Valuation of a business in the auto tire retail industry

Auto tire retail stores, classified under SIC code 5531 and NAICS 441320, represent around 19,000 establishments in the US alone. Over two thirds of these businesses are small, owner-run single store operations.

Check these interesting facts: while the industry as a whole generates over $77bn in revenues, the average store makes around $1,500,000 in annual gross sales, employing just 7 employees.

A well-run store offers around 6 – 12 brands of tires, with commercial dealers carrying as few as four or five. Big brand tire products are a major plus since they tend to attract repeat business from brand-loyal customers. As a result, a store which offers the right mix of top brand name products in its market tends to command valuation multiples that are 15 – 20% higher than its competitors.

Key factors that affect an auto tire store business valuation

When it comes to valuing a business or setting its selling price, not all auto tire stores are created equal. You need to consider the factors that drive business value in this industry. Here are the top ones:

1. Location
2. Established, loyal customer base
3. Availability of trained employees and strong store management, beside the owners
4. Terms of lease
5. Condition and quality of store equipment
6. Percentage of sales derived from product sales and service.

For many stores, service offerings tend to be more profitable than tire sales. In times of rapidly increasing oil prices, tire product costs tend to crimp product profit margins. Service revenues on the order of 50% of the total typically indicate a store with excellent profit potential. The result is higher business valuation and, very likely, a higher business selling price.

Business valuation methods for auto tire stores

Auto tire stores sell often, so there is plenty of business sales to compare your selling price and terms against. Such business market value comparisons can give you very accurate and compelling results. Typical valuation multiples are based on the business discretionary cash flow plus inventory levels at replacement cost.

Another excellent way to value a business in this industry is to use the time-tested Multiple of Discretionary Earnings valuation method. In addition to the business earnings, this business valuation methods lets you account for all the key value factors above.

Using this business valuation technique, you can determine what the business is worth today, then see what can be done to increase business value – before making critical decisions such as offering the business for sale or bringing a partner on board.

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