The pros and cons of buying an auto shop

The auto repair business is one of the largest industries in the U.S., grossing over $383B of revenue each year and employing over 4.4 million Americans. With the average age of vehicles on the road increasing, there are strong tailwinds for the repair industry. For entrepreneurial auto techs and enthusiasts, it’s a great time to own a shop.

When considering whether to buy an auto shop or start an auto shop from scratch, it’s important to be honest with yourself about your goals and the pros and cons of each path. Given that Mainshares focuses on helping people buy existing automotive businesses, this post will highlight the pros and cons of buying an existing auto repair shop. 

Pros of buying an auto shop vs. starting from scratch

In Q4 of 2021, there were nearly 239,000 auto repair shops in the U.S. Nearly half of auto shop owners are 60 years or older, and 34% are between 50 and 59 years old. Said another way, the vast majority of shop owners are approaching retirement. This presents an awesome opportunity for entrepreneurs considering buying an auto shop. Here are some of the benefits of buying over building:

1. Survival rates

According to the SBA’s Small Business Facts report, only two-thirds of businesses survive past the first two years and only about half survive through the five year mark. Said another way, most businesses that are built from scratch end up closing doors due to trouble acquiring customers, hiring a team and generating profit.

On the other hand, the failure rates for businesses bought with SBA loans is around 5% according to loan charge-off data. While buying a business with an SBA loan is not the only way to acquire a business, the data shows that the odds are more in your favor with buying over building.

2. Securing a Prime Location

Part of the reason for better performance with buying vs building is that the buyer of an automotive repair shop is often able to secure a prime location through the selling owner’s lease or owned property. Securing front-road locations in high traffic areas is difficult these days, especially when facing greater competition from private-equity backed franchises. By buying an existing auto repair shop, you are able to keep the existing location through transferring a lease or including the property in the acquisition.

Mike Anderson, an automotive consultant and founder of Collision Advice, said the following in a recent interview: “If your goal is to not be so insurance dependent, then your location is critical. Find a location on a main thoroughfare where customers are more likely to see you.”

3. Inheriting an Existing staff

In addition to accessing a historic location, buying a business gives the added benefit of inheriting the existing staff of the business. While there’s no guarantee that employees will stick around for a new owner, a majority of them will.

The labor shortage for qualified technicians is no secret.  IMR published a report in 2022 that showed nearly a quarter of shops ranking “finding qualified/responsible technicians” as their top challenge.

Buying an existing auto shop allows you to hit the ground with a solid team instead of competing against other shops in hiring new techs.

4. Learning Systems and Processes

Owning a business is tough. It requires a wide breadth of knowledge, from compliance with local and state regulations to payroll and HR to leading a team of employees in a specific trade. By buying an existing auto shop, entrepreneurs are able to use the prior owner’s playbooks to keep the lights on while they get their feet under them.

These systems and processes may not be perfect, but as the saying goes, “don’t let perfect be the enemy of good.”

5. Existing Cash flow

Given that most businesses are bought on the basis of cash flow, an existing auto shop will come with excess cash that you can use after paying down your debt and paying yourself a salary. Rather than having to scrap together funds to invest in a new hire or a new piece of equipment, buying an existing business allows you to keep reinvesting profits.

Potential downsides of buying an existing auto shop

1. High Initial Investment

It’s no secret that buying an existing auto shop can be more expensive than starting from scratch. Most auto shops listed on the market today are priced at more than $300K. That does not include fees for closing on a loan, registering your new entity with state and local governments, or working capital investments you’ll need to make payroll for the first few weeks.

Luckily, there are sources of funding you can use to make an acquisition, ranging from SBA loan programs, private investors and even 401(k) rollovers.

2. Personal Guarantee

A majority of auto shop acquisitions are purchased with an SBA 7(a) loan. This loan program offers a 10-year term loan to entrepreneurs who need capital to buy a business. Oftentimes, entrepreneurs only need to put 10% of the price down at closing, either from their own funds or from investors.

While this loan program allows entrepreneurial techs to have strong buying power, it does not come without some key requirements. The main requirement is for the borrower to accept a personal guarantee for the loan. If the business acquisition fails and the entrepreneur dissolves the business, the bank has the right to personally pursue the entrepreneur for the outstanding money owed. In some states, this will even require a lien on the entrepreneur’s primary residence.

3. Ownership Transition

While buying allows entrepreneurs to hit the ground running faster, there are more emotions and interpersonal dynamics that need to be navigated. Most acquisitions include a 30-day transition period, during which the selling owner will introduce the buyer to employees and clients and train the buyer on how to run the business.

There are instances where this transition period goes south. Perhaps the owner decides to leave dodge or tries to get employees to work on pet projects. The best way to protect against this is by working with an advisor and attorney to structure the correct legal agreements and consulting contracts ahead of close.

4. Upgrading Equipment and Facilities

With many existing shops having been in business for well over a decade, there is a decent chance that buying an existing shop will require upgrading equipment in short order. Automotive repair equipment isn’t cheap. A lift can cost upwards of $40,000 or more. 

Understanding the state of equipment is crucial during the diligence phase of a business acquisition, so that you don’t find yourself having to put another $100,000 into the business within the first year.

Final comments

With a growing industry and many shop owners nearing retirement, buying an auto shop can present an amazing opportunity for automotive enthusiasts and existing technicians. However, it’s not all roses. Things can and will go wrong, and buying an auto shop often involves a personal guarantee on a bank loan.

It’s important to be honest with yourself about your personal and professional goals as well as the risk tolerance you and your family are willing to take on a new venture. To learn more about buying an auto shop, feel free to reach out to our team at copilot@mainshares.com.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.