Grow Your Business by Adding Locations Part Two
Last time, we addressed some success strategies for opening a second location, including creating a business plan and choosing a location. Today, we are going to delve into more specifics regarding acquiring and evaluating existing turnkey operations, since they usually offer a significant profit opportunity that can be realized in a short period of time.
Existing Turnkey Opportunities
Competition in the repair industry is fierce! The highest death rate of businesses in this industry is in the independent sector, and most of these businesses fail due to poor management, not a lack of customers. Many of these mismanaged operations can be turned around to become very profitable shops. This can be accomplished by implementing the systems and procedures described in the first part of this article, in combination with a good business model and plan, all supported with a good staff and adequate funding.
Once you’ve found a repair business available for purchase, you should evaluate every aspect of that business from the location to custodial services. There are many questions to ask during the evaluation period. Here are a few you may find useful:
The Business Name
- How long has the business had the same name? Has there been a recent name change, and, if so, what effect has that had on the business?
- Does the business bear the owner’s name, such as “Bob’s Auto Repair?” Bob, as an advisor or technician, may be essential to customer relations. If that’s the case, you may want to consider reducing your forecast of future sales, as customers may leave when Bob departs.
- How long has the seller been in the business at this location? Has the business moved recently, and if so, what effect has the move had on the business?
- What role does the seller play in the business? If the seller occupies a highly visible position, his leaving may have a significant negative effect on sales and staff.
- What’s the seller planning to do after the sale? Do they intend to remain in the repair business locally? If so, will they then be considered a competitor to either this location or to one of your other shops? This is where an agreement not to compete may need to be considered during the negotiations.
- Does the seller have other business interests directly or indirectly related to this one? An example would be a seller who owns a fleet of vans for a carpet cleaning business that are currently maintained by the facility you’re interested in purchasing, and who plans to maintain another shop just to repair those vehicles. The loss of revenue from maintaining those vans, and perhaps the potential loss of a key technician, could have a devastating effect on the business.
Equipment & Fixtures Inventories
The best method to determine the value of equipment and fixtures is to have two or more suppliers bid on the purchase of the equipment as well as provide you with what they feel is fair market value. If any of the equipment or furniture is attached or built into the building, you’ll want to review the lease (If applicable), since the attached equipment and fixtures may belong to the landlord.
Parts & Chemicals Inventories
Most parts and chemicals inventories are off by at least 15% compared to what’s on the books. Conduct a physical inventory to confirm the numbers. Most inventories are valued only on the cash value of the returnable merchandise. Finally, obsolete inventory is often left on the site on a consignment basis and pre-priced for a specific period of time. You’ll need to agree on how the leftover merchandise will be disposed of when the time period elapses.
The value of a shop’s customer databases is not reflected on the balance sheet; however, its databases are one of the most valuable assets of any business.
How these databases have been constructed and maintained will have a significant effect on determining the value of the business. Questions to ask regarding the databases should include:
- Do any customers represent more than 10% of the shop’s annual gross revenue? If the answer is yes, then you’ll want to meet with those customers prior to concluding the purchase to make sure they’ll continue to bring their vehicles in after the sale.
- How many major customers has the seller lost, or how many have become “inactive” during the last two years? Why the drop-off? The answer to these questions should provide you with some insight into problems that may have driven customers away.
- How many new customers have come in within the last year compared to the prior 12 months? The answer will help you determine customer trends. Sales dollars may be higher, but with fewer customers, that could indicate a problem.
- What has been the frequency factor of each of these customers? If new customers are streaming in but not returning, there could be a serious problem. Perhaps quality of work, pricing, poor customer relations, or some other negative is at work. Likewise, if there are no new customers coming in but the existing ones are staying, that could be a very good sign.
- How much money has each of these customers spent? The answer to this question will provide you with some demographic information that will be useful when you begin to formulate plans for improving operations. If the average customer spends less than $1000 per year, there may be some opportunity for growth with the existing customer base.
- Do fleets make up a large portion of the database? Most fleets are loyal to people with whom they do business. If the shop’s fleet customers find out there’s been an ownership change, they may elect to renegotiate for lower rates or go elsewhere. If the bottom line is 10% net and the fleet business represents 20% of sales, the fleet “sailing away” could make the business unprofitable. If fleet business makes up a substantial part of the total business (5% or more), you may want to interview the fleet owners to ensure they’ll remain before concluding the purchase.
- Does the seller have in place a method of measuring customer satisfaction? If there is some form of Customer Satisfaction Index (CSI), it should provide you with insight into how customers feel the shop is or is not meeting their expectations.
- What methods does the seller use to price products and services? Are their pricing strategies competitive and fair?
- What do the seller’s advertising and promotion efforts generate as a return? If they’re ineffective, you’ll need to determine alternative methods of marketing to avoid making the same mistakes. New marketing strategies could increase operating expenses substantially until a desired return is generated.
- What are the seller’s credit policies for customers and employees? If they’ve been lax, chances are accounts receivables will reflect it. However, there may be many customers who expect those credit policies to continue, and the loss of these customers may reduce the shop’s profitability.
- Who are the seller’s major competitors? What are their strengths and weakness?
- How do the seller’s products and services differ from those of their major competitors?
- Does the seller compete mainly on price, service, or quality?
Answers to these questions will provide you with powerful demographic information that will help determine the advisability of the purchase.
We will continue with more aspects to think about when purchasing an existing auto repair shop in our next post. Check back in two weeks for more information! If you missed the first part of this article, please click here to read part one.