What Metrics Impact the Value of Your Diesel Repair Shop?
So, you're working on getting your diesel repair shop ready to sell. Or, you're at least considering selling at some point in the future. It should be as easy as figuring the going rate of repair shops and finding a buyer willing to pay that, right?
There are actually quite a few factors that impact what a buyer will spend on a business, but in simple terms, the more turn-key your business is, the more likely it is to attract a buyer who will spend top dollar on it. In other words, a buyer doesn't want to have to spend a bunch of their own money to make the diesel repair shop profitable.
That might sound complicated, but by tracking and working to improve just a few different metrics, you can increase the odds that a buyer will be willing to pay top dollar for your shop. So, just what are these key metrics? That's what we're going to take you through today!
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What are the Metrics You Should Improve for Your Diesel Repair Shop?
We feel that there are three main metrics that affect the selling price of your diesel repair shop, for better or for worse: cash flow, gross profit, and profitability. The higher you can get these metrics, as well as having a history of good numbers, the more likely it is that a potential buyer will pay you more upfront for your business.
If you want to know other metrics to help boost your profits, we have 10 key metrics to track!
What is Cash Flow?
Cash flow is the difference in the money coming in and going out in an accounting period. It measures the liquidity of your business. Essentially, it's the cash you have available to spend, reinvest in your business, or invest in other things.
Obviously, you want to have more money coming into your diesel engine repair shop than you have going out, so you'll want to aim for a positive cash flow. This, however, doesn't always mean that your business is profitable. If you've taken out a business loan, for instance, you might have a lot of cash on hand, but the amount you receive from your customers might actually be small. This could give you a false impression of the financial health of your shop.
You might also run into trouble if your business has too much money tied up in inventory, rather than cash on hand. It's important to maintain a good balance of where your money is.
Want to know more about how your shop's financial health can impact its value? Check out our article on how financials contribute to repair shop value!
What is Gross Profit?
Gross profit measures the amount of money you're actually bringing in for your services. To calculate your gross profit, you simply subtract your revenue (the total you receive from your customers) from the cost of providing that service. The cost of service provided would include things like the initial cost of the parts you provide and the pay of your mechanics. The value that is left is the money you're actually bringing in.
This is an important metric to understand, because if your gross profit isn't positive, not only will it not be an attractive investment for potential buyers, you likely won't be able to remain in business for much longer.
So, you want to focus on keeping the price you charge your customers as high as you can while still remaining fair market value (too high of prices can quickly drive customers away) while keeping your costs down. In this way, you can bring more profit into your repair shop.
If you're interested in your shop's gross profit, check out our in-depth look at the gross profit margin.
What is Profitability?
Profit and profitability might sound similar, but they actually measure different things. Profit, as we mentioned, is a calculation of your revenue minus expenses. It is a dollar value, the amount of cash you're bringing in.
Profitability, on the other hand, measures a business's capability of generating a profit.
And, it's not as simple as "yes, this business can generate profit," or "no, it cannot." There are different ratios that impact how investors and business valuators judge the growth potential of your repair shop. If you're making just a little more money than it takes to cover operating expenses, then yes, you're business is technically profitable. This does not, however, allow for money to be reinvested into the business to allow for growth and larger future profits. The buyer would either have to put in more of their own money, or work hard to cut costs to improve the overall profitability.
So, it's not just whether or not your business is making money now. It's also whether it has the potential to be making more money in the future.
So, What Do These Metrics Mean to Potential Buyers?
Together, these metrics tell a potential buyer a lot about the financial stability of your business. It lets them know how much money they'll have to put into the business to either make it profitable or help it grow.
It's all a balancing act.
As you can assume, the more of their own money they see themselves having to put in the business, the less they'll be willing to pay for it. And the opposite is true as well. The less money a buyer will have to pay into your repair shop to help it grow in the long run, the more turn-key and self-sufficient it is now, the more they'll be willing to pay you for it.
So, you'll want to take a look at these metrics and keep an eye on the growth of your business. It's all about manageable growth. You want your shop to grow, to bring in more profits, but you don't want it to grow too much, too quickly. This could end up with you losing money because you can't keep up with the expenses that come with the growth.
Working on these three metrics can help ensure your repair shop will be in good shape when you decide to sell.
If you're looking for a way to increase profits in your diesel repair shop, you should check out our Repair Shop Value Program. It's benefit could be just the thing you need to help bring those numbers up!