Chapter 15
Gus's Garage

By Jake Snyder

Gus has made a decision to move forward on negotiating the purchase of Hometown Chrysler's autobody operation. Hometown Autobody is currently operating at a profit with independent management and also has a large established customer base. Gus also likes the idea of establishing a relationship with a major OE manufacturer.

The best deal in terms of cash flow would be leasing the building and property. Since Hometown Chrysler owns the property and building outright, it can continue to realize depreciation and cash benefits on its operating statements.

In terms of risk, Gus and I agreed that the success of the new venture could be influenced by more factors outside Gus's control compared to a stand-alone and independent operation.

Gus will need to negotiate a contract that can protect him against:

• Changes in Hometown management or ownership
• Hometown management deciding not to maintain a cooperative relationship.

These risks will be a negotiating point to discount the price of the deal or receive better terms.

For structuring the price of the deal, we looked at a multiple of earnings to give us an idea of the business value. Using the last 12 months' Profit & Loss statement and having to adjust parts gross profit margins from 10 percent to 16.4 percent due to an understatement - EBIT was 6.6 percent or $139,000. Excluding real estate, EBIT multiples of three or four resulted in a $417,000 or $556,000 business value. Assuming a $500,000 purchase price and a Home-town five-year note as they implied during earlier meetings at an 8 percent interest rate, the payments would be around $125,000 yearly.

For lease payments we estimated that a fair yearly lease for the 25,000 square foot building and property would be around $87,500 per year. For Gus, a $212,000 total yearly payment during the first year would not work if sales and profits stayed at current levels. We both agreed that we must not build any "blue-sky" assumptions into the first year of operations. We actually thought it would be prudent, to consider that cash flow would be lower due to a change in ownership.

We then reviewed what Gus was willing to pay. To keep it simple, Gus looked at what he could afford to layout in cash and what price he was willing to pay yearly for the potential risk and reward. For initial purchases we calculated that $100,000 would be needed for minor renovations, upgrading the information systems, and for new promotional materials and signage.

Gus also was willing to put down $100,000 cash for a down payment on a note held by Hometown. Finally, Gus did not want to layout more than $100,000 in loan and lease payments the first year. After the first year of operations, he felt it would be safer to pay more.

Gus also wanted to make sure that protection would be in place to prohibit Hometown management from prematurely drawing down receivables and building-up payables. He didn't want to make working capital contributions at the outset of taking over operations.

We next listed what Hometown gained financially from its autobody operations. See Table 1 for a summary:

Hometown Gains from Auto Body Operations

In addition to Table 1, we guessed that Hometown saved anywhere from $25,000 - $50,000 yearly for the internal autobody work that was charged to the dealership at cost.

As a continued benefit, Hometown will still realize the $14,500 of yearly building and property depreciation.

The $4,000 equipment depreciation listed in Table 1 is only applicable for 2 more years.

Jake Snyder, creator of the popular Gus’s Garage series, is interested in hearing from shop owners with real-life questions.
E-mail JJ the Remote Pro, Gus’s intrepid consultant.