Building Generational Wealth Through Your Shop

Welcome to Ratchet and Wrench Radio, produced by Endeavour Business Media, a division of

Endeavour B2B, bringing you strategies and inspiration for auto care success.

Welcome back to Ratchet and Wrench Radio.

I'm your host editor, Christine Schaffrin.

In the final episode of the financial future of independent auto repair,

CPA Nick Papacaricos connects the dots between profitability, shop valuation, and long-term

wealth creation. From the rule of 130 to the power of a second bite of the apple, Nick breaks down

how shop owners can turn a successful business into generational wealth, while avoiding the

mistakes that leave too much risk tied up in one asset. Let's listen in.

Welcome back to the financial future of independent auto repair. I'm editor Christine Schaffrin,

and this is episode three, the final episode of our three-part series with Nick Papacaricos,

a CPA who specializes in auto repair. Nick, welcome back.

Oh, thank you, Christine. I'm very excited to wrap this series up.

Yeah, so am I. So before we get into today, let's take a quick minute to remind everyone

where we've been because we've covered a lot of ground. And today is really the payoff of the

first two episodes. So in episode one, we tackle the problem many shop owners face. The shop is

busy, the bays are full, the phones are ringing, and yet there's no money in the bank. We walk

through that anyone can do this profit-first methodology. It's a simple system to get control

of cash flow and stop feeling broke even when business is good. Then in episode two, we shifted

gears. We talked about why private equity is buying up independent auto repair shops all over the

country. We explained the right profit number to focus on, such as Ipita. We explained multiples

on how many buyers decide on the value of your shop, and we explained the most important rule

of supply and demand in the industry. There are thousands of shops with profit under a million

dollars and very few with profit between 1000000 and 15 million, which is exactly why

bigger shops get higher multiples and sell for dramatically more money. So episodes one and two

gave shop owners the knowledge. Today, what are we doing with all that knowledge, Nick? Well,

today, Christine, we're going to put it all together. So as you said, episode one gave shop

owners the tools to fix their cash flow and run a more profitable business. Episode two gave them

the awareness of what their shop could be worth and why. And today is about taking those two things

and using them to build something much bigger than a paycheck. Today is about how do you go from

being an independent shop owner to creating generational wealth for yourself, your family,

and the generations that come after you. That's a big promise. Walk us through how today

is going to land that for shop owners. Sure. We're going to do four things. First, I'll give listeners

a simple tool to figure out where they stand right now, meaning do they have plenty of time to build

this business or do they need to exit soon? It's called the rule of 130 and it takes 10 seconds.

Okay. Secondly, we'll talk about the factors that actually build value in a shop. You may remember

from episode two that a higher profit means higher multiples, which is how many times your profit,

the buyer will pay, and a higher multiple means a much bigger sales price. So the bigger you get,

the more valuable exponential your shop is. And that's the nuance that I want to make sure people

keep in mind. So how do you build that higher profit, that Ibbita, as we call it, on purpose?

Thirdly, we'll talk about the timing of a potential sale. This is the one that surprises most people.

The smartest shop owners often sell earlier and they plan to retire and I'll explain why. And fourth,

we'll get to the strategy that actually creates generational wealth. It's sometimes called the

second or third bite of the apple. And if you've never heard of it, this might be the most important

nugget for you to take out of this and it could be the most important 15 minutes of your career.

And I only say that partially, partially, this is just the year. It's pretty important.

All right, let's do it. So you said the first thing every listener needs is a way to figure out

where they personally stand. Walk us through that. Right. He goes, here's the truth. Every shop owner

listening to this broadcast is in a different spot. Some are 35 years old with many decades of runway

to decide where they want to go and how to get there. And some are 65 years old and need to make

a move this year. The strategy isn't one size fits all. So before we talk about anything else,

you need a way to diagnose your own urgency, where you'll eye the shop owner fit in this whole vision.

And the simplest tool I've ever seen for that is something called the rule of 130.

Comes from my author Adam Coffey's book Empire Builder and the formula is dead simple. It's your age

plus the percentage of your net worth is tied up in your business. You total those two numbers. And

if it's 130 or more or less, we make a decision. And unless just in case anybody's a little confused

by what I mean about the percentage of your net worth is tied up in your business. For a lot of

people, you might have some money in the bank, some investments. But if you think about everything

you own and what your financial net worth is, you realize that an awful lot of that is tied up in the

day that I sell this business. So we're not talking about some mathematical analysis here. We're just

saying roughly, it's not that hard to figure out just that the exact what percentage of my net worth

is in the business. So that's the whole formula. You add those two numbers together. The threshold

is 130. Okay, let's break that down and talk about what that means in plain English. Sure. So if you

do this and your number is under 130, you're in what we call the build and grow zone. You have

runway, meaning plenty of time to plan things out and to plan to grow it accordingly. You can

afford to focus on increasing the value of your shop, because time is on your side. If your number's

over 130, the alarm should be going off. Because at this point, too much of your life is concentrated

in what asset, that asset being the value of your business. And every year you wait, your number

goes up by one automatically, just because you're getting old. Father time waits for no one, as they

say. Give me a real picture of this on each side. Sure. So let's take a fictitious shop owner named

Jake. Jake is 42 years old. He owns one shop. And about 60% of his net worth is in that shop.

So 42, his age plus 60, the percentage of his net worth in that shop is 102. So Jake's number at 102,

he's obviously well under 130. What this tells us, and we'll tell you, is you have time. You should

be focused on building your profit at a special profit called EBITDA, putting systems in place for

your business, increasing the value of your shop. Time here is your friend. You have time to figure

it out and get it right. Now let's take the second fictitious shop owner, a person named Dave.

Dave is 58 years old. He owns two shops. But 85% of his net worth is in those shops. He's invested

a lot of money getting his things open, whatever the reason is. So his age, 58 plus 85, the percentage,

is 143. So Dave's number is 143. He's well over the 130. So Dave has a totally different situation

than Jake does. Dave needs to be making moves now to take chips off the table, not in five years.

So same industry, same type of business, but completely different sense of urgency.

Completely different. And here's why this matters so much. There are three things that happen when

you're over 130. And a lot of times you don't realize it. Number one, you start playing defense

without even realizing it. By that I mean, you stop investing in growth because subconsciously

you're protecting what you have. You don't want to spend the money. There's not enough time to

recover you think. You generally become risk averse. You're afraid of risk. This is exactly when in

your situation you should be making bold moves because you don't have a lot of time left to do it.

Number 21 bad event can completely wipe you out. Pandemic, which might have once in a while

seemed like a complete, you know, wild situation we've already been through. They're talking about

this Hentavirus or whatever it's called now. Could be a lawsuit. It could be a key employee

leaving. Might be as simple as a landlord deciding not to renew. Many landlords are trying to tear

down commercial building and build residential. When 85% of your net worth is tied up in this

one business, you're one bad day away from losing decades of work. And the third one is

you can't time the market. You can't say I want to wait. The buyer demand is not in your control

when buyers are looking to buy. Your health is not in your own control. The economy is not in your

control. None of these things are going to wait for you every time a plan. And in this industry

right now, the buyer interest is at an all time high. That window won't be open forever.

So someone listening right now is doing the math in their head. What do they do with that answer?

Okay, let's start with Jake who's under 130. He has time. So I'm not done. I'm talking to Jake

right now. Jake, you want to use this time to build the value of your asset. We'll talk about

how to do that next. So if you're approaching 130, the next two to five years are going to

define your outcome. Stop preparing seriously. And if you're over 130, you need to be in active

planning mode, whether that's selling outright, bringing in a private equity partner, selling to

a platform. Those options need to be on the table right now. So again, under 130, you have time to

build over 130. It's time to act. The math doesn't lie. And it doesn't slow down. So in episode two,

camera home that shops with higher profit, get higher multiples, sometimes dramatically higher.

So for the listener who's under 130 and has time to build, the question is, how do you actually

drive up that profit and that multiple? What are buyers really paying for? That's a great way to

frame it, Christine, because remember, buyers aren't just paying for the profit number. They're paying

for how reliable they think that profit is going to be after you're gone. And there's a phrase that

I want listeners to remember. Buyers don't pay for potential. They pay for predictability.

So if a buyer looks at your shop and thinks, I know exactly what I'm going to get when I take

this over, you're multiple, meaning your sales price goes up. If they think on the other hand,

this could fall apart. The second the owner leaves, you're multiple, your sales price drops and it

drops very fast. So what creates that predictability? What are the actual value drivers?

Well, there are six big ones. Let's move through them one at a time. Number one is a consistent,

reliable profit, not just one good year. You'd want three years of cleaning financial statements,

showing good profits, no surprises. One of the things that most buyers, especially private

equity will do is they'll focus intently on the previous 18 months and review those in detail.

And this is the point, and this is where episode one really pays off. If you're using that profit

for a system, you've already built this. Remember, inconsistent profit equals risk,

and risk equals a lower multiple, which results in a lower sales price. When those buyers are

looking at the last 18 months, they're looking for a lot of things. But one of the things that

you want to know is they're looking for consistency over those past 18 months. They're really trying

to find out, is there a seasonal aspect to your business? Now, when I say seasonal, I don't mean

that some months are busier than others. Most businesses have something of that kind. What

I'm talking about, even if January, February, and March are slow and your sales are generally

lower than the rest of the year, what you want to be able to show is your gross profit margins

are the same. Even though the volume is low because of the seasonal aspect, I still bring in the 60%

gross margin overall, you want to show consistency. That's the big thing about that. Number two,

and this probably is the big one, a business that doesn't depend on you. If you were the face,

the decision maker, the problem solver, the rainmaker, we don't own a business. You are the

business, and buyers will discount that heavily. Because if you leave now or shortly thereafter,

they have no predictability in how this business works. Number three, they're looking for a stable

team. So buyers, again, aren't just buying numbers, they're buying people. If your top techs walk when

you leave, that's a huge risk to a buyer. So they look at loyalty, low employee turnover,

leadership inside the shop, that's what they want to see. So you want to take that away as,

at some point in your plan, you're building strong shop managers, you're going to start the

leadership lessons, but you need to build a strong team beneath you. Fourth thing is what we refer

to as systems and processes. So if everything in your shop lives in your head, which is not uncommon

for small businesses, that's not a business. That's chaos with revenue. You need to document the processes,

how cars move through the bays, how customers get handled, how pricing decisions get made.

That's what creates consistency. You leave, the system still runs on its own. Five, what's your

customer base and reputation? Are your customers loyal to your business? Or are they loyal to you

personal? That's a big difference. If you leave and all that goodwill goes with you, that's not

that's not reassuring to a buyer. You want a strong brand, great reviews and repeat customers.

You want to be monitoring if you want already your reviews, and you want to take those reviews

seriously and work on them. That tells a buyer that the revenue continues after you walk up the

door. Again, predictability. Six, location and facility, especially if you own the building,

that can be a massive value driver, both for the sale itself and for the ongoing real estate income.

Now I do want to mention one thing. Most often the buyers will not be looking to purchase your

building. When they say it adds value, it means you control the lease terms. You can give the buyer

as long a lease as you see fit. They know then that you have a vested interest in keeping them

renewed and they know that they're not going to lose their location. The nice part is if you're

charging market value rent in your shop right now, which you should be, that's a nice income stream

that's going to keep coming long after you sell your business. Of the six, which one do you think

you see owners underestimating the most? Systems, every time. Owners think the buyers want profit,

and of course they do, but they really want the confidence that the profit will continue without

you. And that only happens when they're a real system running the show. So if I'm under 130 and

I'm listening to this, the play is essentially building those six things up over the next few years.

That's right. And the beautiful thing is every one of those six things when you when you implement

them also makes your shop more profitable while you still own it. So you're not just building up

the value of your business for an eventual sale. You're building a better business, better income,

and a better lifestyle for right now. Nobody, nobody minds that. So this is the part I think is

going to surprise a lot of listeners because most shop owners assume the plan is to work until they're

ready to retire, then sell at the very end. You're saying that's often the wrong move. Is that correct?

Oftentimes it is, yes. So this is one of the most important things that like Lucen is to take away

as well from today. The smartest shop owners that I work with, and indeed we recommend this to them

if they haven't thought of it, these are the ones who most likely end up creating real generation

of wealth. They sell earlier than when they actually plan to retire and stop working completely.

Why? Well, three reasons. First, you sell when the market is hot, not when you're tired. So whether

it's now, whether it's in a few years, you're making the choice to sell. Right now, private

equity is aggressively buying in this industry. The multiples, meaning the sales prices or historic

highs, if you wait until some arbitrary date, 65, 55, whatever, and if you're burned out by then,

then you're selling it for that reason, the window may be gone. The buyers that exist today

may have already finished their rollups because there will be multiple rollups, not just the first

one. A few years ago, roofing contracts were very hot. Now they're not really such a hot commodity.

Second, you're selling from a position of strength, not desperation. When you're not forced to sell,

you can negotiate. You can walk away from a bad deal. You can wait for the right buyer. The minute

you have to sell because of health, family, or burnout, you lose virtually all your leverage.

Third, and this is the magic one, selling earlier lets you stay in the deal. What do you mean stay

in the deal? Here's what I mean. If you sell at age 65 and immediately retire, you hopefully write

off into the sunset. That's a one-time transaction. Okay. You get the check and you're done. You're

usually to decent sale, you pay the taxes, and you live off the proceeds and you hope that you're

not going to get through retirement. But if you sell at age 58, when you still have energy,

when you still want to work, now we have something completely different. Now you can stay on as a

manager or operator in your old shop and work to help grow the new company's value and the value

of the piece you invested. Now you can help that buy a growth platform using the same skills you

use to make your shop successful. So if you sell when you're still in your prime, you don't just

sell once. You become a partner in something much bigger than what you built alone.

And you're saying the buyer wants you to stay on? Oftentimes, yes, especially when the buyer is a

private equity rolling up multiple shops. The buyers don't want to learn the business overnight.

They want the operator who built the business to stay involved at least for a few years.

They want your expertise. They want continuity for your team and your customers. That's actually

how they protect their investment. So you keep working, but you've already gotten paid for the

business. Exactly. You've taken some cash off the table. In other words, you've taken the chips off

the table. This is your safety net. It might be the money you've targeted for your kids' education,

for your retirement, you know, whatever the most important things are. But you've also kept some

skin in the game. And that's where the next part comes in, because that piece you keep,

that's where the real generation of wealth can get built. Okay, so this is the concept I want

our listeners to understand, because this is where today's episode delivers on that big promise

of generational wealth. Walk us through the concept of the second bite of the apple. This is the

concept that changes everything, Christine. Many shop owners have never even heard the term second

bite of the apple. And it's literally the difference between a decent retirement and generational wealth

for many people. Okay, walk us through it like you're walking through it for the first time yourself.

Sure. Here's how it works. When private equity buys your shop, they're not buying it just to own

one shop. They're building a larger company, sometimes called the platform company. Their

goal is to acquire your shop, plus another eight, 10 or 20 other shops, combine them all into one

gigantic bigger company. And then in four or five years, they sell that bigger company, the platform

company, to an even bigger buyer for a much higher multiple than they bought the shops for.

And that's where the math from episode two that makes this whole, and here's the math from episode

two that makes this whole thing work. So I'll walk through this slowly. But basically, let's say you're

a single shop and your profit is $500,000. So that might sell for four times its profit or four x as

we call it. So your $500,000 profit for the year times four means that the buyer is going to pay you

$2 million. Okay. But the combined platform with profits of 10 million, that sells for 12, 14,

sometimes 15 times profit, the same earnings bundled together as a bigger company, get a

dramatically higher multiple of sales price. That's the supply and demand we talked about in episode two.

So the private equity buyer is making money on that buy low sell high strategy.

Yeah. But here's what most shop owners don't really think about. You can be a partner in that buy low

sell high strategy. How? By rolling some of your sales proceeds into the new equity platform. So

instead of taking 100% of the sales price in cash, which many people would be inclined to do,

you take 70% or 80% of it in cash and you leave or as they call it roll the rest of that money in

its equity in the buyer's company. That's the math that changes everything. So let me give you a real

example. Let's say your shop sells for the $2 million we talked about a few moments ago.

You take 75% of that sales price, $1.5 million in cash at the closing. That's the money used

through which you need to do. Those are your chips coming off the table. But you leave or roll

the 25% in this case, $500,000 as equity invested into the platform company.

So now the buyer goes to work. Buyer adds eight more shops. They centralize the back office

operations. They build a management structure, management team, the systems we talked about,

and they grow the profit. So five years later, when they sell the whole platform company,

the new company they assembled, your $500,000 initial investment for what we sometimes call

your stake in the new company. Because that platform now sells as a whole for a much higher

multiple than your single shop did, that $500,000 you let sit could be worth one and a half million,

2000000 sometimes 3000000 or more from the same $500,000. And it's just because that $500,000

was the value at the original sales price. So if we say 4x, for example, but the sales price

that bigger company, which includes your up piece of that company that you let stay in the business,

is 13x, so 13 times. Well, 13x minus 4x is 9x. So that $500,000 is now worth an additional $1,125,000.

So you get your $500,000 back, plus the $1,125,000. You now have $1,025,000 from your original $500,000

that you invested, plus the growth of the $1,125,000. So in other words, more than the 75% you took

in cash on the original sale. So that's the idea. The numbers get really big, really fast.

So you've effectively sold that company, your original company, not for the $2 million,

but for $3 million, $125,000. The 5 you took originally in cash and the million 625 you

get back on the platform company sales. So essentially your second bite could be worth more than your

first bite. Exactly. That's the second bite of the apple. And in some cases, depending upon how

the platform performs, your second bite is 234 times bigger than the first one.

That's how a single auto repair shop owner can create generational wealth. You don't just sell

once, you get paid twice, and the second time can be the big one. That's exactly the point of the

concept. And you're not limited to a second bite. As I said, they're a big fish buying smaller fish

and is easily three layers of fish looking to swallow up the smaller fish that all look big to

all of us. So if your system works the first time, you might say, I want to stay in the next deal,

the next deal. It's really an amazing opportunity. That's essentially how a single auto repair shop

owner can plan to create generational wealth. You don't sell it once, you get paid twice,

and the second time can be the big one. And this only works if you sell earlier,

while you still have time to ride that growth. That's the connection, typically. You have to

make a decision at the time you sell. How confident am I in the new company? We talked last time around

about evaluating the buyers and being the manager in the ring, instead of being the bull. You're

asking yourself, how confident am I in the new company? If I walk away completely, I can't

influence the value of my investment. If I sell it at 67 and retire, I'm probably not going to want

to ride a five-year platform growth cycle. But if I sell it 58 or 60 or even younger,

you've got time and the energy to be part of the next chapter. That's why the timing matters so much.

That's why the rule of 130 matters. And that's why building the value of your business, your asset,

properly matters. Everything we've talked about today connects to this moment. Right. So to recap,

at episode one, gave you the cash flow. Episode two gave you the awareness of what your shop could

be worth and why. In this episode, episode three tells you about the rule of 130, which tells you

how much time you really have. We gave you the six value drivers that you want to use to build.

We'll let you know that selling earlier lets you stay in the deal. And the second bite of the apple

is what turns all of that into generational wealth. So before we close out this whole series, give me

the big picture. Why does any of this matter? Why should the shop owner who just wants to run their

shop care about generational wealth? Well, because someday we're all going to retire, we're going to

sell and whether you plan for it or not, that day comes. So the real question is, does that exit,

that sale just take care of you? Or does it take care of your family, your kids and generations after

that? Your family legacy can move from great-grandpa owner garage to the reason we have the great life

and financial security we have is all due to great-grandpa who grew a successful business,

sold it for a fantastic price, it set up our family for many generations. That's kind of a nice way

to be remembered, isn't it? And the thing is, any shop owner can do it. Most shop owners follow the

same path. They work hard, they hopefully make a good living, they take care of their family,

and eventually they sell the shop. And that's a respectable accomplishment, that's not to be

diminished. But oftentimes it usually ends with a question mark. After the sale and you paid the

taxes, you're thinking to yourself, I hope it's enough to make it through. But what if just enough

wasn't your goal today? What if you built something that pays you why you work, grows in value why

you own it, gets sold for a real big number when the time is right, and then keeps growing through

your equity stake long after you step back? That's generational wealth. It's not flashy,

but it's also not complicated. That's just ownership, options and control done with a plan,

with intention. And the message you want every listener to walk away with from this whole

three-episode series? Your shop is not just a business. Remember, it's an asset. And how you

treat that asset starting today determines whether your family is set up for one generation or many.

You already have the shop. Now build the asset. Time it right, take the second bite,

maybe even a third or fourth bite, and turn a lifetime of work into generational wealth.

Nick, this has been an incredible three-part series. I really hope our listeners take this whole

arc to heart. So basically we're looking at fix the cash, understand the opportunity, and build

toward generational wealth. For everyone listening, if today connected with you, go back and listen

to episodes one and two with fresh ears. You'll hear them differently. And if you want to talk to

Nick directly about your specific situation, his contact info and free consultation are available

in the show notes. Nick, thank you so much for everything you brought to the series. It's been

a pleasure. Thank you for the opportunity. We're seeing it's been a privilege for us too. Until next

time everyone, take care. That's going to do it for us today at Ratchet and Wrench Radio.

Be sure to check out other episodes on your favorite podcast player and leave us a review

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of today be the greatest day of your life.

Christine Schaffrin

Nick Papacaricos

independent auto repair

bays

rule of 130

Adam Coffey

second bite of the apple

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