Getting a Pulse on Profit: Conducting a Fast Lube Valuation
A healthy business is something every operator strives for. Having a business valuation completed is essential to knowing the financial heartbeat of your company or one you are interested in buying.
Business valuations are established by looking at factors such as financial statements, discounted cash flow models and similar company comparisons. When you value a business it isn’t about one aspect, it is an assessment of the whole picture.
Mike Baynes and Joe Thissen work for Lube Center Sales, a company that represents buyers and sellers in the quick lube industry. They stressed the importance of understanding the industry that you’re in when conducting a business valuation.
According to Thissen, there are two primary theories you can use to get a pulse on how much your business is worth.
Income Approach: The income approach determines a fair market value of the business by examining cash flow and determining the value of the business by its ability to generate revenue for the owners.
There are several different income approaches, but the most popular is the earnings multiple approach. The primary approach used in valuing a business is the multiple of earnings before interest, taxes, depreciation and amortization (EBITDA).
If you decide to use this approach, it will look a little bit like this: Let’s say a business sells for five times the EBITDA. If the earnings before interest, taxes, depreciation and amortization are $300,000, then the business is worth $1,500,000. Determining the multiple can be the most challenging part of this approach. A broker should be able to help you with this if you are unsure how to calculate this number.
Comparison Market Approach: This method of evaluating a business compares your business to similar businesses in your area that have recently sold. However, the comparison market method of valuation is only accurate when the properties are physically similar and in the same area, the interest rate is the same, there are recent and accurate records of similar transactions and the market is stable. Keeping these requirements in mind will help you get the best idea of what your business is worth in the current market.
There are also a few other categories to evaluate when valuing your fast lube business.
Blue Sky: When doing an evaluation the most important information is what the numbers say. Any amount above the desired value and what the numbers say the value is, is called “blue sky.” Reputation, years in business, the people who work at the business and the customer base all have a value. To put a number on that value is commonly referred to as blue sky. Blue sky is always negotiable because none of these assets are reliable enough to say that they will stay with the business.