Selling Your Salvage Yard
How would you go about selling your yard if you were to retire, or to sell for any reason?
Understanding the Market and Making a Game Plan
Do you have the type of yard that a chain would want as part of their network, or does it fill the needs of an operation that is already strong in the area? Maybe it is attractive to an individual or a couple who simply want to earn a good living. Some buyers may want your yard because it makes money, others because it is in the right location. And others because it is an underperformer that they can buy at a lower rate and turn it around.
When you approach a potential buyer, naturally he or she will want to know exactly what you’re selling, and the price you’re asking. This means that you will want to look at the various components of your company that have value, such as land, buildings, inventory, equipment and profit. The buyer will have a professional evaluate any documents you provide, so it is in your best interest to have them presented professionally.
Is your yard positioned to continue profitably for the next 20 years? If so, buyers will notice. What are the current trends in our industry and are you a participant or a bystander? This could apply to best practices in dismantling, internet sales, brokering, etc. Networks of salvage yards have come on the scene in the past few years. Team PRP is a network of 160-strong, full-service operators across the country. There is a network in Florida that is cropping up to broker and distribute (truck) parts among its members. There are other networks in place now and more coming. Strength in numbers is the fundamental advantage of LKQ, and others are now responding. How will potential buyers view your ability to continue to operate in this new world?
Does it make sense for you to meet with one of the handful of good salvage yard consultants we have in this industry? If you’re not already speaking with them, they may be able to help you tune the performance of your business so that you might achieve the best price. Some of them know how to utilize your yard management system to point out adjustments to make. They’ve helped hundreds of salvage operators become more profitable.
Decide early who your allies will be in selling the yard. Will you bring in your attorney, CPA, business broker, friend or do it all yourself? Once you decide this, you can divide and conquer this project, with your team playing various roles.
What about confidentiality? Some yards advertise in the classifieds. Is that okay for you, or would you prefer to sell the yard quietly? Most buyers need employees to continue the business, so this does not need to be bad news for the employees, as long as the new owner finds value in them. Still, that doesn’t mean you should or should not confide in them. You will likely have your reasons for deciding one way or the other.
Establishing the Sales Price
There are standard methods for valuing any business, whether it’s an auto salvage yard, a muffler shop or otherwise. These methods include valuation of the land, buildings and improvements. There are industry-accepted parameters for the real estate that you can use, which must be followed to establish credibility with buyers for the deal overall.
There is a sweet spot as to the size of your parts inventory compared to the sales it generates. Most buyers will examine this and you will either be rewarded or discounted by the performance of your yard. The strongest yards generate tremendous sales with the least amount of money tied up in the warehouse. Makes sense, right?
Equipment replacement value needs to be totaled up and listed as well. Buyers want to know the equipment that is necessary to keep the business going. Nobody cares what it costs new, and nobody cares what value your CPA calculates as undepreciated value left on the book. Replacement cost is all that matters to a buyer.
You’ve heard of a company selling for three, four or five-times earnings. This refers to the adjusted profit. The more advantages your company has, such as a prime location, the higher the multiple. If your business sells for five-times the earnings, the new buyer would have to work five years to pay for the business component of the deal.
Once the buyers absorb the information about the yard, they will calculate how long it takes them to recoup their investment. You’ll want to know the answer to that beforehand. This helps you adjust your asking price to a realistic level. Be realistic. No buyer wants to take 10 years to pay off their investment. But if they pay it off in one or two years, you didn’t ask enough for your company.
Consulting with a financial specialist is important now. Just a few key observations by such a professional can help to minimize the tax consequences of the sale.
Read part II, which focuses on developing the marketing literature and selling the yard, in the Locator UpFront Winter 2016 issue.
George Metos is a business broker specializing in full-service automobile salvage and U Pull It yards. He owns and operates GM Consultants, and is based in Salt Lake City, Utah. He can be reached at 801-953-1003 or GeorgeMetos@aol.com.