
Let Our Auto Repair Shop Coaching Team Help with Your Business Evaluations
When it comes to effective business evaluations, knowing just what to look for can make all the difference. You often have to read between the lines to determine if the auto shop in question aligns with your expectations. Miss the mark, and you’ll end up with a serious case of buyer’s remorse.
Thankfully, you can avoid that by partnering with Chris Cotton and our team at AutoFix Auto Shop Coaching. With our support, you can explore all the strengths and weaknesses of each shop, giving you the info needed to make great purchase decisions.