“I’d sell, but I wouldn’t get what I want for it.”

I’ve heard this from multiple clients in my consulting career focused on the automotive aftermarket. Emotional attachment runs deep in the world of car enthusiasts – we’re attached to our cars, but we’re also attached to our businesses.

Sometimes your business doesn’t give you the life you want, your priorities shift, and you want to change your role to get out of the day-to-day of business operations. One option you have: sell the business. The catch to this option? Your target price, or valuation.

For small and medium sized businesses in the automotive aftermarket, valuations are a dark art. Your target price might be based on very little fact. The purpose of this article is to briefly shed some light on valuation methodologies and considerations outside of your gut that can inform the way you think about a sales process, giving you the confidence to ask for a certain sales price based on facts.

The valuation topics covered here include:

  • Key person considerations
  • Historical financial information
  • Forecasted financial information
  • Tangible assets
  • Intangible assets

Key Person Considerations

As the owner and founder of your automotive aftermarket business, how much intellectual property is stuck in your head? If you wanted to get out, would the business crumble without your guidance?

If your answer is no, consider whether any other people in the company, loyal to you, would leave along with you. Your buyer’s diligence will highlight people throughout the company who are defined as a “key person” whose departure would be materially detrimental to the business. Bring them in, on a confidential basis, to the sale conversation. Understand what their future plans are, assure them that you will be supportive of their future. If they would leave with you, then your answer is yes and you should proceed to the next paragraph.

If your answer is yes – the business would struggle without you – change that. Here are two ways to decrease your business’s reliance on you:

1) Design, hire, and train for new roles that take over specific areas of your responsibility. What tasks most heavily rely on your input? Bring in new management to take on your intellectual property and your responsibilities. Enable higher levels of success by committing the new free time to teaching that person everything there is to know about that specific subject matter.

2) Once you’ve freed up your time, write manuals. Get all important information out of your head and into a useable resource. Consider knowledge related to:

  • Customer advice
  • Quality control
  • Supplier relationships
  • Company history
  • Standard training procedures and introductions
  • Job descriptions
  • Processes and responsibilities solely in your control

Write manuals that are simple and short, but contain enough detail for someone to pick up, read, and perform tasks or understand the knowledge quickly.

Historical Financial Information

What information do you have? How far back does it go? Do you have an auditor who can perform a compilation, review, or audit depending on the buyer’s diligence requirements?

Ensure you have an accounting solution in place. This is an issue faced by nearly every small, fast growing business. Installing an accounting process early will save you from a big headache down the road.

Historical accounting records dictate most sophisticated buyers’ pricing. Income or revenue multiples or a premium over the current net assets is common.

Forecasted Financial Information

Do you have forecasts? If no, hire a professional to work with you to create them. Forecasted financial information will give you a return on the investment of time and money to create them. It will give buyers the confidence that the founder is leaving the business for a lifestyle change, rather than offloading financial underperformance. Forecasted financial information can facilitate certain valuation calculations as well. While you shouldn’t necessarily share all financial information with your buyers right away, it can be used as a bargaining chip or support for your target price later in negotiations.

Tangible Assets

Do you have company project cars? Do you own your real estate? How about tools, lifts, materials, CNC machines, customized testing technology, and other facilities? Do you hold inventory? Do you consistently have lots of customer work in progress?

All of these assets have value that must be considered. Get appraisers or track down the receipts for everything you can. Keep in mind depreciation. Assets are not worth as much today as they were when purchased due to wear and the passage of time resulting in innovation and additional assets being released into the market.

Intangible Assets

Make an inventory of all intellectual property, customer relationships, brand strength, processes, key people, and supplier relationships.

Due to accounting rules, these assets are not financially eligible for the balance sheet. However, an inventory of these intangible assets will also boost your valuation. Get an understanding for their financial value through looking for comparable companies with similar intangible assets, or by hiring an appraiser or valuation expert to work with you to create a valuation.

Conclusion

Taking these proactive, simple steps guarantees an increase to the valuation of your automotive aftermarket business. If you need more information on how to execute each of these steps, reach out to Driven Performance Advisors at arun@drivenperformanceadvisors.com and I will be happy to speak with you about how we can increase the valuation of your automotive aftermarket business.

Arun Coumar, Managing Director of Driven Performance Advisors is a former capital markets and complex accounting consultant with 6 years’ experience in financial valuations and equity and debt capital markets. He has worked with multiple automotive aftermarket and motorsports clients to increase company valuation for sales and capital raising purposes.