A shop owner looking to expand their footprint may be debating if they should build a new shop from scratch or buy one already humming. What’s the best choice?
According to Hunt Demarest, accountant and business valuator with accounting firm Paar Melis, buying one is the easier route to go.
Shop owners taking part in the session Transitioning Your Business at the Midwest Auto Care Alliance’s Vision Hi-Tech Training & Expo in Kansas City, agreed wholeheartedly when the question was posed to attendees.
“When you start your business and you’re starting from fresh you are guaranteeing that you’re going to burn cash,” Demarest advised. “And you’re hoping to get to that point where you can level off or hit your breakeven.”
While you may have not had to pay someone for their business and goodwill, there are other costs like assets and advertising to bring in customers.
“What was the cost of losing money on those years till you get to the correct breakeven point?” Demarest asked.
Even buying a decent shop is going to typically be a better bet, assuming you’re experienced and know how to run a shop well, he added.
Demarest advised to steer clear of troubled shops. “There are some ones that have good bones to them and they’re just run very poorly — you come in there and make some changes and they turn out to be a great investment,” he said. “There’s some of these where you go in there and you’re like, ‘Alright, I see why you struggle.’ This is just an uphill battle.”
But have a look at what’s available. The only shop that may be on the market may be one that’s too successful. For example, say the shop is netting $1 million a year. With a top-end multiplier, that shop would be valued at $3 million. Do you have that cash?
“A lot of banks aren’t going to give [that loan],” Demarest said.
And for someone who is used to running a smaller shop, operating such a profitable shop can be daunting as it likely runs in a very different manner with roles and positions that don’t exist in smaller ones.
“It is a big ship to steer,” Demarest observed.
So maybe investing $800,000 to set your own flag is the better route in this case.
“I already know what I’m going to get,” Demarest rationalized. “It’s kind of easy to see how you could spend more money building this myself versus buying that one.”
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