12/26/2024

A 3-Step Process to Building Value in Your Auto Body Shop

Source: Body Shop Business

Jim is in his late-50s and runs a successful collision repair facility. While he’s not looking to exit his business immediately, five years ago he knew that he needed to put a five-year plan in place. Yet, because he has been busy running his shop and did not know how to start on such a plan, here he is five years later still trying to figure out his five-year plan.

Jim is on what I like to call the “revolving five-year plan.” A shop owner begins to think about a possible exit in five years, doesn’t have the time or is unable to put a plan together and then, five years later, still has to put together a five-year plan. Unfortunately, too many shop owners who are on this merry-go-round get to the point where they must exit either from burnout, health or other circumstances in life — and have either not built enough value in their businesses to exit with the lifestyles they want, or they leave money on the table because they never maximized the value of their businesses.

Thankfully, there is a process that will allow shop owners to continually build the value of their shops so that, whether it be through family or key employee transfers or third-party sales, they can exit on their terms and live the lifestyles they want for themselves and their families. Ideally, if you have at least five years to plan, this process will allow you to achieve your goals.

So, how do we build value in our businesses? I like to break this down into a three-step process.

Step 1

The first step is to develop a personal vision for your family and your business. In his book, “The 7 Habits of Highly Effective People,” Stephen Covey lists the first habit as, “Begin with the end in mind.” If you’re going on a trip, you get your GPS out. So, what is the first thing you need to do?  You need to tell it where you’re going! If you don’t know where you’re going, how are you going to get there? I liken the process to putting a puzzle together. To put a puzzle together, all you must do is put the pieces that fit together in place. Yet, have you ever tried to do this without looking at the picture on the box?  It’s very difficult!

This is why the first step is to help the shop owner develop the picture first. Once you have the personal vision of what you want your family’s life to look like and how the business fits into this picture, you can then put the pieces of the puzzle together. 

Here are some questions you can ask yourself to begin creating this personal vision:

• What do we want our lives to look like in 10 years? Three years? Next year?
• How will you occupy your time?
• What do you want your business to look like? Do you want to be a market or industry leader? Do you want to be a community family or community asset, or do you want to create a legacy? Or do you just want to do something? 

I talk to a lot of shop owners who say, “I’ve loved what I do for 20, 30, 40 years, and yet I’d like to be able to have more free time and maybe do consulting work or just be a CEO and only work on big-picture stuff with the industry.” 

You can take the boy or girl out of the shop, but you can’t always take the shop out of him or her. That’s what I love about this industry. I have yet to meet one shop owner who is not good-hearted and who doesn’t have the best interests of their families and their businesses in mind. And many of them want to continue to give back to the industry. So, that’s something that needs to be considered when creating this personal vision.

Step 2

The second step is to determine where you are. So, let’s go back to our trip. You now know where we’re going, and the next thing your GPS asks you is: From where do you want to start? Usually it’s your location, right? So, you have to figure out where you are. 

To do this, you need to look at two things: the current value of your business and what you have in personal resources. With regards to determining the current value of your shop, a valuation that assesses the business based off free cash flow and is benchmarked against the industry will give you a pretty accurate determination of value. There are several cost-effective ways to determine this, which range from having an assessment from an M&A specialist or business broker to utilizing software solutions that use normalized financials and industry data.

Next, you need to determine what you have in personal resources. A financial plan or roadmap is the best place to start. Ideally, you’ll want to have a good financial planner assist you. The first step is addressing what your goals are and determining how much income you’ll need in living expenses. Then, you’ll want to assess what you have in investment assets, retirement plans, insurance, Social Security and other income sources, including rental payments, and then add in the business value. Then, this information should be calculated to determine if your goal can be achieved. If done properly, it should be tested against many market scenarios to determine if you can achieve your vision.

Many times, a gap (called a “value gap”) can be identified, which means that there are not enough resources between the value of the business and your personal resources to give you the income to support your personal vision. The question now becomes, “How are we going to close this gap?” There are two ways you can do it. One is we build up your personal resources. The problem with that is that it can be a very slow process. Or, we can help raise the value of the business, which will increase free cash flow. In this scenario, not only is the business value going up, but free cash flow can be used to help build the personal resources. That’s why it’s important to give yourself some time to make sure you’re in the position to exit or transition on your terms. 

Step 3

Building the value of your shop is more than just increasing revenue and profitability. Whether a family member, key employee or third-party is looking at the business, that potential buyer is also going to look at:

• Shop reputation
• Operational efficiency
• Market position
• Future growth potential
• Minimized risk
• Owner dependency

Step three is the roadmap that allows you to address all these areas. There are three action steps in this process:

• Ensuring business continuity
• Minimizing risk
• Building business value.

Each of these is a topic in and of itself and will be addressed further in future articles. But here is a brief explanation of each:

• Ensuring business continuity. What does business continuity mean? How will you ensure that your business will continue and that your family’s needs will be taken care of if you cannot function in the business? While most people think that this means getting hit by the proverbial “beer truck,” it could also be disability, divorce, bankruptcy or a business dispute between partners, all of which can throw the business and your family into a whirlwind and detrimentally affect each. Instructions on what to do, where information is and who to contact are vital, as well as having properly structured financial and funding vehicles for the shop and key employees to continue to run it and provide income for your family. For a sneak peek at the concepts, check out my article “Tales from the Crypt” in the August 2023 issue of BodyShop Business). 
• Minimizing risk. This step is about outside threats to your shop, such as key employees leaving, lawsuits, natural disasters and cyber threats.
• Build business value. Once you’ve ensured that your shop and family are protected, you can now begin to work on increasing your shop’s value. In order to do this, you need to consider increasing cash flow, implementing key-employee incentives, developing employee retention programs, minimizing taxes, improving systems and technology, and developing successors.