Thinking of Buying a Smog Test Only Shop? Know the 10 big questions before proceeding.
Definition of a Smog Test Only Center?
A smog test only center is a smog check station that is allowed to do only smog checks, but no repairs. A test only Smog Check Center has an obligation to insure a non-biased smog test inspection. They can not perform repairs and cannot profit by failing your car.
Why should you go to a Test Only Center? In order to comply with state of CALIFORNIA laws department of Consumer affairs/Bureau of Automotive Repair directs vehicles that are more likely to fail called High Emitter Profile or Gross Polluters to a Test Only Center. Two percent of the vehicles that are driven on California roads are directed to test only centers. New cars do not need a smog check for the first 6 years; thereafter one is required every two years.
What is High Emitter Profile? All the gasoline powered vehicles driven on California roads are required to get emission test every two years or when there is a change of ownership.
All the data collected from smog inspections goes into a database called Vehicle Identification Database (VID) The VID is used by the Department of Motor Vehicles (DMV), BAR, and other government agencies.
- Also stored is general vehicle data such as
- Make, model and year
- Vehicle miles traveled. Notes about high mileage or very low mileage for the age of the car.
- Emissions-related recalls
- Technical service bulletins
- A history of failing smog tests along with the with the technician/station that received a citation. "¢ Pattern problems and engine size
Due Diligence for Smog Test Only Shops in California
Every state has different rules regarding how they test for auto emissions. California has privately owned test centers.
Private business owners can be licensed by the State of California, Department of Motor Vehicles to do testing of automotive emissions. A buyer, if he wants to do his own testing, must go pass the ASC, California State Smog Test, to get a license. The time frame to take the course, pass the test and get the licensed issued is 6 months. A non-licensed owner can hire a smog check person for $2,500 to $3,000 per month net (after payroll deductions and income tax withholding).
One smog test only shop, I did due diligence on, for a business buyer, paid the smog technician $70,000 per year while another location only paid $40,000 per year but did give bonuses.
In recent months many smog test only centers in California, have come on the market. Prospective business buyers have had a lot of interest in these Smog Test Only shops because the published profit numbers are impressive. A lot of these shops on the market appear to be making a lot of money. The truth is that some are and others are not. This is not apparent to the novice.
When looking to buy a Smog Test Only Center in California, there is a lot more to be known about the business besides the profit number.
Let me give some examples:
Some smog test only shops have fixed prices. Others offer $10.00 coupons or accept the coupons issued by their competitors. I just heard about one smog test only shop located in Northern California that has a posted price of $99.00 and negotiates a different price with every customer. The owner does not work at the business, so the tester has complete flexibility in his negotiations. This makes it difficult to control employee theft, for an owner.
Another variation between shops is how many employees there are. Some have a service writer and a technician, on site at all times. Other let the technician also do the order write ups.
Some places have two smog technicians each working 40 hours a week. Other smog test only centers have the smog test technician work 60 hours, per week, with the technician making time and half on the extra 20 hours per week worked. It is important to make sure that all overtime is paid where required by law and payroll taxes are being paid on 100% of the wages. Some smog test only centers illegally pay their staff a portion of the wages under the table. A business buyer has to be very careful to determine if this is being done or not. The sellers sometimes forget to mention this little important fact so you must ask.
Another big consideration when buying a Smog Test Only center, or any business for that matter, is the location, the competitor's locations, the location's rent-including the CAM (Common Area Maintenance) and the other lease terms. The lease terms and conditions can affect determine half the value of a business. Never sign or assume a lease without having an attorney or an experienced real estate broker look at it carefully.
Smog Test Only Centers are regulated by the State Legislature and DMV of the State of California. Government agencies change the rules periodically. You must be aware of what rules there are and what changes have been made and will be made. Then you must determine the future effects of any rule changes that will be taking affect. As part of doing my due diligence on any industry I study the industry carefully. That is one of the actions that a good due diligence expert does to protect his clients.
Two smog test only centers can be doing the same volume, charge the same prices and have completely different profit numbers, because of how they run the shop and handle their payroll. That means that the value of these two similar locations could be the same or they could be drastically different.
When you sign an offer to buy a business the listing broker will always advise you, in writing to hire an outside CPA or other due diligence expert to assist you with the business review. The reason that agents do this is so that if you do not hire an outside advisor and you latter are unhappy with your purchase, his attorney can tell you My client told you, in writing, to get outside help, and you didn't listen to that advice.
Take that very good advice, even if someone gives you oral suggestions to the contrary. Never buy a business without a CPA or other experienced due diligence expert assisting you. If the advisor has experience in the subject industry, he is worth his weight in gold. In my case, I am a big man so the weight is higher than smaller men. Due diligence usually costs less than two percent of the purchase price and is always worth 20 times what it costs. Since no one can know everything about every type of business, it is important to note that any buyer especially a novice should never buy a business without at least one outside adviser.
About The Author: Willard Michlin is a CPA, CFE (Certified Fraud Examiner) and offers business buyers Due Diligence Services (Second Opinion, Offer Assistance, Final Due Diligence) when they are thinking of making an offer on a business or in the process of investigating a business purchase. He has written numerous articles on the due diligence process and can be reached direct at 805-428-2063 for more information and an appointment.
Categories: BizBen Blog Contributor, Business Valuation Issues, Buying A Business, How To Buy A Business