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The Ultimate Sale Of Your Business Real Estate
This is a 4,600-word, 7-page epistle on what will ultimately lead to the sale and retirement of your business. It covers the ups and downs of one shop owner, in real life. Here’s my story…
There comes a time in every automotive shop owner’s life when they start thinking about retirement. My dad’s advice about retirement served him well when he said “Go to work for a company that has a great pension plan.” That was good for most of his generation, however, pension plans of his generation are not sustainable. He was able to retire at the age of 50 after serving his steel company for 30 years.
However, when he was in his early 70’s he received a letter from the insurance company insuring his pension that the company’s pension plan had become insolvent. Now, the good news, the insurance company was going to be writing his monthly pension checks. The bad news was that his monthly pension checks were going to be roughly half of what he was getting.
Fast forward to today, and most companies no longer have a pension plan because they aren’t sustainable. In a perfect world, we would all be putting our savings for retirement into some sort of retirement vehicles like a 401K or the like. The retirement world today is much different, especially if you are an automotive shop owner. The first hurdle to cross is that we are all self-employed. The second hurdle is being able to consistently monthly retirement payments. For those of you who can do that on a consistent basis, kudos to you! However, for most shop owners, that’s very hard to do.
Let me give credit where credit is due. First, my wife for her sharp business and money sense. When we met, she was in her final semester up at the University of Utah getting her degree in Economics. She already had a degree in accounting from when she was much younger. Second, to my landlord who worked with us through some pretty tough times. None of this story would be possible without those two people. Lucky me, huh?
We need a way to not only have a comfortable retirement but also not be a burden on our younger family members. This is key. We don’t want to be living with our son or daughter because we can’t afford to pay our own rent someplace else. We want to live totally on our own without being a burden on any family member, let alone our kids, right?
As an automotive shop owner, I comfortably retired at the age of 60 and fully retired at 65. Those 5 years in between I refer to it as “semi-retirement.” I worked some, but not a lot, and here’s why. I originally thought I would make enough money from the sale of our business my wife and I thought we could fully retire comfortably. We would sell the business and lease the shop out to the buyer to receive a regular monthly income. Sounds great, doesn’t it?
The person I sold our transmission shop to had been in the transmission industry for over 30 years and had 5 locations. What could possibly go wrong? What I didn’t account for was having an effectively dead-beat shop owner. I didn’t check the guy’s background, credit history, or with the other landlords, he was renting from. Too late now. He would get 2 and 3 or 4 months behind in his monthly rent of $11,000/mo. That may sound awfully high to you, but I’ll explain a little later.
We originally sold our “business” for $330,000, with $240,000 down and we’d finance the rest over 5 years at $1,100/mo. As previously mentioned, he also signed a 10-year lease on the building for $11,000/mo. The reason the lease payments were so high was the going rate for a property similar to ours.
Our total shop, inventory, and office space added up to 6,460 sq. ft. but to get him to pay rent on time was like pulling a hen’s teeth. We came to learn he was 2 and 3 years behind on other property he was renting for his business. Luckily, we had added enough to the base rental amount to cover the property tax which we put in an escrow account for timely payment of the property tax. Make a note of that because you’ll see how it saved us a ton of headaches.
This is the section you need to highlight. We originally thought we could live off the sale of the business and monthly rent payments. I don’t care what type of profitable automotive business you have, you’ll never make enough off the sale of the business alone to retire on. If your shop has a great location, you can either live off the outright sale of the property or in monthly mortgage payments. That’s provided you find a dependable person to make the monthly payments.
My first bit of advice is to whomever you sell your business to, do both a credit report on their personal finances and a Dun & Bradstreet (D&B) credit report on their business credit worthiness.
The second bit of advice is to either have them give you a personal guarantee or have the name of the business to have enough substantial assets just in case they default. DO NOT let them buy your business in the name of a “shell company” with no assets. That was our mistake. In the end, we were able to get an $85K judgment against the buyer’s shell company name, but the shell company had no assets. The judgment wasn’t worth the proverbial paper it was written on.
Additionally, near the end, he took out a $125,000 loan and put up all the shop’s assets as collateral for the loan. In the last 3 years of business we owned the place, we were averaging $1.2 million a year in sales. It was consistent. Unbeknownst to us, his sales had been falling from the time he took over possession of the business to only $400,000/yr. If you do the math, rent payments were THIRTY-THREE PERCENT of his sales. How would you like for rent to take 33% of everything you took in due to falling sales?
We saw no light at the end of the tunnel. Things could only get worse, not better. We got an attorney involved. During the last 11 months, he was in the building, he was served a “pay up or get out” attorney letter by our local constable. There were the usual late fee and attorney fee added into the $11K/mo. rent payment which, in total, added up to over $13K/mo. Finally, he had enough. The monthly payments for the business were only within 2 or 3 months of being paid off.
He called me on the phone screaming. It seems this month’s papers he was served were in the presence of employees, customers, and a part salesman with whom he did a lot of business. Total embarrassment is why he was screaming. Long story made short we left the guy alone. One day, my wife was driving down the freeway and noticed their neon company sign wasn’t there. We went in to investigate and everything was gone. Furniture, fixtures, equipment, and more were all gone; the building was stripped. However, he did leave 29 cars and trucks, or “dead jobs” in our back parking lot.
The rest is history. We managed to clean up the majority of the mess he left, but he left making sure a transmission shop would not be able to open up in that building again. Of course, unless a substantial investment was made. The year was 2020, and we owed 3 months back rent due mostly between the time he moved out of the building and the time we spent cleaning the place up. Little did I know it would turn out to be a blessing for my wife and me.
We move into the building originally in 2008 under a 5-year lease. When the lease came due, I offered to buy the building for whatever the appraisal came in at. $860K @5% for 10 years was the agreed-upon price and interest rate in 2013. Little did I know at the time that we’d be selling it 7 years later in 2020 for $2.3 million. Housing prices were in the process of going through the roof, but interest rates were falling. At that period in time, housing was about 30% higher than they were just 2 years ago.
As I mentioned earlier, the reason the rent was so high is the location. The old adage in the real estate business is location, location, location, right? We were right on I-15, the only north-south interstate in Utah. Actually, I measured it. We were only 50 feet from the off-ramp to Draper. The traffic count was 245K vehicles per day and that’s not counting the frontage road traffic! We received a ton of business for both being highly visible to the freeway and also being the ONLY transmission shop in Draper. The next nearest transmission shop was an Aamco in Sandy, UT more than 5 miles north of us in an industrial rental park on a side street.
Unbeknownst and totally unplanned to us, we were very near (1.2 miles) a good job source for business. It was a 12-dealership auto mall known as SouthTowneAutomall.com. Whenever somebody was experiencing any sort of transmission trouble and took it to the dealer, a service writer would call the customer up and try to sell them a factory reman transmission, installed. Many times the customer would say something like “let me call you back” and basically shop around by phone. Being the nearest transmission shop, we would get the call. In the end, almost always we would get the job. Most of the time the vehicle was still driveable. Drive it or tow it, and the vehicle would end up at our shop. When we were planning our business, we had no clue having so many dealers near us would be such a great source of business. I call it “lucky’. I eventually came to know we were either the same price or higher, than the dealer. One male customer who came to pick up his wife’s car mentioned to me, “You are more money than the dealer, but you have a longer warranty. If I’m going to pay big bucks for my transmission, I want the biggest bang for the buck.” He was referring to our 5 yr./100K mile warranty.
We eventually had so much business, we couldn’t handle it all. I seriously thought about putting on a crew and staff for a second shift from 6:00 pm to 2:00 am but decided against it. We were too old. I was 60 and my wife was 62. I reasoned I ought to be retiring. More than that, I started to see that we had a gold mine of a location. That sort of thinking made me come to believe that we had a multi-million dollar location. I started looking for similar properties on I-15 and there were NONE! So when I listed the building for sale on https://www.loopnet.com (the Zillow of commercial real estate) I simply pulled a figure out of thin air and listed the building for $3.2 million.
In the final stages of cleaning the place up, I had a gigantic 30’ X 8’ banner made that had the words “FOR SALE” along with my phone number. I also had a traditional real estate sign made for the grass apron on the property. I was expecting the phone to ring off the hook, but it didn’t. Within 2 weeks, we had a plumber express interest in the building. He had only driven by our place. I learned he had a fleet of 40 Ford F-350 plumbing trucks and he needed a place to service and repair the trucks instead of farming them out to a 3rd party, which was usually the nearby Ford dealer.
I told him $3.2 million was the price tag. To summarize, we mutually agree upon $2.3 million. I had checked his D&B credit report and it was stellar. Nothing over 30-days showed, so I knew he paid his bills. Further, he agreed to pay $500,000 cash down. I wanted to be the mortgage company as I could rely on $9,600/mo. payments. We set it up for him to have a balloon payment after 5 years. We got an escrow company involved where they would do the collections and the escrow company would pay us. I still had a bad taste in my mouth from the last deal on the building.
Things rocked along pretty well till about the 6th or 7th month. We received a letter from the escrow company saying our ‘tenant’ had sold the business and the new owner wanted to pay off the mortgage. Included with the letter was a check for $1.9 million. Sadly, I didn’t have an early payoff clause to where they would quite possibly beat us out of all the unearned interest. Let that be a lesson for all.
We received the $1.9 and my wife promptly made 2 significant investment decisions. What she didn’t invest she used for the ongoing home improvements. We received 2 pieces of bad news that were all due to the new owner paying off the building mortgage. The first bad news was the Social Security office saying because my wife and I had so much income for that year, they were going to charge us $500/mo. a piece for Medicare. My wife knew that would last for 2 years. Essentially, we were getting a combined $24,000 reduction ($1,000/mo.) in our Social Security checks over the next 2 years. Once the 2 years have gone by, our S.S. checks go back to what they were before. The second piece of bad news was that we now owe $400,000 in federal and state income taxes. This would be much less had they continued to make the mortgage payments as originally agreed.
The moral(s) to the story is to…
- You won’t make enough to fully retire on the sale of your automotive business, so don’t plan on it.
- You’ll only make enough to fully retire when you sell your automotive business real estate.
- Do background and credit reports on both the business and personal credit reports.
- Do not sell to a shell company or an entity name that has no assets.
- Sell in a “double net” not “triple net” transaction. Just add the monthly property tax into the rent amount so you can be assured you won’t wake up someday only to discover you owe 2 or 3 years’ worth of property tax.
- Use an escrow company.
- Have an early payoff penalty/clause in your purchase agreement.
- Have a clause against the buyer encumbering the shop tools, equipment, furniture, and fixtures.
- Have a 10-day grace period for late payments and a substantial penalty for going over 10 days.
Although we had significant ups and downs, we were able to retire off the sale of our business real estate and not the sale of the business itself. The real estate MUST be in a prime location; most shops aren’t. To plan for retirement, move to a prime location. Negotiate with your landlord. Before retirement, a prime location will be the cheapest advertising you could ever buy, usually up to 9% of gross revenue. Ours was 9.1% actual. That’s where you’re going to make bank with your retirement. Either renting or owning a subprime location will cheat you out of a comfortable retirement.
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