My comments here are very philosophical general in nature, but because I get so many inquiries on this topic, I thought it might be good to discuss it.
I have been hired many times to help determine the value of a yard (not including real estate), in cases ranging from contract disputes, tax cases, condemnations, assisting buyers and sellers.
I have NEVER heard of a wrecking yard (not including real estate) sell for more than one times annual sales, and most often much less. Typically, the sales price for the business is a multiple of earnings (about 5-6 times earnings), which need to be legitimately recast to solve errors. Another method is to use the value of the assets. An operation with significant upside can be worth more than 5 times earnings. It’s funny, most sellers are “just turning the corner on earnings”, and see significant upside, even though they have been there decades.
In asset discussion, the value of used parts inventory always comes up. Typically, it can’t be worth more than about three months sales (from that inventory, not including brokered parts or car sales)
The earnings used for the multiple must include fair market value rent (which will drive the land value), and compensation for the owner.
The land may be worth more for other uses, and if so, sell it for those uses and close the yard. Also, a typical well run yard shouldn’t need more than 10 acres (many do well with 3-7 acres), so I suggest you sell the yard with the land currently being utilized, not to exceed 10 acres, and sell rest of the land to another user who can pay top dollar. No need to buy a shopping center to get a store, from the buyer’s perspective.
The land value for the wrecking yard should be driven by the rent payment being made, using a 10 – 10% or so return on investment. A typical real estate investor will want a higher return due to environmental risk. Obviously an ex-operator could settle for less of a return, as they are more comfortable with the risk. So, your P&L should show the rent, before net earnings. If the rent is say, $3,000/mo, or $36,000 per year, on a triple net lease (where the tenant pays insurance, taxes and utilities), the land is worth $257,000 for the yard use (give or take some, but not much). If you aren’t paying yourself enough rent, why not?
If after rent, ($36,000), and adequate compensation to owner (at least $50,000), you still have earnings, of say, $35,000 (10% of sales), the business is worth a maximum of $175,000 (5 times earnings), and the land is worth about $250,000 based on the rent being paid. If the rent isn’t market rate, or there has been significant development in the area, the land could be worth more of course, perhaps much more. Obviously if the earnings are more and can be proven, the business could be worth more.
My experience is that owners hardly pay themselves anything, and rent isn’t being paid, or is not at market rates, and if they were, the earnings are negative, which means the whole enterprise is worth commensurately less.
Ninety percent of people that contact me are unrealistic about the value of their business. Their savior is that their land is worth more for other uses. If you are looking to sell your business, be sure to find out what the land is worth – it may be time to close or move the business and realize the value of the land.
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Remember only you can make business great!
Ron Sturgeon, Mr. Mission Possible, has been a successful business owner for more than 35 years. As a small business consultant, he can deliver wisdom and advice gleaned from an enviable business career that started when he opened a VW repair business as a homeless 17-year-old and culminated in the sale of several businesses he built to Fortune 500 companies.Ron has helped bankers, lawyers, insurance agents, restaurant owners, and body shop owners, as well as countless salvage yard owners to become more successful business people. He is an expert in helping small business owners set the right business strategies, implement pay-for- performance, and find new customers on the web.
As a consultant, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plainspoken style, providing field-proven, and high-profit best practices well ahead of the business news curve. Ron is the author of nine books, including How to Salvage More Millions from Your Small Business.
To inquire about consulting or keynote speaking, contact Ron at 817-834-3625, ext. 232, rons@MrMissionPossible.com, 5940 Eden, Haltom City, TX 76117.