My comments here are very philosophical and general in nature, but because I get so many inquiries on this topic, I thought it might be good to discuss it. Most, if not all of the principles here, apply to most any business, not just recycling businesses.
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, and assisting buyers and sellers.
I have NEVER heard of a salvage yard (not including real estate) selling for more than one times annual sales, and most often it sells for much less. Typically, the sales price for the business is a multiple of earnings (about 4 times earnings), which need to be legitimately recast to correct errors. Another method is to use the value of the assets. An operation with significant upside can be worth more than 4 times earnings. It’s funny, most sellers are “just turning the corner on earnings” and nearly always see significant upside, even though they have been in the used parts business for decades. These numbers are very much estimates, and rely on many factors. For instance, if all your equipment is worn out, expect to get dinged for at least part of that cost taken off of the indicated price as a multiple of earnings.
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). Many folks think because their warehouse is bursting at the seams, with hundreds of engines, that the inventory is worth a ton. INVENTORY IS ONLY WORTH WHAT IT CAN PRODUCE IN SALES. Maybe it wont surprise you, most recyclers are pack rats and save way too many parts, that are unlikely to ever sell. Yep, squeeze that last nickel of revenue, but spend a dime to do it pulling and saving parts.
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 8%-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 most other expenses), the land is worth about $400,000 for the yard use (give or take some, but not much, I’m using a 9% return). If you aren’t paying yourself enough rent, why not? Why do you care, you keep the profits? If your land is worth more than $400,000, you’re not paying enough rent. Many operators, who think they are making money, aren’t
making anything because they aren’t paying themselves enough rent.
If after rent, ($36,000), and adequate compensation to owner (at least $50,000), cost of goods sold and other expenses, you still have earnings, of say, $35,000 (10% of sales), the business is worth a maximum of $140,000 (4 times earnings), and the land is worth about $400,000 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 once the rent is adjusted to the right rate and the owner is paid a reasonable amount, the earnings are negative, which means the whole enterprise is worth commensurately less, if anything, and its likely time to liquidate and sell the land, and retire.
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.
I look forward to seeing old friends and making new ones at this year’s ARA convention in November, in Dallas.
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.