# Valuation of an auto repair center

Considering valuation of an auto repair center? Some industry sector observations.

General auto repair shops make up a large portion of the auto services industry. And given the number of vehicles on the road, this is no luxury business with customers needing either repair or maintenance on a regular basis.

Independent auto repair shops are usually privately owned and focus on a number of essential services for the ever growing pool of cars.

### Some industry sector stats

Take a look at some key industry statistics. There are over 81,600 companies in this line of business in the USA alone, classified under NAICS code 811111 and SIC 7539. Combined, the auto service centers produce \$37.7B in annual revenues. The average auto repair shop is \$462,000 with a staff of 4.

Successful auto service centers develop strong reputation and loyal customer following in their market. For example, these companies act as experts who are able to advise and address a wide range of customer concerns. Unsurprisingly, well established auto repair shops tend to command consistent earnings and higher profitability.

### Recent business sale comps for auto repair shop valuation

As you can expect, such companies often become acquisition targets selling to competitors or larger firms working to expand their market share. So the selling prices that result in such deals are a good indicator of what the companies are worth.

To value any other auto repair business, you can do a comparison against these recent sales. To do so, calculate valuation multiples that relate the business selling prices to their financial figures such as revenues, profits, cash flow, or assets.

### Example: Valuation of an auto repair center by multiples

A typical way to estimate the value of a company in this industry is to use the annual revenue as the key metric. To illustrate the idea, let’s take a typical company with \$462,000 in annual sales and inventory on hand of \$50,000.

Here are the valuation multiples we choose along with the results:

Multiple Multiple value Business value
Low 0.18 \$133,160
High 0.65 \$350,300
Average 0.32 \$197,840
Median 0.29 \$183,980
Average Business Value \$215,985

### Inventory is added to the multiple result

The value results above include the inventory addition as is typical when valuing the auto repair shops.

Note that there is quite a range in our business valuation results. But what makes some companies worth more than others? Above all, this is a labor intensive business involving highly specialized auto mechanics. As a result, for higher valuation multiples the staff has to be managed well to prevent defection and loss of customer following. This is a growing concern since many large car dealerships seek out skilled auto mechanics aggressively.

Availability of seasoned management over and above the owners is important as well. Such shops are easier to take over even for a someone who is not an auto repair expert. Therefore, the pool of potential business buyers is larger resulting in a higher selling price.

The auto repair centers that focus on excellent customer service tend to be more valuable. Why? Because customers are more likely to pay for top quality service and return when the need arises. Needless to say, such return business and customer referrals lead to higher profitability and increased business value.

### Want to learn more about auto repair shop valuation?

See an example of valuing a business using valuation multiples derived from recent business sales.

### Don says:

With annual sales of 420k and 50k in inventory, we have 512k, right so far?

on the low end calculation we times 512k by .18 multiplier, and we get 92,160. How did you arrive at 133,160?

### Harry says:

You made a mistake. By convention, inventory is added to the result of multiplication. Therefore, the correct business valuation result is:

• \$462,000 x 0.18 = \$83,160
• Add \$50,000 inventory
• Business value: \$133,160

### Kurt says:

When buying a auto repair shop does this number also usually include all large equipment such as lifts and compressor

### Harry says:

Business valuation of auto repair shops includes all the fixed assets currently used in the business. This would typically include the heavy machinery, such as the lifts and compressors, at their fair market value.

### Kurt says:

So you multiply your sales by the multiple you choose then add inventory and cost of equipment, or does the value of equipment help to dictate the multiple you use?
Thank you

### Harry says:

As a rule, the valuation multiple result includes all operating business assets. The inventory is extra. The value of the equipment does not influence the choice of the valuation multiple. Rather, the choice of the best multiple is empirical based on what the market participants tend to rely on when pricing the businesses in your industry.

Interested in details? Take a look at the coefficient of variation when choosing the best valuation multiple for your business.