Brad Templin, who works in the three-store family business, Scott’s U-Save Tires & Auto Repair, in the south Chicagoland area, asks a good question about how to acquire single store tire dealers.
Brad has tried to acquire a fourth store, but notes that sometimes after years of discussions, he’s reached an impasse on valuation — only to find out later the seller sold to someone else.
Brad is targeting the right type of tire dealer. The average age of the person selling is about 62 years old. The seller has been disengaged for three or four years and is no longer investing in the business.
Stagnation sometimes shows in the business’ customer count, low average repair orders and weak inspections. But the store usually has a solid base, a good team and is well-regarded in its area.
When the discussion finally turns to valuation, Brad says he and the seller end up far apart. In every case, the owner had no prior real market input into his businesses’ value and Brad bore the brunt of telling the owner what he thought the value really was. In several cases, the seller was offended and walked and then sold to the next guy who came along with a slightly better offer.
Here’s a few ideas I gave to Brad when we discussed this over a video call.
One of the first suggestions I always give expansion-minded tire dealers is to have a pipeline of potential deals going. I recommend developing a target list of all the single store locations in the markets they like and ranking them. Then reach out personally and start having conversations about your desire to grow through acquisition. The idea is to get multiple conversations going so you don’t get fixated on any one business if you need to walk away at some point.
I always recommend having a valuation discussion in the first meeting. This sets the owner’s expectations and perhaps educates them a little bit so they can ponder things. This also saves everyone a lot of time. Sincerely show that you're not out to take advantage of them. My approach is to throw in the kitchen sink of “add-backs” to profit in there. Is there a condo in Costa Rica leased through the business? Throw it in. Are non-essential family members on the payroll? Throw them in. Can you prove personal expenses “mistakenly” get passed through the business? No problem. Start with the last 12 months and then work backwards as you need to.
But next, identify the ‘contra-add-backs’. If the owner works in the business, what’s the fully loaded cost to replace him? Is rent set at fair market value or does the owner need a bump to bring the property to market value? Are there delayed investments like equipment, broken bay doors or a sales floor that need to be refreshed? You want to itemize this stuff and show the owner how they lower the value of the business to you and everyone else.
Then analyze the business to see what it would look like under your ownership. First, look at the profit margins. Small businesses typically underprice, so that’s potentially some upside for you. Perhaps you have more buying power? Compare their sales and vehicle inspection process to yours. Are you better? Is your incentive program more effective?
Why is this analysis important? Let’s say, for example, that you offer 4X on a business with $250,000 in EBITDA for a price of $1,000,000. If, with your tweaks, you think you can get it to $330,000 EBITDA, you can see how this might be a 3X deal in hindsight. Maybe you take that chance and go with a slightly higher offer to get the deal done?
There is no one right way to present the discussion of valuation, but try using logic. Talk about the differences between Monro, with $1.3 billion in revenue and 14X EBITDA valuation, and a single, independent tire store. They are at polar ends of the valuation spectrum.
If you reach an impasse, ask the owner to take his cash flow and balance sheet for the business (not the real estate), go to a bank and find out how much he can borrow without signing a personal guarantee. It’s not as much as he thinks. Point out that he gets to keep the cash or excess working capital in the business when he sells. Sometimes that’s a lot.
Part of the challenge with a single store operator being offered a 3X EBITDA valuation is they might say, "You know what? I'll just work it another two years. I’m feeling healthy." Two years goes by and the guy figures, "Well, I'll just work it for another year."
At some point, a mostly cash-at-closing offer should resonate. Beyond that, you might have to get creative with employment agreements and earn-outs. At the end of the day, what’s it worth to you and what can you really do with it?
