Nearly every independent shop owner, chain or franchise operator in the tire and automotive service business has been materially impacted by the effects of COVID-19, despite being considered “essential” services. Many dealers have called me to say that they have been thinking about selling their business in the next 1-2 years but wonder if the sales declines and employee furloughs will prevent them from being able to find a buyer now. I’m hearing reports of auto service sales reductions of anywhere from 10% – 75%, as consumers are driving less and are fearful of close contact with shop employees, despite many operators enacting “touchless” service protocols.
It has been about a month since many states have enacted some form of “Stay at Home” or “Shelter in Place” orders. So far the impact on buyer activity seems to be as follows:
• Many buyer candidates are working from home or temporarily furloughed, so they have time to think about the possibility of being their own boss and doing initial research on business for sale opportunities
• Most were not aware that auto repair businesses were essential and remained open
• Most are not rushing into making a decision. They are treading slowly, and many want to see how quickly life gets back to normal, the pace at which consumer spending recovers, and if there is pent-up demand for auto repairs. On the other hand, buyers get excited when I tell them about the special new SBA incentive program that will 100% cover their first six months of bank payments.
Admittedly, the weekly pace of buyer inquiries is down about 25%, but the good news for sellers is that YOU ONLY NEED ONE BUYER to cash in your chips and retire from the business. Fortunately, the buyers that I have had under contract with existing clients are continuing to move forward in the process and are relieved that the recent CARES Act stimulus program covering their first six months of bank payments will help their cash flow until sales are back to normal.
A great question that I am getting from sellers is how the steep decline in sales caused by COVID-19 is going to affect their business valuation and ultimate sale price. Obviously, the severity of the decline and the timeline of COVID-19 will impact the valuation…and as Dr. Fauci would say, “You don’t make the timeline, the virus makes the timeline.” Here are some factors that I believe will impact business valuations in 2020 and 2021:
• Right now, banks and the SBA are doing everything that they can to stimulate the economy and this is a positive factor for buyers and sellers. The good news is that they are IGNORING the sales declines in March and April and are motivated to make SBA 7a guaranteed loans for 90% of the sale price. By ignoring the declines in sales and profits due to COVID-19, they are not dropping their valuations and financial criteria for approving loans.• Buyers, on the other hand are likely to be a mixed bag. As you might expect, some buyers will use the recent declines and market uncertainty as an argument to negotiate a more significant reduction in the Asking Price. Buyers are sensing that it will become more of a buyer’s market the longer that the COVID-19 impact drags on. Many believe that valuations will drop for those sellers who wait a year or two to sell their business. On the other hand, there are buyers who can recognize a top quality business that can weather a downturn in the market and will make a fair offer price because they don’t want to lose the opportunity to purchase a historically high-profit business to another buyer.
• Some sellers are rushing to put their business on the market ASAP because the SBA incentive that covers the first six months of bank payments is scheduled to expire for all loans made after September 27, 2020. Considering the time it takes to get a business on the market, find a buyer, and get the deal through the financing process, there is no time to spare if the deal needs to close in about five months.
• My personal opinion is that 2021 is going to be a very tough year to sell a business, especially if it takes a while for shops to get back to pre-COVID-19 monthly sales and profit levels. I worry that valuations will tank in 2021 for many high-profit shops that finish out their 2020 financials with big declines in their Cash Flow. Right now, buyers and banks are more willing to overlook a few months of ugly financials. Next spring, it will be much harder for a buyer to pay top price for a business when the full year 2020 tax return doesn’t show enough operating profit to cover an unsubsidized SBA/bank loan, let alone a rewarding salary for the buyer. Sellers may need to wait until 2022 or 2023 to get their pre-COVID-19 valuation, assuming a full rebound in profits.
• Clearly, these are uncertain and emotional times for everyone. There are no easy answers, and everyone is struggling and fearful. Many marginal tire and automotive centers may close their doors despite the government’s financial incentives. Those closed service bays may help others to survive, just as the old-timers remember from the 2008 recession.
For those of you who have been negatively impacted by COVID-19 and were considering a transition out of the business in the next 1-3 years, my best suggestion is the sooner the better! There are still buyers out there looking at business opportunities and many of them perceive auto repair as recession-resistant, compared to other types of businesses. The CARES Act SBA incentives that give buyers six months of free loan payments will be expiring and the money available for this program may run out sooner. Contact me if you would like to receive a FREE, no-obligation estimate of the Most Likely Selling Price for your business, if you were to put it on the market now.