Amid some recent buyouts by multi-shop operators, Supplement! collision repair financial blogger Bradley Mewes gave a financial crash course in business valuation last week.
His analysis is worth reading even if you have no intention of selling. (And if you don’t, you’re in good company. Most of the shops out there are still independent outfits.)
Knowing your business’ value can help you get investors or a loan should you need money for an expansion. Also, it’s a nice ego boost — or healthy dose of humility — to estimate what the company you’ve built is really worth.
Here are three common methods to figure that out.
Mewes wrote that the multiple method is the most common. “It is efficient and effective but also has limitations,” he wrote.
It’s very simple to do — multiply your EBITDA (earnings before interest, taxes, depreciation and amortization but after you’ve paid your other bills; learn more here.) by some sort of number. Most businesses are between three and five times earnings, according to BizBuySell; this Harvest Business Advisors piece gives a lower sample multiplier for auto repairers (rats) but gives a better idea of how to get that number. (It doesn’t specify whether that’s auto service or collision repair, but its arguments would apply to both businesses.)
Discounted cash flow
Mewes calls discounted cash flow “theoretically the soundest and best way to asses a business.” It involves what a business is going to do in the future and factors in the idea that that money you have now is better than the same amount in the future.
It’s also really complicated. But he offers a simpler version: Subtract what your reinvest in your shop (new tools, maintenance, etc.) from your EBITDA to get your cash flow. Estimate at what that flow could be in the next couple of years. Then discount it by 15 percent to 35 percent, depending on your size and history. (He notes that he is making an “extreme oversimplification.”) According to Investopedia, most analysts stop at 10 years because it’s kind of silly to project further than that.
Asset value is the amount of money you get if you had a gigantic garage sale and unloaded your entire business — building, equipment, inventory, etc. at market prices. You can probably do better — unless you can’t.
“Be careful with this approach – it often yields very low values,” Mewes wrote. “Normally deals that use asset values are for businesses that are on the ropes.”
Supplement!, Jan. 27, 2015