What is my Yard Worth, Ron?

August 2006

My comments here are very philosophical and general in nature, but because I get so many inquiries on this topic, I thought it might be good to discuss it.

I have been hired many times to help determine the value of a yard, in cases ranging from contract disputes, tax cases, condemnations, to assist buyers and sellers, and in divorces.

I have NEVER heard of a wrecking yard (not including real estate) sell for more than one times annual sales, and most times much less. Typically, the sales price for the business is a multiple of earnings, which need to be recast to solve errors (about 5 times earnings).

The value of the assets

In asset discussion, the value of used parts inventory always comes up. Typically, it can’t be worth more than about 3 months sales (from that inventory, not including brokered parts or car sales).

The earnings used for the multiple must include fair market value rent (which will drive the land value), and compensation for the owner.

The land may be worth more for other uses, and if so, sell it for those uses and close the yard. A yard this size should only have one employee plus owner, so labor costs are likely too high now. Also, a yard this size shouldn't need more than 3-5 acres, so I suggest you sell the yard with 5 acres and sell the rest of the land to another user. No need to buy a shopping center to get a store, from the buyer’s perspective.

The land value for the wrecking yard should be driven by the rent payment being made, using a 14% or so return on investment. So, your P&L should show the rent, before net earnings. If the rent is say, $3,000/mo, or $36,000 per year, on a triple net lease, the land is worth $257,000 for the yard use. (Give or take some, but not much) If you aren’t paying yourself enough rent, why not?

If after rent ($36,000) and adequate compensation to owner (at least $50,000), you still have earnings, of say, $35,000(10% of sales, seems unlikely), the business is worth a maximum of $175,000(5 times earnings), and the land is worth about $250,000 based on the rent being paid. If the rent isn't market rate, or there has been significant development in the area, the land could be worth more of course, perhaps much more. Obviously if the earnings are more, and can be proven, the business could be worth more.

My experience is that owners often pay themselves hardly anything, and rent isn't being paid, or is not at market rates. If they were, the earnings would be negative, which means the whole enterprise is worth commensurately less.

90% of folks contacting me are unrealistic about the value of their business. Their savior is that their land is worth more for other uses.

Remember, only you can make BUSINESS GREAT!

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AutoSalvageconsultant.com was formed in 2001 to help recyclers improve their businesses. With over fifty years of experience in three staff members, the group is THE definitive source for recyclers’ management and training needs. The founder, Ron Sturgeon is past owner of AAA Small Car World. You can review his resume, with skills and experience at our web site. In 2002, his book How to Salvage Millions From Your Small Business was published to help small business owners achieve significant success, and was recently reprinted in the U.S., and published in China, Korea and the Czech Republic. You can learn more about how to help your business at www.autosalvageconsultant.com.

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