Make selling your business location your exit strategy
Do you own the building your business is in? Do you plan on buying the building? If you are starting an auto repair shop have you decided to buy your own building. If not, why not?
Not many people know this, but McDonald’s isn’t a burger business. It’s a real estate business. The value of the property, with improvements, is the real value of a McDonald’s store. The vast majority of stores are run by franchisees who pay head office rent every month, no matter how good or bad their month has been head office still get their rent and they own the building forever.
Someone could come up with a better burger tomorrow (and some would say that already exists) but no one can take away the prime locations that Mcdonalds own.
Starting an Auto Repair Business
Like starting any business it is expensive, it is scary and risky. You have enough to worry about looking for staff and thinking just how much you need to earn every month to break even, never mind paying a mortgage as well. You worry about this weeks payroll and looking long term is not easy, we live in the moment and work on fixing the problem in front of us. Leasing a building may be easier, quicker and seem cheaper, than buying a building but is it the right long-term decision?
What does your Business Plan say?
Before you even think about starting a business you need a plan, you need to do research and you need to think long term not just short term. A real-world example is a very experienced mechanic who opened a shop in a area that was 40 minutes’ drive from his home. He didn’t think about how that driving time would extend his work day and cause him stress and expense. He spent less buying the shop than if he had bought one locally but over time he spent a lot more on fuel, increased wear and tear and stress for him.
You need to have an auto repair shop business plan and it needs to cover every possible thing, you should look into the costs associated with leasing a building and then collect the data on buying a building. Two plans almost exact in every way but with very different long-term outcomes.
Should I Lease Space?
The benefit of leasing is that it is generally quicker to arrange and cheaper, in the short term at least. Your rent will go up every 5 years (maybe sooner, make sure you read the agreement), and it may go up substantially at the end of your pre-agreed time. What if the owner sells the building to someone else who wants to remove you at the end of your lease?
Say it all goes well and you pay your rent for 30 years, retirement comes along and what do you have to sell? Nothing is the answer, you get to either sell your equipment and customer list to a new person who wants to start in the auto repair business or you sell it off piecemeal (for a lot less than you paid). You don’t own the building, you don’t own the land it’s on you don’t have much in the way of physical assets.
Should I Buy an Existing Building?
For the soon-to-be owner of an auto repair shop, your easiest strategy is usually to buy an existing location (even if it’s not currently profitable), they will already have equipment and they will have at least some customers for you to build on and you are in business fast.
What if the current business owner also owns the building? Buy the business complete with building all in one fell swoop.
You could do two separate deals. Buy the business and agree to pay rent for 5 or 10 years and then buy the building. By working with the current owner to arrange terms to buy the building now you remove the problem of what happens in 10 years when you have built a successful business and the property owner puts the rent up and up just because they know you can pay it.
Should I Build my own Shop?
Buy land and build your shop from the ground up, this is a second option and will take more upfront cash and more time than just buying an already existing business. The positive of this option is that you get what you want in a shop. Doing self-build allows you to choose every detail, right down to the color paint and carpet you have from day one.
Building your own shop takes time and energy (as well as money), everyone who I know who has built their own repair shop has said that while it is profitable in the long run it is also the most stressful and exhausting part of their life. Unless you have substantial money and energy this is a last option.
What is Your Endgame?
I know it sounds crazy but the saying that “Time and Tide Wait for No Man” is true. One day you are a fresh-faced technician thinking about going out on his own, the next day you wake up and your have a successful business and all the aches and pains that go with 30plus years of fixing cars.
How you spend the 30 (or more) years after retirement can be deeply affected by the decision to buy the building your business is in or not.
If you currently lease your business’s building, you need to seriously consider true ownership, rather than just adding another lift to your shop. No matter how profitable you can be (even with Profit Boost auto repair software helping you), the intrinsic value of land and buildings can be the difference between retiring with a bit of money and retiring with a ton of money.
That may mean relocating your business, if the current owner won’t sell. It is a lot less painful to relocate your business when you are young and have the energy to rebrand and reignite it in a new location.
Poor Planning Prevents Profit
The point here is that you must be mindful of your first priority: make a profit.
It means finding value in every aspect of your business, not just in the revenue of your operation. Plan to make every part of your business profitable, even a simple thing like renting parking space for extra money every month can mean the difference between meeting your payroll, and not, in the short term.
Profit Boost shop management software can help you improve your bottom line, especially if you’re willing to use it as fully as you can. Measuring profit on parts, technician efficiency and PPH are all valuable, no essential, for your business profitability.
Using that profit to ensure your long-term future is the real secret sauce.
Think of it as plugging holes in a bathtub you want to fill completely and increasing the flow of water as much as you can. There’s a limit to how much you can make, no matter how efficient your operation may be.
Owning the land and building that houses your business can be your ticket to a satisfactory retirement. Give yourself an edge – plan for your future and provide for yourself when it’s time to move on from managing the shop.
Get Help From Day One
No I don’t mean technicians or a service writer, we have covered that in previous blog posts. I mean get a real tax advisor, get to know a banker locally, get a good business attorney, speak to a Commercial Real Estate Broker.
You should have all these people on speed dial and spend the money to take them out to lunch once a year.
Even if you don’t think you need a loan or any kind of money anytime soon it always pays to have your banker know just how well your business is doing, your tax person will be able to explain new laws (do not make the mistake of only thinking of taxes in September when they are already late or close to it).
Ask the commercial broker how a building like yours is valued? There are 2 or 3 different ways but the most common is based on how much rent it brings in. What does this mean for your auto repair business and your property holding business?
You didn’t think the repair shop was going to own the actual building, did you? No you set up a property management LLC and that owns the structure. The repair shop rents the building. The amount of rent it pays will increase the value of the building when you sell it. Even though you are renting the building from yourself you should have a water tight lease and have regular rent increases baked into the lease. Now you can see why we said to get an attorney and become friendly with him.
We recently spoke to a shop owner who owns the building that his auto business is in, but he has been charging a below market rent to the repair shop. He thought he was doing himself a favor, making the auto shop look more profitable. In fact that has reduced the value of the building. If he finds a buyer for the building but not the business, they are going to low ball him as the rental income is low. If he sells the auto shop he can’t suddenly increase the rent he is charging the new owner so either way he loses.
Don’t leave it to the last minute to increase the rent, a buyer is going to want to see more than one year of accounts. Remember we mentioned planning for success earlier, now you see how planning really does result in long term profits.
How do I Buy an Auto Repair Shop?
Start with the money, how much do you have and how much can you borrow? We mentioned a banker earlier, you should be opening a business account months (or longer) before you need to borrow any money. Speak to a real banker (not just the teller) and see if there is one who has experience with financing Auto Repair Shops. Ask other local business owners, see who they recommend. We have found local credit unions to be better than the nationwide banks in many instances but do your research.
Small business loans for auto repair shops are available, search for a lender with SBA (small business administration) experience and when you find one milk every bit of knowledge you can from them.
As for the ins and outs of buying, selling, negotiating, and managing the purchase and sale of commercial real estate, do the right thing. Engage the services of a professional experienced local commercial real estate broker, one with a track record of dealing successfully with all the aspects of the business you need handled.
Local knowledge and experience really do count in instances like these, your realtor will be able to point you towards reliable contractors and experts in their field (and share who to avoid). The realtor will want to know that you have spoken to a banker, that you have earnest money and that you have some idea of what you are looking for. They may even know a local business that is on, or about to be on, the market. Ask them for info before you tell them what you know and don’t know.
In some cases, you may require property management, because your location is (or will be) more than just a repair shop. In other cases, you may require specialized services because of your location.
Ask questions and listen to answers, better to ask a hundred questions and learn all you can than to buy the wrong business.
Think Long Term
Now that you’re thinking about more than just squeezing the last dollar out of every repair job, and ensuring profitability with your auto repair shop software, begin to think long-term about your repair shop exit strategy. Every business has a beginning, a middle, and an end. Do yourself a favor and make sure that your end will be as satisfactory as was your opening day.