The individual planning to buy a towing business with the expectation of receiving a good return on investment should understand a few key facts about the opportunity. Vehicle towing is a highly competitive business with some characteristics not found in other types of businesses. Among the most important aspects to understand when considering a company being sold in the towing industry are:
1. Characteristics of market served: Chief classifications of towing businesses are the private companies often associated with service stations and providing roadside assistance to individuals, and enterprises that work for parking control departments of local governments. A third type of business serves the commercial market, such as pay-to-park lots and businesses, churches and other enterprises that need to remove cars parked without permission on their property. It's important to know, incidentally, whether the business being offered has contracts with its customers or is affiliated with a roadside service such as AAA. Another key factor to consider when offered a tow company with government customers is whether all or most of the business comes from just a few government agencies. If there are only two or three different government entities using the service, for example, and even if they have a contractual relationship, the towing firm is vulnerable to the loss of a substantial portion of its income if political reasons cause one major client to discontinue the relationship.
2. Whether property is included: At least half of the 8,500 towing companies in the U.S. involve an "unimproved" or slightly improved--lot where towed vehicles are stored. In some cases, the business is offered with the property and in others the seller plans to keep the real estate and rent it to the new owner of the business. The prospective buyer must fully understand the details about the property in order to determine the value of the tow business, how the purchase can be funded, and whether the business can support the cost of purchasing land along with the towing enterprise. If an investor wants to avoid the purchase or lease of a storage property, it's best to focus on towing companies for sale that don't need extra vehicle space. One example is the firm that works for municipalities and delivers towed vehicles to the customer's storage lots. Another is the company that tows disabled vehicles to repair facilities.
3. Age, book value and condition of assets: As tow vehicles can rapidly decline in value it's important for a prospective buyer of the business to calculate the remaining life of the capital equipment offered and determine how the replacement cost and scheduling will affect the company's earnings. Sellers often claim that depreciating equipment on the books is a great write-off, representing non-cash expense to be added back to the bottom line. But the ongoing need to replace equipment in this business means that funds allocated to the depreciation category actually must be spent on physical upgrades so the company can maintain its ability to perform its services.
4. Additional businesses: It's common for a towing company to have related sources of revenue, with enterprises such as auto repair, vehicle storage and parts dismantling. When considering an offering with additional businesses, the prospective buyer must determine if he or she has the ability and desire to manage any enterprise connected to the towing business. Someone who feels capable of running a towing business successfully, may be at a loss as to how to manage a business that repairs vehicles or dismantles them for parts to be sold.
5. Business valuation: While there are rules of thumb to help a seller and buyer to determine the market value of a towing company, so many factors can impact the value of a company in this industry that the short cut valuation methods often are not very reliable. The buyer may hear that the industry valuation rule uses a multiple of 2.75 calculated with the seller's average annual earnings total before deductions for interest, taxes, depreciation and amortization (EBITDA). Another familiar approach is to add a figure that is 70% of average annual revenues plus the cost of inventory. Perhaps the best way for a buyer to value a towing business is to consider the value of the business separately from the property and assign a valuation to each. Then determine whether those values correspond to the buyer's expected return on investment, measured by business earnings and after tax capital gain expected with the real property.
Whether or not the purchase of a towing business for sale represents a good investment depends on the expectation of the buyer, the value and condition of the assets and market position of the business and any related enterprises.
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For over 25 years Peter Siegel, MBA has been providing niche business purchase financial advisory and loan placement services with SBA Loans, Non SBA Financing, Retirement Plan Conversions, Note Restructures, etc. Call me regarding business purchase financing and to get pre-qualified: 925-785-3118.
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