There is a growing wave of concern how accelerating electric vehicle (EV) sales in the US will affect the automotive maintenance industry.  Headlines declaring that 2021 will be a year of record EV sales do nothing to quell these concerns; nor do statistics showing a 329% increase in EV sales in May 2021 on a year-on-year basis.  Predictions that auto maintenance revenues will decline 35% over five years on EVs, as compared to internal combustion engine vehicles (ICE vehicles), are no less hair-raising.  What is an auto service center to do?  Shut down shop?  Sell?  Overhaul operations?

Before panic mode sets in, let’s consider the bigger picture when it comes to the increased adoption of EVs.  To be clear, the category of electric vehicles considered in totality includes:

• Battery-Electric Vehicles (BEVs) – vehicles solely powered by electricity and have regenerative braking that allows the car to recapture energy when you brake or decelerate
• Plug-in Hybrid Electric Vehicles (PHEVs) – vehicles that run on both electricity and gas, can be plugged in to recharge, and have regenerative braking
• Hybrid Electric Vehicles – vehicles primarily powered by gas with electric capabilities and often have regenerative braking
• Fuel Cell Electric Vehicles – vehicles powered by electricity using a fuel cell powered by hydrogen

We will focus on BEVs as they are the type of vehicle experiencing the most rapid growth in sales, and they are the vehicles most people identify with the term EV.

Reasons For Concern

Before turning to the reasons for optimism, let us first acknowledge the very real reasons why auto center owners may worry about the future of their operations with EV sales growth increasing as a percentage of all new auto sales.

Firstly, EVs eliminate over two dozen mechanical components that would require routine service.  Oil changes, tune-ups, transmission servicing, replacing spark plugs and drive belts among other routine services are obsolete when maintaining an EV.  The loss of revenue on these periodic services is not insignificant when considering the replacement of ICE vehicles with EVs as a percentage of the vehicles in operation (VIO).

Secondly, regenerative braking obviates the need for typical servicing and brake pad replacement that friction brakes on an ICE vehicle require.  Regenerative braking systems use motor resistance to slow the vehicle and send energy back into the battery.  Although most EVs still have traditional friction brakes, they tend to last much longer if the driver adapts their driving habits to rely on the regenerative system rather than slamming on the brakes.  Furthermore, the friction brakes work in tandem with the regen brakes, lessening the wear on the brake pads overall.  EVs typically can travel over 100,000 miles without having to replace the brakes, whereas ICE vehicles generally need brake pad replacement every 30,000 miles.  The recurring revenue losses on brake services for an EV, though not as significant as the losses on other maintenance services, is not inconsequential.

Reasons for Optimism

Although the prospect of an EV takeover may seem daunting to auto center owners, it is essential to take a broad view of the market for new car sales as well as the ratio of EVs in operation to ICE-vehicles in operation.

The number of BEVs registered in the US has increased from 300,000 in 2016 to 1.1 million in 2020; however, BEV and PHEV sales have accounted for only approximately 2% of all new cars sold since 2018 as shown below.

Source: evadoption[1]

The US has been slower to adopt EVs than European countries, for instance, for manifold reasons, but there are several major ones to consider:

• Preference for SUVs and large trucks. 

Currently there are few offerings when it comes to EVs that are not light passenger vehicles.Tesla, Hummer, Ford, and innovative new manufacturers such as Hercules are all bringing new models to market to fill this gap.

• Inexpensive gasoline and fuel-efficient ICE vehicles reduce the economic pressure to switch to EVs.
• EVs are generally more expensive at point of purchase than ICE vehicles, pricing many consumers out of the market.
• Preference for long-distance travel.

Although battery life keeps improving in EVs, the most recent models generally require charging after about 200 miles.Standard ICE vehicles can often travel 250-300 miles before refueling, and fuel-efficient models may go over 400 miles.

• Few government mandates with respect to emissions or ICE vehicle sales.

Several states including California, Massachusetts, and New York have or are considering legislation that would restrict all new car sales to zero emission vehicles by 2035.

• Lack of charging stations in many areas.

Additional hindrances to EV adoption are microchip shortages, battery recalls, supply chain issues, and factory and production delays.  Microchip shortages have especially affected new car sales in 2021, driving up the price of all new vehicles. Consumers are turning to the used vehicle market as an alternative even though prices are surging in that market as well.

Nationwide, we observe a great disparity in the rates of EV registration in different states.  The graphic below reflects data collected in 2018 pertaining to BEV and PHEV registration rates in each state.  The rates shown here reflect current rates of EV purchase.

Source: Pew Research Center[2]

While all the factors listed above contribute to the variation in rates across states, government mandates and the availability of charging stations are the most salient.  Whether the mandates to end non-zero emission vehicle sales and availability of charging stations prompted the adoption of EVs or vice versa, it is most probable that the phenomena are mutually reinforcing.  As evident in the graphic below, as of May 2021, EV charging stations are most concentrated in regions where the registration rates of EVs in operation are highest. 

Source: Pew Research Center[3]

The previous data shows that the transition to EV usage is relatively slow and mostly concentrated in few regions.  All data considered, shouldn’t the arrival of EVs be the death knell of the auto maintenance industry as we know it?  Wouldn’t it be best just to close shop in New York city or San Francisco and concentrate one’s resources on the Midwest?

The answer is a definitive no.  For one, EVs still require maintenance, just not of the exact same variety as ICE vehicles.  But, secondly, and most importantly, the number of ICE vehicles in use is only expected to grow.  Not only are ICE vehicles remaining functional longer than previous generations of ICE cars and becoming more fuel efficient, but the growing trend of telecommuting is also extending the lifespan of vehicles since fewer miles of travel are demanded of a car on a weekly basis. 

The expansion of telecommuting has also accelerated because of the COVID-19 pandemic.  Individuals are, therefore, less likely to feel enough economic pressure to switch to an EV.  If they do purchase an EV, chances are that they still may own an ICE vehicle in operating condition.  Although EVs may continue to increase as a percentage of new car sales, they are expected to remain a minor portion of the VIO.  The following graphic shows the anticipated numbers of VIO through 2030.

Source: evadoption[4]

Given the predicted changes in the VIO over the next decade, auto center owners can generally expect an increase in revenue.  EV ownership is and will be relegated to a few specific regions; and, even then, EVs will not supplant the use of ICE vehicles for many years to come.  Barring extreme conditions, particularly with respect to government legislation, the transition to an EV dominant market should be gradual. 

EVs are expected to become the future of all new light passenger vehicles, but ICE vehicles – especially larger vehicles – will by no means disappear.  By 2040, current projections suggest that about 30% of new vehicle sales in the U.S. will be EVs.  Thus, the numbers indicate that one should expect to see an increasing number of fuel-efficient ICE vehicles on the road.  Traditional auto services will remain in increasing demand as the absolute number of VIO increases as well. 

Some services are simply impervious to any change in the composition of VIO.  Auto body repair, interior customization, auto restoration, and parts replacement are just a few fields where consumer demand will remain stable. 

The long of the short is that auto centers will continue to play a very important role in vehicle maintenance for the foreseeable future.  The transition toward EV-oriented services will take place gradually over time, allowing auto center owners to adjust their operations as necessary.  Certain regions will require a more substantial shift toward EV maintenance than others.  However, the demand for ICE vehicle maintenance will not disappear overnight and, in fact, may increase if the average age of VIO increases. 

Areas for Growth[5]

The transition toward EV ownership does present several opportunities for growth in certain areas of auto maintenance. 

For one, EVs tend to consume tires at a much higher rate than ICE vehicles.  They are heavier and their engines have much more near-instant higher torque than traditional ICE vehicles, so they require more frequent tire replacement.  Generally speaking, EV owners need tire replacement 30% more frequently than ICE vehicle owners. 

Secondly, services pertaining to visibility will increase.  Sensors and cameras are becoming more and more important in the functioning of modern vehicles, be they EVs or traditional ICE vehicles.  Regardless, the information from these additions to on-board technology are worthless unless they are kept clean. 

It is also important to acknowledge that current visibility technologies work alongside and enhance previous visibility technologies.  Wipers, cleaning fluids, headlights, and bulbs have always been important to safe vehicle operation.  The addition of sensors and cameras simply enhances driver safety as well as the opportunity for auto maintenance centers to capitalize on the upkeep of essential safety technology.

New EVs also tend to be equipped with larger windshields and moonroofs.  It is probable that these structures will need replacement as more efficient materials become available to prevent thermal losses.  Currently, Tesla’s panoramic Model X glass cost $2,300 to replace, so this sector of the glass maintenance market should not be ignored and may positively sway revenues compared to those incurred by traditional ICE vehicles.

Conclusion

That EVs are coming is a fact.  They will require that existing automotive maintenance businesses adapt.  However, the shift toward EV presence with respect the totality of VIO will be gradual.  Many ICE vehicles will remain in operation for decades to come, and consumer preference will ultimately dictate the types of vehicles on the road.  Regardless, the absolute number of vehicles on the road will continue to increase, and the need for auto services will remain despite the exact nature of these services.

If you are interested in discovering new opportunities in the auto center industry, please contact Black Iron Advisers here.  Black Iron Advisers brings high caliber investment banking expertise to the auto center industry.  Black Iron Advisers specializes in sell-side and buy-side representation of franchised and independent auto centers.

Black Iron Advisers was founded with a client first philosophy.  To ensure that our only priority is maximizing value for you, we don’t accept kickbacks from lenders or fees from buyers. 

For more information, please contact us here.

President Joe Biden has proposed a $4.1 trillion economic agenda to be enacted this year. 

This two-part agenda is composed of the $2.3 trillion American Jobs Plan, focused on upgrading critical infrastructure (e.g. roads, bridges, the electrical grid, water treatment plants, etc.), expanding broadband access, revitalizing manufacturing, retrofitting and modernizing privately- and publically-owned buildings, and creating good-quality jobs. 

The second component of the President’s economic agenda is the $1.8 trillion American Families Plan that seeks to expand and improve early and postsecondary education, invest in teacher education and preparation, provide direct financial support to families with children, advance accessible and high-quality child care, and upgrade paid leave and nutritional support policies.

To finance this agenda, President Biden proposes sweeping changes to the current tax code.  The President has promised not to alter income taxes for those earning less than $400,000 annually, but it is expected that the top marginal rate will be increased from 37% to 39.6%.  Corporate taxes could rise from 21% to 28% with a 15% minimum on book corporate income.

Most significant, however, for investors are the suggested changes to capital gains taxation.

What Are Capital Gains Taxes?

The capital gains tax is a tax assessed on the profit earned when individuals or corporations sell capital assets.  Capital assets include, but are not limited to, stocks and bonds, business assets, precious metals, real estate, antique cars and other collectibles, art, and jewelry.

The tax does not apply to the increase in value of unsold investments, which is known as “unrealized capital gains.”  It only applies when assets are sold for a profit, at which point, the capital gains are “realized.”

Capital losses, on the other hand, occur when a capital asset is sold for less than the price at which its owner purchased it.  Taxable capital gains are the net capital gain, calculated by subtracting capital losses from capital gains incurred in that year.  This figure, along with filing status, determines the tax rate assessed.

Capital gains taxes can be assessed at the Federal and state level.  There are several states that tax neither income nor capital gains:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

For the sake of simplicity, we will focus on a generalized case of the capital gains taxes associated with the sale of stocks and bonds.  Other capital assets are taxed according to another subset, or overlapping subsets, of tax codes with variable tax brackets.

Short-Term Capital Gains Versus Long-Term Capital Gains

It must be noted that short-term capital gains and long-term capital gains currently receive different tax treatment.

Short-Term Capital Gains Taxes

Short-term capital gains are realized when the seller of a capital asset has held it for one year or less.  These gains are taxed as regular income according to the following schedule:

Source: Investopedia[1]
It is possible under the current tax code that a portion of one’s total income will be taxed at a higher rate if the amount of the short-term capital gain pushes the tax filer’s income into a higher tax bracket.  As such, regular income, plus the portion of the capital gains that brings total income to the threshold level, is taxed at the lower rate; and, the additional short-term capital gains are taxed at higher rate.

As we shall see, the 2020 tax code typically taxes short-term capital gains at a higher rate than long-term capital gains.

Long-Term Capital Gains Taxes

When a capital asset owner sells that asset after holding it for more than a year, a long-term capital gain is realized.  The following schedule shows the current Federal long-term capital gains tax rates prior to the addition of possible state-level capital gains taxes:

Source: Investopedia

Comparing the two tax schedules, we can see that the capital gains tax is almost always lower on long-term capital gains, encouraging investors to hold their assets for more than a year.

The schedules here represent the tax code instituted under former-President Donald Trump’s Tax Cuts and Jobs Act, that took effect January 1, 2017, with tax brackets indexed for inflation.  Prior to that, former-President Obama’s tax policy had also assigned tax rates of 0%, 15%, and 20% to long-term capital gains although the determination of tax brackets differed.

The Net Investment Income Tax And Capital Losses

Finally, we must consider two other significant topics with respect to taxes.

The first is the Net Investment Income Tax (NIIT) instituted in 2010.  This is a 3.8% tax applied to the net investment income of certain individuals, estates, and trusts. 

With respect to individuals, the NIIT is assessed when either net investment income, or modified adjusted gross income (MAGI), surpasses IRS-imposed thresholds, the lesser amount taking precedence.

NIIT thresholds are represented in the following table:

Source: smartasset[3]

It follows that a high-earning investor would pay the NIIT on top of long-term capital gains tax.  So, for example, the top marginal long-term capital gains tax would be 23.8%.  This tax came into effect January 1, 2013 as part of the Health Care and Education Reconciliation Act of 2010 and has remained unchanged since then.

The second topic and final significant topic that we must address, before turning to new tax policy proposals, is capital losses and their tax implications.

If, in a given year, an investor experiences a net capital loss, then the investor can claim a limited deduction on the loss to lower taxable income.  The maximum deduction is capped at $3,000 (or $1,500 for those married and filing separately), and the investor may carry forward any additional losses to later years.

For example, if an investor incurs capital losses of $12,000, then she may claim a net loss of $3,000 in that year.  The remaining $9,000 of capital losses is carried over so that she may claim losses of $3,000 in the following three years (i.e. $3,000 x 3 = $9,000).

Now, having laid out the current state of capital gains taxes as they presently stand, we may turn to some of President Biden’s tax proposals that may affect current investors, particularly those who realize large long-term capital gains.

Possible Changes To Long-Term Capital Gains Taxation

The most salient feature of President Biden’s proposed tax policy is the creation of a new tax bracket on the long-term capital gains tax schedule that would apply to capital gains of $1,000,000 or more.

This rate would coincide with the proposed top marginal income tax rate at 39.6%.  Assuming that the NIIT is still imposed as it is currently, the top total capital gains tax would be 43.4% before state taxes.  Adding in state long-term capital gains taxes, the tax on gains of $1,000,000+ would average out to approximately 48%.  Capital gains taxes would range from the base rate of 43.4% in states with no capital gains tax to 56.7% in California and 54.3% in New York, the states with the highest capital gains tax rates.

The following map shows predicted tax rates on a state-by-state basis:

Source: Tax Foundation[4]

The Biden tax plan would account for the creation of this new tax bracket by adjusting upward long-term capital gains cut-offs at each currently existing level of taxation. 

This graphic depicts projected 2021 long-term capital gains tax brackets with the NIIT thresholds included for each filing status:

 Source: smartasset[5]

It is worth noting that taxes on short-term capital gains and long-term capital gains on gains of $1,000,000 or more would equalize under President Biden’s plan since the top marginal tax rate on ordinary income (as previously noted, the rate at which short-term capital gains are taxed) and the top capital gains tax rate would both equal 39.6% before the addition of NIIT and state taxes.

Other changes to long-term capital gains taxation seek to close existing loopholes, such as the carried interest loophole and the stepped-up basis loophole.  Generally speaking, eliminating these loopholes would result in imposing the newly created top marginal capital gains tax rate on high earners, generating significant additional revenue for the Federal government, ceteris paribus.

Conclusion

This article gives only a generalized overview of the current capital gains tax regime and the anticipated changes that will occur with the enactment of President Biden’s proposed tax plan.  By no means can anyone claim certainty to the concrete details of the exact policy that will be signed in to law.

Furthermore, tax codes are exceedingly complex and nuanced.  The entire United States tax code, including statutes, regulations, and case law, is 70,000 pages long.  Therefore, it is important for investors to consult a range of financial specialists when considering the tax implications of their investments.

The knowledge and expertise of the advisers at Black Iron Advisers makes them an invaluable resource in planning your investing strategy.  Their in-depth market insight, vast intra-industry network of connections, and broad execution capabilities will help you achieve your investing goals in today’s dynamic investing environment.  For further information, please contact Black Iron Advisers today.

Buying or selling an auto center can be a challenging, confusing, and highly complex process, that can be further complicated when a real estate transaction is part of the deal.  While some individuals wish to go it alone in undertaking this type of transaction, they may lack the specialized knowledge to identify the correct market price for the business and/or real estate in question, the connections necessary to produce an optimal deal, or the time to effectively manage a transaction while attending to their current business ventures amongst other things. 

Though there is a strong temptation to avoid the cost of using an investment banker as an intermediary when conducting an auto center transaction, their contribution to the process adds value that more than compensates for the additional expenditure.

What Is an Investment Banker?

Before discussing how an investment banker can add value to your transaction, it is important to identify what an investment banker actually does. 

Investment bankers facilitate complicated financial transactions, frequently structuring acquisitions, mergers, and sales.  They also are involved in issuing securities as a means to raise capital, but that subject is beyond the scope of this article.

Ideally, investment bankers are experts in their particular field with the insight to identify risks and opportunities, having an in-depth understanding of the current investing climate.

How an Investment Banker Can Add Value to Your Auto Center Acquisition or Sale

Far from being mere number crunchers, or the wheelers-and-dealers seen in Hollywood films, investment bankers possess a diverse range of skills and abilities that all contribute to the structuring of the most advantageous deal for both buyer and seller.

The following list comprises the main attributes that a qualified investment banker brings to the table to maximize the value of your acquisition or sale:

1. Investment Bankers Have Strong Quantitative Abilities (i.e. They are very good at math.)

An investment banker’s quantitative acumen is extremely important in identifying the correct market price for an auto business as well as any associated real estate that is part of the transaction.  They apply specialized financial mathematical analyses to arrive at the appropriate market price.

An incorrect sale price for the business will result in a suboptimal outcome for the parties involved.  If the price is too high, then the business may not sell.  If the price is too low, then the seller is giving away value that they otherwise could have captured.  And, while it may be tempting to accept on trust the offer of a known colleague, sellers must be aware as to whether this offered price matches the market price.

On the other side, an investment banker can advise a potential investor whether the asking price for a business is too high.

Additionally, an investment banker’s adeptness in evaluating numerical data can assist buyers and sellers in deciding whether to include real estate in a transaction if the option exists.

The specialized experience of an investment banker is unparalleled when it comes to conducting numerical analyses to determine pricing.

2. Investment Bankers Are Excellent Communicators

That investment bankers are able to communicate unambiguously and effectively is important on several fronts.

From the seller’s perspective, it is important that an investment banker be able to articulate the reasoning behind a recommended sale price as well as any possible advisement that pertains to real estate holdings.  Financial concepts are far from intuitive, so it is important that the investment banker be able to translate these concepts into working terms.

Secondly, an investment banker plays a key role in marketing a business for sale.  Beyond financial analysis, the investment banker can draw up a broad and comprehensive overview of a business, highlighting its key selling points.  This information can be assembled into a thorough presentation package that explains to potential investors the nature and workings of the business operation under consideration.

This clear communication to both buyers and sellers helps to remove confusion and overwhelming complexity from the transaction, enabling them to better consider their options and assisting them in making the best decisions for themselves.

Adroit communication is absolutely critical in another aspect of facilitating a transaction.

3. Investment Bankers Are Highly Skilled Negotiators

All is for naught if an investment banker cannot structure a mutually beneficial trade between parties.  As such, investment bankers must maintain strong communication with both buyer and seller to ensure that they are able to cooperatively achieve the best possible outcome.

As a negotiator, an investment banker must be quick-witted and persuasive with an eye to creative problem-solving.  Not seeking to exploit one party for the benefit of the other, the savvy investment banker wishes to reach a deal that both parties can agree to with confidence and satisfaction.  Game theorists need not apply.  An investment banker cannot expect to have many clients in the future if he or she develops a reputation for cheating one side of a transaction for the other’s gain.

In this way, an investment banker contributes tremendous value by ensuring that a transaction meets both the buyer’s and seller’s financial goals.

4. Investment Bankers Protect Confidentiality

Frequently automotive business owners require confidentiality when putting their business on the market.  The major reasons that sellers wish to keep a possible change in ownership confidential are:

- To avoid customer flight should they be concerned about the continuation of the business, which in turn would harm the prospects of a profitable sale

- To avoid losing the top talent among their employees who might look for other employment when fearing a change in management

- To protect their financial information and intellectual property rights

To maintain confidentiality, an investment banker can require all parties to a sale to sign non-disclosure agreements.  Once signed, the seller is willing to share proprietary information to the potential buyer while ensuring that news of the sale remain private and that the information shared remain confidential and not be revealed to a third party. 

Should a potential buyer violate the terms of the non-disclosure agreement, the business owner has the right to sue for compensation.

Yet again, the communication skills of the investment banker come into play so that they can explain to prospective buyers why non-disclosure agreements are necessary as well as why access to certain information may be limited.

A major perquisite of an investment banker’s non-disclosure requirement is that it serves to qualify the buyer.  Essentially, it identifies the individuals or entities with a sincere interest in acquiring a business and excludes those only interested in mining for inside information.

5. Investment Bankers Have A Solid Network of Industry Connections

To aid clients who need supplementary assistance with financial, legal, or other business-related matters, experienced investment bankers have a highly developed network of industry connections from which to draw in order to provide useful referrals.  Much as a primary care physician may refer a patient to specialists to treat their specific needs, so an investment banker may refer a client to certain industry professionals to optimize their business’s wellness to ensure maximum enterprise value.

Knowledgeable automotive business investment bankers are capable of reading the client’s needs and directing them to a range of professionals from attorneys to insurance agents to real estate agents, vendors, lenders, accountants, and other industry professionals.  The goal is to connect the client with the right specialists to address any aspects of the business or legal process that might become obstacles to the most advantageous transaction.

An investment banker, therefore, generates a sort of network effect by bringing disparate interests to bear on a given deal, which synergistically increases the value of the transaction for all parties concerned.

6. Investment Bankers Display A Tireless Work Ethic

Investment banking is not for the faint of heart.  It requires dedication, patience, attention to detail, and substantial time to structure a successful financial transaction.  At the outset of their careers, many investment bankers work 60-70+ hour work weeks in a dues-paying trial by fire.

The ingrained habit of hard work is a massive benefit to the clients of an experienced investment banker.  They can expect their investment banker to approach their project with focus and commitment, executing a transaction with a superior level of efficiency and know-how.    

The net result is that the client saves time, energy, and money, allowing them to remain focused on their current business ventures and other pursuits. 

Black Iron Advisers Can Help

The investment bankers at Black Iron Advisers possess the qualities described above and more.  As one of the few FINRA licensed investment banks focused on serving franchised and independent auto centers, Black Iron Advisers can represent their clients in the full breadth of transaction structures.  They were founded with a client first philosophy with their only priority being maximizing value for you.  If you want to learn how an investment banker can help you, please contact Black Iron Advisers for further information. 

When buying or selling a business, the parties involved have two options: an asset sale or a stock sale.  These two types of transactions entail very different implications in the transfer of assets and liabilities.  To complicate matters, such transactions involve a good amount of technical accounting, finance, and legal terminology.  The goal here is to clarify this terminology and delineate what the potential outcomes are in either type of transaction for buyer and seller.

Background and Definitions

It is helpful to start with the basics, so let us look at assets, liabilities, and shareholders’ equity.  A good primer on this subject is the balance sheet – one of the three core financial statements used to evaluate a business, the others being an income statement and a cash flows statement.  Balance sheets provide a momentary snapshot, representing the state of a company’s finances at the date of publication.

Balance sheets show what a company owns, its assets; what a company owes, its liabilities; and, the money attributable to a business’ owners, its shareholders.  By definition a balance sheet must balance.  Therefore,

• Assets = Liabilities + Shareholders’ Equity

For example, assume a company has no shareholders, assets, or liabilities.  If this company takes out a loan for $5,000, it now has an asset of $5,000.  The loan must be paid back, however, so the company has also assumed a liability of $5,000.  According to our equation above, $5,000 = $5,000, and the balance sheet balances.

Turning to what constitutes the components of a balance sheet:

1. Assets

• Cash and cash equivalents - equivalents include highly liquid assets such as Treasury bonds or short-term certificates of deposit that are easily converted to cash
• Marketable securities - stocks and bonds owned
• Accounts receivable - what customers owe
• Inventory
• Prepaid expenses - what a company has prepaid examples often include rent or insurance
• Long-term investments - securities that cannot or will not be liquidated in the next year
• Fixed assets - such as buildings, vehicles, machinery, equipment, and other durable assets
• Intangible assets - such as intellectual property and goodwill (i.e. the value associated with trademarks, patents, proprietary technology, etc.)

2. Liabilities

• Current portion of long-term debt
• Bank indebtedness
• Interest payable
• Wages payable
• Customers prepayments
• Dividends payable
• Earned and unearned premiums
• Accounts payable
• Long-term debt - principal and interest on bonds
• Pension fund liability - money a company must pay into employee retirement funds
• Deferred tax liability - taxes that have been accrued but will not be paid for another year

3. Shareholders’ Equity

For the sake of simplicity, we will consider shareholders’ equity to reflect the money attributable to a business’ owners.  This element of the balance sheet is also known as “net assets” because it is equivalent to a company’s total assets minus its liabilities.  Holding stock in a company means that one is a shareholder of that company, and, therefore one of the business’ owners.

Asset Purchases and Sales Versus Stock Purchases and Sales

Buyers and sellers are often at odds in their preference for asset sales versus stock sales.  In general, buyers prefer asset sales while sellers prefer stock sales.  The pros and cons to each structure are as follows:

Asset Sales

In asset sales, the seller remains the owner of the legal entity (i.e. the business), and the buyer acquires assets of the company such as inventory, equipment, licenses, telephone numbers, and goodwill.  Some asset sales do not include purchasing the seller’s cash, and the seller retains its long-term debt obligations.  These acquisitions are known as cash-free, debt-free transactions.

Generally normalized net working capital is included in a sale.  Net working capital typically includes inventory, prepaid expenses, accounts receivable, and accounts payable.

• Pros:
  • A buyer can “step up” the depreciable basis in its assets.  What “stepping up” means is that the buyer can allocate a higher value to assets that depreciate quickly – such as machinery and vehicles; and, they can allocate a lower the amount to assets that amortize slowly – such as goodwill.  By doing so, the buyer may obtain tax deductions for depreciation and/or amortization.
  • Taking advantage of tax deductions enables buyers to improve their cash flows more rapidly.
  • Buyers are able to select which assets and liabilities they are willing to assume in the acquisition.
  • Buyers can more easily avoid inheriting liabilities such as product warranty lawsuits, product liability, employee lawsuits, and contract disputes.
  • Since the buyer’s exposure to liabilities is limited, fewer resources (time, money, etc.) are needed to conduct due diligence. 
  • Buyers may choose which employees they wish to retain or let go without affecting the unemployment rates they must pay to the government.

• Cons:
  • The tax cost to asset sellers is usually higher.  Though intangible assets are taxed at capital gains rates, other assets generally carry higher income tax rates.
  • Assets may need to be retitled.
  • Buyers may need to renegotiate employment agreements, customer contracts, and supplier contracts. 
  • Sellers potentially have to pay any liabilities not assumed, liquidate any assets not purchased, and terminate leases.

Stock Sales

Stock sales are markedly different from asset sales.  With stock sales, a buyer purchases stock directly from an existing shareholder, gaining ownership in the seller’s legal entity.  There is no transfer of individual assets to the buyer because the title of each asset lies within the legal entity.

• Pros:
  • Stock sales tend to be less complex transactions in part because the seller’s contracts transfer automatically to the buyer.
  • Sellers’ proceeds are taxed at a lower capital gains rate.
  • Buyers may potentially be able to avoid transfer taxes.
  • Re-valuations and retitles of individual assets are not necessary.
  • Since the legal entity maintains ownership of any assets that are difficult to assign – such as government or corporate contracts – a stock sale is preferable to an asset sale.  It is more likely that the company in question will not lose those contracts with large customers or vendors.
  • Buyers can usually assume licenses and permits without having to obtain specific consent.
  • Sellers may benefit from reduced responsibility for future liabilities such as employee lawsuits or product liability claims.  However, the specific terms in a purchase agreement could shift liabilities back to the seller.

• Cons:
  • Buyers cannot “step up” the basis of their purchase and re-depreciate certain assets, losing the tax benefits of an asset purchase.
  • Goodwill is not tax-deductible when it exists as part of a share price premium.
  • Buyers are unable to pick and choose the assets and liabilities involved in the purchase.  Unwanted assets and liabilities must be distributed or paid off prior to the transaction.
  • Assets transfer at carrying value.  Carrying value is a measure calculated by subtracting accumulated depreciation from an asset’s original cost.  Carrying value is almost always lower than market value.
  • Buyers assume additional risk with a stock purchase, including those liabilities that are unknown or undisclosed.  These liabilities may be reduced in the purchase agreement via representations, warranties, and indemnifications.
    • A representation is an assertion that a fact is true on the date the representation is made.  It is meant to convince another person to enter into a contract.
    • A warranty is a promise of indemnity if the assertion is not true.
    • An indemnification is security against legal liability.
  • Applicable securities laws, pertaining to the purchase and sale of stocks, must be managed and may complicate the process, particularly when the entity has many shareholders.
  • Transactions may become more difficult when some shareholders do not wish to sell their stocks, increasing the time and money costs of the acquisition.

There are many factors to consider when undertaking a transaction.  Black Iron Advisers (BIA) exists to bring together buyers and sellers and help them decide the optimal way to structure their deal.  BIA exclusively represents our clients, and our preeminent concern is assisting you in realizing your future business goals.

There is no way to say this politely: 2020 rocked the automotive franchise industry.  However, current information suggests that the auto repair and maintenance industry can expect a strong recovery in 2021 and is unlikely to slack for many reasons including:

• In 2019, more than 33 million vehicles in the United States were older than 14 years old, requiring regular maintenance and servicing due to their age.[1]
• By 2023 the size of the auto care industry is projected to reach $448.9 billion, up from an estimated $380 billion in 2020.
• Most vehicle owners prefer to visit local auto franchises, rather than dealer shops, to have work performed on their vehicle since this option is typically the most economical.[2]
• Repair and maintenance work is becoming increasingly complex due to onboard computers and intricate systems, and most people must rely on trained professionals to perform this work on their vehicles.
• Commercial vehicles, such as medium- or heavy-duty trucks, have seen an expansion in sales since 2018 while the passenger vehicle sales have declined.  The preference for pick-up trucks that can transport passengers and cargo is the reason for this growth.  Since trucks tend to cover more miles than regular passenger vehicles, they require more frequent servicing.[3]
• The part and component maintenance and replacement cycle for commercial vehicles is also more frequent because of the high distances traveled in a relatively short period of time.[4]
• Many commercial vehicles run on diesel as opposed to petrol.  Diesel filters must be replaced at regular intervals, driving demand for maintenance of commercial vehicles until at least 2026.[5]

Below is a list of major auto franchises where we expect to see significant rebound in revenues in the coming year.

1. Big O Tires - Consistently a top performer in automotive repair
2. Tuffy Tire & Auto Service Centers - Established in 1970 with strong representation in the Midwest and some Southern states
3. Midas - Founded in 1956, received top listing in their category in Entrepreneur’s Franchise 500 rankings
4. Meineke - Uses cutting edge Meineke eInspection technology, an iPad-based tool that keeps a digital audit of each vehicle, services performed, and recommended service to provide transparency for customers
5. Jiffy Lube - Consistently performing quick lube brand that provides a 12-week on-boarding process for all new franchisees
6. AAMCO Transmissions - Specializes in transmission repair with a new emphasis on hybrid and EV repair
7. Grease Monkey - Quick lube founded in 1978 and looking to open 30+ new locations in 2021
8. CARSTAR - Collision repair leader that features a proprietary operational platform, EDGE, helping franchise owners measure business performance against industry Key Performance Indicators (KPIs)
9. Mighty Auto Parts - A supplier to the auto service industry, offering a direct sourcing model for preventive maintenance, common use auto parts, shop supplies, oil, chemicals, and lubricants for vehicles
10. Tint World - Premier auto styling and window tinting franchisor with experts in real estate, construction, training, purchasing, distribution, marketing, and operations
11. Mr. Transmission - Specializes in the repair and installation of transmission systems and drive train components with over 60 years of experience
12. Valvoline Instant Oil Change - Quick lube serving approximately 9 million customers nationwide
13. 1-800-Radiator - Franchisees have on average 1,000 automotive businesses as their primary customers, including parts stores, repair shops, body/collision shops, new and used car dealers, junk yards, and radiator repair shops
14. Christian Brothers Automotive - Offering collision repair services with an extra emphasis on customer service
15. Ziebart - Auto detailing and styling franchisor that offers a military discount to all US military veterans, waiving 100% of the initial franchise fee
16. SpeeDee Oil Change & Auto Service - Quick lube franchisor with comprehensive business planning assistance and on-going technical and marketing support to drive sales
17. Fleet Clean - Commercial truck-washing service with proprietary washing method that ensures top-quality outcome while rapidly servicing customers
18. Precision Tune Auto Care - Top-rated Entrepreneur Franchise 500 company with a full range of services from oil changes to engine replacement
19. Honest-1 Auto Care - An eco-friendly car care company founded in 2003, focusing on pollution prevention, recycling, and resource conservation
20. Alta Mere Automotive Outfitters - Install aftermarket accessories and window tint with a reputation for expertise and professionalism
21. Milex Complete Auto Care - Providing a full range of auto care services such as preventive maintenance, brake repair, tune-up services, and engine repair
22. Merlin 200,000 Mile Shops - Auto care centers with unique Motivation and Achievement Programs that help franchisees recruit, keep, and grow employees to promote better customer service
23.  Fleet Services International, Ltd. - SBA-approved network of on-site fleet repair dealerships serving commercial, government, and industrial clients across the US, including Amazon, U-Haul, and Cintas
24. Fleet Services USA - Commercial vehicle maintenance and repair dealerships with major support services to help business owners to start and grow their company’s profitably
25. Matco Tools - Manufacturer and distributor of professional quality mechanics’ tools and service equipment that allows franchisees the right to purchase, resell, and service the products as a mobile distributor
26. Maaco - Paint and body repair services including cosmetic car repairs as well as fleet and industrial services
27. RNR Tire Express - National franchise retailer of quality tires and custom wheels with a strong presence in Midwestern, Southern, and Southeastern states
28. Glass Doctor - Offers complete glass replacement and repair services
29. Snap-On Tools - Grants franchisees a license to operate a mobile store, selling quality repair and diagnostic tools
30. Advanced Maintenance - Servicing and repairing commercial fleet vehicles and trucks with only a limited number of franchises awarded in any given area

This list is not exhaustive but represents the ample and diverse franchise opportunities available in the auto services industry.

The specialists at Black Iron Advisers are dedicated to working tirelessly with clients to identify opportunities (size, region, franchisor, etc.), negotiate purchase price and structure, and engage with all parties to ensure the deal closes.

[1] “United States Automotive Service Market - Growth, Trends, COVID-19 Impact, And Forecasts (2021-2026).” Mordor Intelligence. www.mordorintelligence.com/industry-reports/united-states-automotive-service-market.

[2] ibid.

[3] ibid.

[4] ibid.

[5] ibid.

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.

No Payments for 6 months?  Now you have my attention.

Under the provisions of the new CARES Act, the Small Business Administration (SBA) will cover the first six months of payments – including principal, interest, and associated fees – on new SBA loans.  The loan must be closed from February 1, 2021 to September 30, 2021, and payments are capped at $9,000.

What is an SBA loan, and how do I get one?

SBA loans are government-backed loans, intended to promote economic growth and entrepreneurship.  All major business lenders (e.g. Wells Fargo, JPMorgan Chase, Bank of America, etc.) offer SBA loans.  The loan forgiveness program covers SBA 7(a) and SBA 504 loans, which have a variety of purposes including business acquisition, equipment acquisition, working capital to help manage cash flow, and business expansion.  It does not cover Paycheck Protection Program (PPP) loans.

Are there any additional benefits during this SBA loan period?

Beyond six months of payments forgiveness on new loans, the additional benefits are as follows:

• The SBA is increasing its loan guarantee to 90%.
• The SBA is waiving guarantee fees, which range from 2.6% to 3.5%.
• Refinanced loans – both SBA and non-SBA – will also receive six months of payments forgiveness under this program.
• Borrowers that obtained SBA loans during the 2020 forgiveness period may qualify for another 3 to 6 months of covered payments.

The positive outcome of these benefits combined is that banks will be more willing to make SBA loans, as they are largely guaranteed by the SBA.  These conditions bode well for those seeking to buy or sell auto centers and are also favorable for those wishing to invest in auto center business currently owned.

I want to buy an auto center.  What else is important to consider?

It is an opportune time to purchase an auto center because:

• The temporary SBA loan forgiveness program will increase the ease of access to financing.
• Six months of no payments will significantly improve cash flows immediately following purchase.
• More high-quality auto centers will be available for purchase since current owners perceive the favorable lending conditions for potential buyers.

Buyers will need to obtain an SBA 7(a) loan.  These loans are available in amounts up to $5 million with flexible terms, allowing for longer maturities and less money down.  If wishing to purchase real estate, a buyer may obtain an SBA 504 loan.  Both types of loans may be used in a single transaction to purchase an auto center and its associated real estate if necessary.

To qualify for these types of loans, borrowers must identify the auto center and/or real estate to purchase.  If the seller filed tax returns for the business and/or real estate, the returns must be provided to process the loan. 

It is worth noting that SBA loans are now a more attractive option for banks, as the SBA has guaranteed 90% of the loan amount.

What if I am a current auto center owner?  Is it a good time to sell?

With the new SBA loan program in place until September 30, 2021, it may be a favorable time to consider selling your business.

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. 

However, there is reason for optimism since the availability of effective vaccines should enable further reopening of schools and businesses.  Additional government stimulus will give the economy a further boost.  Increased economic and recreational activity will increase the demand for transportation, and, thus the demand for auto center services.  Finally, some people are opting to forgo airline travel, preferring instead to drive to their destinations.  This factor will also contribute to increased demand for auto center services.

However, if your business has not rebounded to pre-Covid cash flows over the past six months, you may have to significantly discount the valuation of your auto center.  Under such circumstances, it may be wise to hold off on selling your business if possible.

I am an auto center owner, and I do not wish to sell at this time.  Can I still benefit from the SBA loan forgiveness program?

Current owners can avail themselves of this program by obtaining an SBA loan during the specified forgiveness period for real estate or equipment acquisition, construction, working capital to manage cash flows, and refinancing debt.

Depending on the exact use, a current contractor may obtain either an SBA 7(a) loan or an SBA 504 loan.  Only SBA 7(a) loans can be used as working capital, and the maximum amount is $5 million. 

SBA 504 loans are commonly used to refinance debt or purchase owner occupied real estate, and the maximum amount is $5 million from the SBA.  Depending on the specific project and the lender, these loans may have a maximum amount of $11.5 million or more.  The additional loan funds come from Certified Development Companies (CDCs), which are nonprofit corporations that promote economic development in their communities through 504 loans.

Both types of loans require only a 10% borrower contribution, and both will have six months of forgiven payments if closed before October 1, 2021.  The forgiven payments will not be counted as income by the IRS.

Wait…so, everybody wins with the SBA covering the first six months of payments on loans closed between February 1, 2021 and September 30, 2021?

Yes, there advantages for buyers and sellers of auto centers, and there are benefits for auto center owners as well. 

The experts at Black Iron Advisers are well qualified to assist you in the purchase, sale, or financing of your auto center.  Black Iron Advisers exclusively represents their clients.  As one of the few FINRA licensed investment banks serving the auto center market, Black Iron Advisers can provide a level of service and flexibility that business brokers cannot match.

Owned real estate adds a level of complication, but also a substantial number of options. While some business brokers will tell you otherwise, the business and the real estate do not need to be sold together.  There are many options each with distinct advantages and disadvantages:

• Sell the operating business and keep the real estate
  • Advantages – This allows you to continue to receive lease payments, creating consistent monthly income. You will also be the beneficiary of any property appreciation. This strategy can be very tax efficient for estate tax planning.
  • Disadvantages – This strategy limits the cash disbursed at the time of the transaction (a substantial portion of the combined value may be sitting in the real estate). You retain risk of major repairs (most of the leases we see are NNN, but exclude major repairs such as roof repairs). Additional time needs to be spent underwriting the credit worthiness of the buyer, as you will be taking credit risk that the buyer continues to pay rent.
  • Summary – This is a great strategy for sellers looking to maintain ongoing cash flow, who do not need to maximize the amount of cash received today, and believe the real estate will continue to appreciate
• Sell the operating business and real estate to different buyers
  • Advantages – The highest bidder for the operating business and the real estate are not always the same, this strategy allows us to pursue the highest bidder for each distinct asset.
  • Disadvantages – This takes longer, and often costs more money in commissions. While the transactions do not need to happen at the same time, they impact each other. A very high credit buyer for the operating business can increase the value of the real estate. Timing this strategy is difficult and can create more hassle than benefit.
  • Summary – In dense urban environments, where there are a substantial number of distinct buyers for both the operating business and real estate, this strategy should be pursued as it should maximize value of both assets.
• Sell the operating business and the real estate to the same buyer
  • Advantages – Simplicity. One transaction, with one buyer is far easier to negotiate. It is easier to determine the likelihood of close, and with fewer moving pieces it is easier to get to that close. It is also the fastest option.
  • Disadvantages – A well run process will ensure both assets trade at fair market value, but it reduces the likelihood of finding an outlier bid for one of the assets.
  • Summary – This is the easiest / simplest transaction.  In smaller markets, this may be the only real option. If speed to close is a priority, this is a good strategy.

These are only three of the options, there are more. We work hard with our clients prior to entering our sell side process to determine what the best strategy is for that specific owner. Have questions, or want to discuss potential options, please contact us here.  

Both seller’s discretionary earnings and EBITDA are used by buyers to estimate the free cash flow produced by a company. Ultimately which number is used depends on who the likely buyer of the company is – this is most influenced by the size of the company. Seller’s discretionary earnings are intended to reflect the cash flow produced for an active owner. This is relevant to smaller companies, where it is reasonable to assume that the owner will be running the business on a day to day basis. Seller’s discretionary income effectively does not include a salary for that key position and assumes the owner will be the beneficiary of all the earnings of the company. In contrast, EBITDA should include all the expenses (including of management) to operate the business. This is a more accurate perspective for a financial buyer who does not intend to have an active roll within the business. There is no hard and fast rule about the size of the company that should be listed using SDE vs EBITDA, but in general under a million dollars of earnings should probably be listed using SDE.  Over one million dollars in EBITDA will appeal to financial buyers such as private equity groups, family offices, and large strategic buyers.

Note, the use of SDE vs EBITDA should not impact the value of the firm. The multiples are different, but the difference in SDE multiples vs EBITDA multiples predominately reflects the increase in value for larger companies.

Part of our job at Black Iron Advisers is assessing the company and determining who are the most likely buyers. If we do this job correctly, we will be able to use the appropriate value in our presentation. For companies that may appeal to both types of buyers, we often prepare two complete confidential information memorandum (CIM). Using the appropriate value based on the type of buyer.

EBITDA (earnings before interest taxes depreciation and amortization) is used by buyers to estimate the cash flow of a company. They remove interest, because that is only correlated to how you have chosen to capitalize the company, taxes because that varies based on the owners, depreciation because it is a non-cash expense, and amortization because it is a non-cash expense. EBITDA is used to calculate the value of the company by multiplying EBITDA by an EBITDA multiple. Ultimately this means any improvement to EBITDA has a big impact on enterprise value. Below are a few rules of thumb for positioning / maximizing EBITDA prior to a sale:

• Personal expenses- We understand tax planning. We understand there may be some expenses that are run through the business that are exclusive to you. We can present these as addbacks, and eliminate these expenses thereby increasing EBITDA. Some of these addbacks are very easy to explain. For example, personal vehicles, country club memberships, and non-active family member salaries are examples of expenses added back to EBITDA. Simply be careful to document these personal expenses the two to three years prior to taking the company to market. Other addbacks are more difficult, for example if the expense could be viewed by buyers as necessary, it is best to eliminate the expense at least a year in advance of taking the company to market. Examples:
  • You choose to advertise more than is necessary (for any number of reasons). It is difficult to convince a buyer that the additional advertising spend wasn’t responsible for some part of your car counts, average ticket, etc. Cut back your advertising to what is necessary at least the year before, and ultimately there won’t be any argument.
  • You over pay an individual within your organization. This can be tricky, often this individual is a family member. Depending on the position, it can be difficult to convince a buyer that this isn’t the fair market salary for the position. This is particularly difficult addback to win if the person is a key member of your operations team (for example your first employee, or DM). If possible, reduce their compensation to fair market at least a year in advance of the process and remove the debate with buyers.
• Operating Expenses – Check your operating expenses to make sure you are as lean as possible. Any reductions in costs that flow to the bottom line will increase enterprise value by a multiple of the change.

For example, if the company was valued at 4x EBITDA, a $100,000 improvement to EBITDA will increase the enterprise value of the company by $400,000. We work hard to understand the financials of each of our clients, to reflect the highest, accurate, EBITDA possible. This presentation (making it believable, and credible) is a key to maximizing value, and is a key skill set of Black Iron Advisers.  

EBITDA or earnings before interest taxes depreciation and amortization is used to estimate cash flow, without any consideration being placed on the capitalization of the company, or the tax circumstances of the owners. It is also intended to reflect the cash flow of the company under new ownership. This allows sellers to addback any expenses that are exclusive to that owner. For example, if you have always paid your aunt a salary, but she does not have an operating roll within the company we can add-back her salary. EBITDA multiples are a method to calculate enterprise value (the value of the company). That is to say, you can multiply EBITDA by the EBITDA multiple to calculate the approximate value of the company. The number you multiply by EBITDA is the multiple. EBITDA multiples vary by industry, situation, location, etc. For example, it is not unheard of to have EBITDA multiples that exceed 20x in the technology or medical device industries. In other industries 1x to 2x is not unprecedented. In the auto center space multiples vary by franchisor, location, team and size. A few quick rules:

• Larger Companies = higher multiples
  • Buyers believe that larger deals reflect lower total risk. More stores = more diversification, larger team = lower dependence on any one store, any one team member, etc.
• Larger Markets = higher multiples
  • Stores in large cities trade for higher multiples than stores in smaller cities. Buyers assume there is more growth potential in larger markets
• Growing Companies = higher multiples
  • Growth receives a premium, because buyers are purchasing a stream of cash flows, and buyers are assuming the company’s growth will lead to cash flow growth

The valuation for your company depends on both the enterprise value of your company and the value of the real estate (assuming you own the real estate). EBITDA multiples are used to calculate the value of the operating companies alone (assuming you have included an appropriate expense for the real estate). For our guidance on the appropriate multiple for your company feel free to give us a call or shoot us an email.

Understanding why a strong management team adds value is straight forward – it reduces risk for the buyer. The team that is running the business, will still be running the business after the deal is done. We have found that most of our clients understand this at some level. Unfortunately, entrepreneurs still wear too many hats. “It is easier than training someone else;” “I couldn’t find anyone good;” “I just don’t trust anyone else to get it right” are some of the frequent comments we hear from entrepreneurs. For a buyer this is a substantial risk. What happens the moment the entrepreneur walks away? Even the most stringent reassurances that the seller will “be available anytime” is still no easy comfort.

How much value the team adds varies based on the type of buyer. If the buyer already owns 20 stores in your region, and has a terrific district manager / Ops team, the lack of a team will matter less (we call these strategic buyers). Obviously, there are a finite number of buyers who will fit that profile. Most individuals, and financial buyers will place substantial value on the team. The process will yield the best possible results for our seller if we can have every buyer type bidding the highest value possible. The strategic buyer may still be the highest bidder but having the other buyer types bidding in the process will force everyone to submit stronger offers.

The strength of your team also adds credibility to a growth story. Buyers pay more for a business that has the potential to grow. In this context that could mean, growing car counts, growing the average ticket, but also growing store count. If the buyer is looking at the opportunity as a potential growth platform, they want to know that your team has the capability of managing a larger operation. Potential growth maximizes value as the buyer is not simply buying the current steady cash flows, they are also willing to pay for some of the increase in cash flows.

Where should you make your investment in the team? Operations vs Finance

Finance

Pros: The financials need to be trustworthy. Ultimately, if there is any question regarding the accuracy of the financial statements buyers will pay less for the company.

Cons: Most buyers, both financial and strategic, will have employees, or will be able to hire an employee to do this function. Buyers will pay no premium for the sophistication of your capitalization, or debt structures, principally because these are not assumable.

Conclusion: Hire a strong controller / bookkeeper. If your organization grows to over $2 million in EBITDA, get your financials reviewed by an external accounting firm each year. If the company grows to over $5 million in EBITDA, get the financials audited by an external accounting firm each year.

Operations

Pros: Strong management leaders within operations add value to the company by maximizing EBITDA, adding credibility to your growth story, and reducing the operational risks/liabilities (fewer skeletons in the closet)

Cons: Good operations staff is expensive, difficult to find, and require time sufficient to prove their capabilities.

Conclusion: If it is an either-or decision, invest in your operations team. Get the strongest team possible, they will maximize your cash flow while you own the asset, reduce your workload, and every buyer type will view them as a major value add in their evaluation of the company.

Most clients don’t believe when we tell them, they will be the largest factor as it relates to how long it takes to sell their business. Obviously, the market influences transaction timing, but for most deals, it is the availability of information, owners, and stores for inspection that drive the duration of the transaction. If you want to the transaction to move more quickly there are steps that you can take:

• Confidential Information Memorandum (CIM) Preparation
  • The CIM is effectively the sales document we use to market the company. It will cover the company history, financial history, management team, strengths and weaknesses of the company, opportunities for the company, details regarding each store (location, size, equipment, condition, etc), store by store performance data, etc.
  • The more of this information you have available prior to engaging an investment bank, the faster the CIM drafting process. We provide clients with a list of requests. We have had clients provide us with all the information we need in a few days, and another provide us with all the information after 9 months. We can’t get started marketing the company until after this document is prepared, and that delay directly translates to a longer process.
• Availability of the Owners and Management
  • Inevitably we can’t answer every question in our CIM. Undoubtedly, we will receive questions from potential buyers. The faster we get the questions answered, the higher the likelihood we can maintain transaction momentum and speed up the process.
  • Post indications of interest (IOI), we will schedule management / ownership meetings. We try to limit the number of these meetings so as not to be disruptive, but ultimately the availability of management / ownership will dictate how quickly we can move through this portion of the process.
• Due Diligence
  • The due diligence process requires a substantial investment of time from management / ownership. We help our sellers by providing a list of data requests that we expect to be requested from a buyer during the due diligence process. Compiling that information (for example the organizational documents, tax returns, complete and accurate asset lists, etc.) takes time. The due diligence process duration can vary wildly based on how prepared the seller is, the quality of the materials, and how much time management / ownership can dedicate to pulling together the information / answering questions.

The difference between a well-prepared seller and one that has not prepared or does not have the time to dedicate to the sale process can be measured in months. We have sold businesses in as little as 3 months, and as long as two years. Our process for those deals was not different. The difference was almost entirely based on our client. For most of our clients, this is the largest transaction of their lives. Going as quickly as possible is not one of our goals (unless it is one of our client’s goals). That said, a well-prepared client usually transacts at a higher value, even if it doesn’t impact transaction timing.

For more information regarding the process, please feel free to shoot us an email or call.