Business valuation of auto body repair shops

Auto body repair shops are a sizable part of the very large auto services industry. The companies address the essential need in collision repair, car exterior and interior maintenance and a host of value added services that go along with keeping your auto in top shape.

To see just how important these firms are, take a look at the industry numbers. Classified under the SIC code 7532 and NAICS 811121, there are over 157,000 such companies throughout the US. As a whole they produce $90B in annual sales. The average auto body shop is rather small with some $578,000 in annual revenues and a staff of just over 5.

From time to time auto body shops sell either to other owner-operators or as part of a larger scale consolidation in the local or regional market. When the sales of businesses occur, the actual business selling prices indicate just how valuable the companies are, at least in the current market conditions.

All you need to do to value any other auto body and collision repair business is compare it against such recent sales. To make the comparison work, you can calculate the valuation multiples that relate the business selling prices to their key financials such as revenue, profits, or assets.

Example: Valuation of an auto body shop using multiples

One common measure of business value in this auto services industry is in relation to its annual revenue. To show how this valuation works, we pick a typical company with $1,000,000 in annual sales and inventory of $250,000.

For our valuation calculations we choose these valuation multiples:

Note that the results in the table include the addition of inventory once the valuation multiple has been applied. This is the usual way to value auto service companies. If you want to see the figures less inventory, just subtract $250,000 from the results above.

What is terminal value in discounted cash flow valuation

The discounted cash flow or DCF valuation method is perhaps the most widely used technique in income based business appraisals. If you take a look at the calculation, you will notice that it consists of two parts:

• A discounted forecast of future earnings over a finite time period
• A so-called terminal value calculation

The idea is that the earnings forecast can be accurate only so far into the future. Beyond some point, the earnings of the business may be less predictable. So one makes a leap of faith and assumes that the earnings will continue growing at a constant rate from then on. In this case these earnings can be capitalized in order to represent the residual or terminal value of the business in perpetuity.

An alternative is to use an estimate of a business sale proceeds if a sale is planned some time in the future. The same idea applies, you discount the earnings of the business until the business sale occurs. At that point, the business sale proceeds, i.e. the selling price less transaction expenses, can be capitalized. The overall business value today is the sum of the discounted future income stream and the capitalized sales proceeds value.

Note that just like the terminal value, the sales proceeds figure must be discounted to the present time.