How to Sell an Auto Parts Store

What a buyer is paying for

Most of the profit in a parts store comes from the commercial side. Repair shops, fleets, body shops and a few dealers call in orders all day and expect a part on the counter or at the bay door within the hour. That business is steady, it comes back week after week, and a buyer will price it higher than the walk-in trade. The walk-in customer, the person fixing their own car on a Saturday, matters too, but it is harder to count on and the margin is usually different.

So a buyer will ask for sales split by commercial and retail, by month, over several years. They will want to know how many commercial accounts there are, what the top ten buy, and how long each has been buying. A store that sells to two hundred shops is a different animal from one where three large accounts carry the building. Our post on customer concentration covers why buyers and their lenders care about that, and parts stores are a good example of it.

The next thing a buyer pays for is the delivery operation. Fast delivery is how a store wins and keeps shop accounts, so the trucks, the drivers and the routes are part of what is being bought. A buyer will ask what the drivers are paid, whether the vehicles are owned or leased, and how many deliveries go out on a typical day. If the owner is the one who knows every shop manager by first name and takes the calls when an order goes wrong, that goes on the list of risks.

Inventory is its own conversation

Inventory is usually the largest asset in the sale, and it is where many deals get tense. A buyer does not want to pay full cost for parts that have sat on the shelf for years, and an owner who has carried slow stock for a long time often does not know how much of it there is until someone counts.

Most parts stores sell on an asset basis with inventory valued at cost on top of the price for the business, adjusted at closing by a physical count. That count is done by both sides, usually over a weekend, and the buyer will want the system to show quantity on hand, cost, last sale date and last purchase date for each item. Parts that have not moved in a year or more are normally excluded or discounted. Special order items for a customer who never picked them up, discontinued lines, parts for cars that stopped being common long ago, and anything damaged or open-box all get sorted out in that count.

The best thing an owner can do is clean this up before listing. Run an aging report. Return what the suppliers will take back. Sell down the slow stock, even at a discount, because a dollar of dead inventory costs more than a dollar in a sale negotiation. A buyer who finds a large pile of obsolete stock in the count usually asks for a price reduction, and the owner has no good answer at that point.

Core charges and warranty returns need the same attention. Cores owed to customers, cores owed to suppliers and the credits sitting in between are balance sheet items that buyers want to understand. We have seen these tangled up in a way the owner did not know about, and a buyer's accountant will find it.

The supplier side

Many parts stores buy through a banner, a buying group or a national distributor, and the agreement behind that relationship matters a great deal. It may set the pricing the store receives, the volume rebates, the signage and the right to use a brand name. Some of these agreements transfer with the business and some require the supplier's approval of the new owner. A few have a right of first refusal or a short termination notice, and a buyer wants to know about that early because the discounts the store earns are part of what makes the numbers work.

Independent stores without a banner have a different question, which is how many suppliers they use and how much credit each one extends. A store that has built strong terms over many years may find that a new owner starts with tighter terms until the new owner has a payment history. A buyer will ask about that, and the owner can help by introducing the buyer to the main supplier representatives late in the process, once the deal is firm.

Rebate programs deserve a mention. Volume rebates are often paid quarterly or annually, and if a sale closes partway through the period, someone has to decide who gets the portion earned to date. It is much easier to settle that in the purchase agreement than after the check arrives.

What makes one store worth more than another

Stores that sell well tend to share a few things. The commercial accounts are numerous, long standing and spread across several types of customer. Inventory turns at a healthy pace and the system can prove it. The point of sale software holds years of clean history, including every invoice, return and credit. The counter staff know the catalog, can look up a part for an unusual vehicle without calling anyone, and have been in the building for years. There is an outside sales person or two who visit shops and bring in orders, and they are not the owner.

Online sales are worth a look. A store that sells through its own site or through a marketplace has a second channel, and a buyer will want to see shipping costs, return rates and how much of the revenue is profitable once fees are counted. For some stores that channel is a quiet success, and for others it is a lot of low margin work that a buyer would happily drop.

What lowers value is also fairly predictable. A great deal of slow inventory. Heavy reliance on one or two commercial accounts. Pricing that has not been reviewed in years, so margins have eroded without anyone noticing. A counter staff that is underpaid and ready to leave. A lease with little time left. An owner who works the counter every day and handles all the calls from the shops.

The records a buyer will ask for

Expect a buyer and their lender to ask for business tax returns, monthly profit and loss statements and a balance sheet. They will want a sales report from the point of sale system by customer, by product line and by month. They will want the inventory report described above, the accounts receivable aging, and the accounts payable list by supplier.

Receivables deserve attention. Commercial accounts buy on credit, so a parts store carries a meaningful amount owed to it, and a buyer will ask how old it is, who owes the most and how much has been written off in recent years. Most asset sales leave the receivables with the seller or price them separately, so how that is handled needs to be settled early. Our post on earnouts, holdbacks and working capital explains how those adjustments work in a deal.

They will also ask for payroll records with tenure and pay for each person, the vehicle list, the equipment list, the lease, supplier agreements, rebate statements and insurance history. If the books and the point of sale system tell different stories, fix that before a buyer finds it. Our guide to getting your financials ready walks through what a buyer expects to see.

What has to transfer

The lease is usually the first item. Most parts stores rent a building with a counter, a warehouse area and a loading door, and the landlord's consent is needed to assign it. A lender will want enough term left to cover the loan. Our post on the lease as part of the deal covers how that conversation tends to go.

Beyond the lease, there are the business license and tax registrations, the supplier accounts and any banner agreement, the point of sale and delivery software, and the vehicle titles. Stores that sell batteries, oil, coolant and similar products also have to think about how those are stored, how used batteries and oil are collected and who has been hauling them away. Rules vary by state and your attorney confirms what applies to your store. A buyer's lender sometimes asks for an environmental review of the site, particularly if the store has had a service area, and it is better to know the answer before the buyer asks.

Employees do not transfer automatically. The buyer decides who to hire, and the best counter people will want to know early whether they have a job. That has to be balanced against confidentiality, which in a parts store matters more than owners expect. A competing store that hears you are selling will call your best accounts, and suppliers sometimes tighten terms when they hear a sale is coming.

What tends to sink a sale

Most parts store sales fail for reasons that were visible early. The inventory count came in far below the books. The commercial accounts turned out to be loyal to a person, not the store. The supplier would not approve the new owner. The lease could not be extended. A key counter person left halfway through. Sometimes the buyer simply discovered that the numbers in the system did not match the tax returns and lost confidence.

We market a store without naming it, and buyers sign a nondisclosure agreement before they see anything that identifies it. Our post on how we market a business confidentially explains the steps.

How to get the store ready

Start a year out if you can. Run the inventory aging report and decide what to return, discount or write off. Clean up the commercial account list and find out who the top accounts are and how long each has been buying. Move some of the relationships with shop managers over to your outside sales person or your counter manager, so the accounts do not depend on you. Write down the pricing structure and when it was last reviewed. Talk to your landlord about renewal. Read your supplier agreements, and find out which ones need approval to transfer.

When you are ready, we start with a valuation built from your own numbers, then prepare the materials a buyer and a lender will expect, and screen buyers before they see the store. If you want a sense of how buyers see a store like yours, our page on selling an auto parts business is a good place to begin. Business Advisors of America works with owners from the first valuation through closing, and a short call is the next step after that.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.