Case Study: Buying And Selling An Automotive Service Business -

Case Study: Buying And Selling An Automotive Service Business

Jim Torres had owned a prominent auto service center in North Providence, RI, since 1983. Although still in good health and wanting to remain active in the automotive aftermarket in some capacity, he sought retirement from the daily grind of owning and operating a business.

“After thinking I should be doing a nationwide search to find the right buyer for my business, it took my broker Art Blumenthal to find the perfect candidate from my own hometown!”

–Jim Torres, Seller

“For a first time buyer, having a broker involved is definitely a plus. There’s an amazing amount of legwork involved to get the deal done and you need a guide.” –Joe Cunha, Buyer

Seller’s Background & Motivation to Sell

Jim Torres had owned a prominent auto service center in North Providence, RI, since 1983. Although still in good health and wanting to remain active in the automotive aftermarket in some capacity, he sought retirement from the daily grind of owning and operating a business.

Jim said, “I was a District Manager for Midas for a number of years before owning three auto service shops over a 28-year period. I was fairly ­successful and, over the years, I sold off two locations myself…one was to a partner with whom I was in partnership at a location, and the other location to another former Midas District Manager, who had actually ­approached me looking to buy a location. So, for the next 10 or 12 years I had just the one ­location in North Providence.”

Buyer’s Background & Motivation to Sell

Joe Cunha has a classic automotive service background.

Joe said, “I have 27 years of experience as an ASE-certified and factory trained Master Technician. I started off in 1985 as a technician and worked as an independent for nine years at local garages and gas stations. Then, I started with an Isuzu dealership in 1994 and worked there for four years. Then, I went to work for a Buick-Pontiac-GMC-Isuzu dealership for another four years and then for a Volvo dealership for eight years after that. Finally, I worked for a Lexus dealership for two years.”

When asked if there was a specific date that he decided to go into business for himself, Joe Cunha admitted that he always had the entrepreneurial spirit.

“I always wanted to run my own business from years back. Even when I was working for dealerships, I had a side business selling log home material packages when the housing market was good, so I had a taste of what it was all about to run a business.

“Once that real estate rollercoaster ride cooled, I decided to start looking around in my real area of expertise…the automotive industry. At first, I looked at some shops and then, by chance, I found Art Blumenthal’s website on-line one night doing a Google search. He had hundreds of listings in the northeast, so I contacted him.”

Joe continued, “When he told me about some of the locations he had listed and that one of them was owned by Jim Torres, I became more interested. I had known Jim’s sons since I was a kid, and when I worked at a gas station when I was a teenager, Jim and his wife would come in at least twice a week. To add even more to the ‘it’s a small world’ scenario, when I worked at the Volvo dealership his wife owned a Volvo and I worked on it.”

An Overview of the Business

As a prominent auto service center, the business is an established, profitable turnkey operation with equipment, inventory and experienced employees in place.

Located just north of Providence, the state capital of Rhode Island, this six-bay, fully equipped business offered a buyer a unique opportunity to live and work in a desirable New England community, with excellent ­demographics and minimal automotive service competition.

The business was consistently profitable for 30 years and is located on the 2nd most highly traveled local road in Rhode Island. It is an Official Rhode Island State Inspection Station, performing more than 1,000 state ­inspections per year.

It offers total car care including brakes, oil changes, exhaust, scheduled maintenance, tires, and steering and suspension services.

Seller Selects a Business Broker

Jim Torres said, “Art Blumenthal caught my attention when he sent out a marketing mailing that he was in the business of selling operating aftermarket businesses. As a District Manager for Midas, I knew Art Blumenthal back when he himself was quite successful as a Midas dealer. Eventually, he went into the auto service software business for many years, and although I had never met him personally, I did business with his company.

“I gave it some thought and knew that he had a reputation as being ­diligent and effective in whatever he does. So I contacted him and we talked a couple of different times to get to know each other and I felt comfortable with his approach. I thought it was important to get more of a national view for the business. I thought we could probably attract people from other than the immediate area.”

What’s the Business Worth?

Establishing a sales price with the guidance of Art Blumenthal included taking into consideration a variety of factors:

• Sales were trending upward;

• Strong cash flow that supported both the bank payments and significant owner compensation;

• Pre-approved for 85% Wells Fargo Bank financing, with a SBA guarantee; and

• Excellent demographics in the immediate area with homes, condos and apartments – professional, ­upscale income levels.

Scope and Timeline of Sales Process 

Jim Torres said, “Art put together a very comprehensive presentation for potential buyers…I was very impressed with it. Over the next months, we had some interest from people in California, Florida and New England. But, like selling a used car, you get a lot of tire kickers sometimes and they don’t go any further.

“And then some months later…I would guess eight months into it…Art contacted me and said he had someone from Massachusetts who was interested. As it turned out, I knew who the young man was…Joe Cunha…because he grew up in our little town of 6,000 people. He played ball with my sons when they were kids. So it took Art, a man in Pennsylvania, to put me in touch with someone I already knew in Massachusetts. After thinking I should be doing a nationwide search to find the right buyer for my business, it took my broker Art Blumenthal to find the perfect candidate from my own hometown!”

Jim continued, “Plus, I knew the young man was very nice with a very good work ethic. So needless to say, I was very happy that Art had a potential buyer for me and that it was this young man, who I think a lot of and I think will do very, very well.

“So Art put us together and we went back and forth and it wasn’t all easy because there are many issues to discuss to come to an agreement on…the financing gets a bit difficult in today’s economy. But I’ve got to say that Art worked very hard on it and was very good in communicating with my attorney and the buyer’s attorney and the banks, and coordinating everything. jim torres and his wife, vivian (left) pass the keys to new owner joe cunha (right).I was very pleased with what he was able to do. It was handled in a very professional way.”

Scope and Timeline of Purchase Process

Joe observed, “My accountant looked over all the financials and we came up with a figure. Then of course, the bank also delves into the financials and bases their opinions and offers on cash flow, which needs to be healthy. Finally, we were able to agree on a purchase price.”

He continued, “For a first-time buyer, having a broker involved is ­definitely a plus. There’s an amazing amount of legwork involved to get the deal done and you need a guide as the months pass quickly. One of the biggest challenges is dealing with the banks, which are now really tough while protecting themselves.

“It was absolutely a learning process with a million details to take care of. Just one example was the last-minute requirement of the bank that I get flood insurance because there is a small river nearby. I would have never thought of that.”

Post-Sale Activities and Observations

A few months after the closing, Jim said, “I am quite pleased with what’s happened…the successful conclusion…and I believe Joe feels the same way.”

The sales contract provided that the Seller would provide a minimum of two weeks training after the closing.

Jim said, “For two weeks, I was there every day, and for two weeks after that, I was there for a day or two if he needed some assistance. It’s now been three months and I try to stop by once a week to see if there’s any mail, or I give him a call, or he calls me if there’s a question. I want him to be as successful as he can be and I’ll do anything I can to help him.”

Joe has welcomed the opportunity to “Be Your Own Boss” and has been able to take a look at the business from a fresh perspective. He has made positive changes, including some new equipment, software upgrades, procedural improvements and fresh paint.

Win/Win Outcome

Jim has been relieved of the stressful day-to-day responsibilities of the business and can now enjoy more time with his family, traveling and exploring other options and interests. He has converted his business equity into cash for his retirement and financial security, without the risks associated with seller financing.

Joe is controlling his own destiny. By securing long-term financing, he was able to leverage his investment and purchase a well-established business with exceptional sales and cash flow. His strong work ethic, automotive and business management skills will enable him to further grow the business and create substantial long-term equity.

Leveraging more than 30 years of experience as both an aftermarket business owner and aftermarket technology executive, Art Blumenthal LLC provides business intermediary and advisory services to both buyers and sellers of industry businesses of all sizes. Art is a member of IBBA (International Business Brokers Association, Inc.). For more information, or to initiate a no-obligation confidential consultation, visit www.art-blumenthal.com.

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Understanding how to calculate ROI can help your purchasing decisions.

I’m not a financial scholar by any means, but I know what return on investment (ROI) is. It’s a mathematical formula that yields a representation of the profitability of any type of investment. In the automotive repair industry, we primarily associate this with equipment. Admittedly, I’ve never used the term much, more often approaching things from the standpoint, “Am I making money with this or not?” As technicians and shops, our typical thought process centers on each individual job, how much time and money we have into it, so we’re used to thinking profit or loss, and also pretty good at knowing if we made money, or if we lost our “back quarters.”But over time I’ve learned that the thought process alone is not always the best approach, and making money doesn’t necessarily mean a good ROI. Even if you don’t go crazy with an exponentially long, complicated equation, if you understand the basic idea and process of calculating ROI, it can help you make good purchasing decisions. The base calculation would be dividing your net profits by the cost of the equipment. That’s your ROI. Then, if you want to take it further, you can divide that number to get a time-based ROI average.Let’s look at a basic calculation. You buy something for $10, then sell it for $14. Your profit is $4. Divide profit by investment, ($4/$10) and you get an ROI of 40%. Not bad, but if it took two years to make this profit, then your ROI would be 20% annualized, which is not as impressive. You can use this basic formula to compare products you sell as well, and it may help you decide what’s best to keep in stock or not.Now let’s try something with equipment. You have an old tire machine that’s paid for. You average one set of tires per week and it takes 1.5 hours to complete the job. You decide to buy a new tire machine that is much quicker and more efficient but it cost you $20,000. Now the same job only takes one hour. Based on the cost of technician salary, you calculate that it saves you $30 per job with this new equipment. In this case you would use the formula: savings (additional profit)/investment. At one set of tires per week, that works out to $1,560 per year. $1,560/$20,000 equals an ROI of approximately 8%. That’s not too good. It will take you almost 12 years to pay off the new machine.On the other hand, if you average five sets of tires per week, then your additional profit for the first year is $7,800. $7,800/$20,000 equals an ROI of 39%. That’s pretty good. A general rule of thumb is to pay off any piece of equipment within two to three years. This puts you right on track.But now, here is the problem. This is where we throw the proverbial wrench into the plans. Equipment is tricky. You should also calculate in installation and maintenance costs, as well as the cost of training for the new equipment, and factor in how long the equipment is going to be relevant. This is an especially important factor when considering a scan tool, the required updates and how long before it’s potentially obsolete. In the case of a tire machine, you can also calculate in savings from other benefits of a new machine, such as no more damage to wheels or tire pressure monitoring system (TPMS) sensors, which the new machine can eliminate.Some of this can be overwhelming, and it makes me realize why it’s easier just to fly by the seat of your pants and wonder, “Am I making money or not?” It’s an important business aspect, however, to know what is behind the idea because it can benefit you in so many ways. Even without math, you can almost visualize the numbers in your head.I’ll try it by leaving the formulas out to decide whether it makes sense to buy a dedicated TPMS tool when you already have a full-function scan tool with TPMS ability.If you get a TPMS problem every day and you use your full-function scan tool to diagnose it, most likely it takes much longer to boot and longer to navigate to the function. Even then, it may not cover all you need. Because there’s such a vast amount of information that a full-function scan tool has, it simply takes more for the manufacturer to keep everything current. Plus, you often must still rely on service information for certain procedures and then, if it’s the only scan tool for your shop, it ties it up for use in other diagnostics.Now, let’s compare that to a dedicated TPMS tool. 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It’s a great concept that represents fundamental business financials.

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