Blog

The Covid-19 pandemic hit the auto center industry disproportionately hard, as lockdowns pulled drivers off the roads for weeks and months at a time.  Some auto centers’ earnings dropped by 50% or more.  With the gradual reopening of the economy, many businesses have experienced a consequent recovery.  As an auto center owner, you might be wondering if it is a good time to bring your business to market.

There are many factors to consider when deciding whether to sell your business now or wait, but the most obviously significant is how your earnings have rebounded since hitting a pandemic-induced nadir.  A useful rule of thumb is:

• If your cash flows have recovered to at least 90% of their pre-Covid levels over the past six months, you may be able to receive the full valuation for your business in a transaction.
• If you did not achieve a 90% recovery in the past six months and are still down 20%-40%, it may be wise to wait until you can show healthy earnings growth for at least a 6-month period.  Otherwise, you may have to significantly discount the valuation of your auto center.

To calculate the free cash flow produced by your company, buyers will consult either calculations of seller’s discretionary earnings (SDE) or earnings before interest, taxes, depreciation, and amortization (EBITDA).  SDE is the relevant calculation when the buyer is a smaller business where the owner will be running the company on a daily basis.  Larger businesses where the owner will not be involved in the active operation of the auto center/s are interested in EBITDA. 

No matter what cash flow calculation is used, the valuation of the company remains the same.  Different multipliers are applied to SDE and EBITDA to reach this number.  Your representative at Black Iron Advisers can determine which value to use based on who is likely to be interested in buying your business.

Many ancillary factors also are worth including in your decision-making calculus when deciding if right now is the opportune time to sell.

• If you own your real estate and your business, you may choose to:
  • Sell your operating business and keep your real estate
  • Sell your operating business and real estate to different buyers
  • Sell your operating business and real estate to the same buyer
• The Small Business Administration is offering loans with very favorable terms through September 30, 2021, which may bring more buyers to market and make them more likely to pay the full valuation of your company even if your earnings recovery has not been as strong as one might prefer.
• Fears of rising inflation, reflected in the increase in yields on long-term Treasuries, as well as the expectation of economic growth following the passage of another stimulus package by Congress are placing upwards pressure on interest rates.  Buyers may be eager to close on a loan as soon as possible to lock in a lower interest rate should they expect rates to continue to rise.  Thus, an increase of buyers in the market in the short-term may put you in a favorable position to receive a higher valuation for your business.

Finally, other intangibles that might contribute to the attractiveness of buying your auto center at the present time are:

• The increasing availability of effective vaccines and falling Covid-19 infection rates have already enabled the further reopening of schools and business, putting more cars that require servicing back on the road. 
• The summer travel season is ahead which is traditionally a time for road trips with family or friends, raising the demand for auto center services.
• Since the early days of the pandemic, some individuals have chosen to forgo air travel altogether and will maintain their preference for driving to their destinations. 
• Consumers have developed a preference for delivery services due to their convenience during the pandemic.  It is unlikely that demand for these services will significantly decline in the future, keeping this cohort of personally owned vehicles active on the roads and requiring auto servicing.  In the words of Tony Xu, CEO of DoorDash, “Convenience tends to go in one direction, which is seeking greater convenience, especially when you think about how it’s getting aided by the fact that there might be some longer-term trends towards working from home.”[1] 

Even if your final decision is not to sell now, you might still consider applying for an SBA loan to provide working capital to manage present cash flows or to upgrade your property and equipment to increase your business’s attractiveness to future buyers.

Black Iron Advisers can help you decide whether now is the opportune moment for you to sell your business.  Our sell-side practice provides decades of cumulative experience to prepare your business for a sale.  We work to obtain maximum value by capitalizing on the strengths of your company, evaluating all potential transaction structures, and large-scale investment banking marketing to the auto center industry.