Auto Body Shop Selling Multiple – what you need to know to maximize your multiple

One of the most common questions I receive is what is the average auto body shop selling multiple? Multiples are on everyone’s mind. Sellers want a quick an easy way to understand what their business is worth. Buyers want a way to know they are not over paying for a business. Even banks and financing partners use multiples when evaluating the overall debt load a company is taking on.

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When evaluating an average auto body shop selling multiple there are certain rules of thumb. In fact, these rules of thumb generally hold true across many industries (if you’re a jobber, parts distributor, equipment provider or mechanical service provider the same holds true in my experience). Multiples generally start around 2x and increase from there, depending on a number of factors. Smaller businesses sell for a lower multiple than larger businesses. Businesses with high customer concentrations, uneven performance, high turnover, or messy financials will generally sell for less than well established businesses. Larger, more diversified, companies with significant growth and synergistic opportunities have higher multiples than businesses with lower growth prospects. Generally, only the largest most strategic acquisitions with high synergistic value that a buyer can clearly leverage new market and growth opportunities will generate the eye popping multiples everyone talks about.

Generally, I have observed companies that sell fall into one of four categories:

Average auto body shop selling multiples

Does this imply that buyers simply lump your business into one of these categories to come up with a multiple? No – buyers perform sophisticated analysis on your company to determine the future value of the business to them, then back into the multiple for every deal. Some small deals have higher multiples and some big deals have lower multiples – every deal is unique. But in order to increase your multiple you first have to understand how a multiple is derived.

Understanding the auto body shop selling multiple

Sometimes I hear people state that top line sales is the most important driver of value. Larger businesses often attract higher multiples. While there is correlation between the size of revenues and the size of the multiple, this assuming revenue drives the selling multiple confuses causation and correlation. Businesses that realize higher sales and earnings generally have a more diversified base of revenue. These businesses often have stronger SOPs, operationally, financially, or otherwise (but not always). Larger businesses also tend to be more geographically diversified and have less customer concentration and less key employee risk. So the increased multiple is more reflection of the confidence a buyer has in the future earning potential of the business rather than a pure size premium.

How buyers determine an auto body shop selling multiple

Multiples evaluate value, but do not drive value. Buyers will evaluate the future prospects of a business, discount the future prospects accordingly, and determine a price based on that methodology (formally referred to as a discounted cash flow analysis, or DCF). A multiple is simple division of the selling price by the earnings, or more formally, Enterprise Value divided by EBITDA.

Mathematically, a multiple is effectively the inverse of the perceived risk of a transaction. Generally, the higher the multiple, the lower the perceived risk and vice versa. If you want to know how risky a buyer perceives your business to be – divide one by your estimated multiple. If you want to know how risky investors perceive a public company to be you could use a similar metric – an inverse Price to Earnings ratio. But be sure to compare apples to apples – use Enterprise Value to EBITDA ratios, or if you want to get wonky – you could look at Ke, Kd, and WACC (contact me if you want to discuss).

How to increase your auto body shop selling multiple

If you want to increase your auto body shop selling multiple you want to decrease your perceived risk to a buyer. There are a few key ways to do that:

  • Diversify you customer base
  • Expand to additional locations
  • Build out your management team
  • Develop well documented SOPs
  • Clean up your financials
  • Hire an M&A Advisor (<–shameless self promotion, but it is a scientific fact)

I’ll talk about these in more detail in coming posts. I want to help you increase your auto body shop selling multiple. Actually, regardless of your business I want to help you increase your multiple.

Are you curious what your multiple is? If so – shoot me an email using my contact page and we can discuss (subscribers can hit REPLY and email me direct). After a few minutes of conversation I can quickly give you a fair range. And if you’re not satisfied with your current multiple we can talk in more depth about ways to maximize your multiple and decrease your risk. All conversations are always confidential.

If you’ve been considering a sale or retirement, now is a good time to start the process. The end of the year is approaching and increasing your multiple can take months – sometimes even years. The sale process that maximizes your multiple can easily take 6 months or more.

Until next week!

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