As you may know, despite excellent growth before the pandemic, the auto rental industry faced many challenges during the COVID-19 pandemic. Fortunately, the industry is starting to recover and is expected to grow by 4.0% over the next five years. This has created an excellent market for many rental vehicle company owners who are planning their exit strategy. In this review, we explore the valuations of auto rental companies using the market-based valuation approach. We also provide a detailed, step-by-step guide to selling your car rental company.
About The Auto Rental Industry
The basis of the car rental industry is to provide customers with vehicles for short-term use. This does not include vehicles with a driver. This includes vehicles of all sizes, from sedans to cargo vans. The most notable data for the auto rental industry is as follows:
- There are approximately 26,000 auto rental companies in the U.S.
- There was a 2.8% annual growth for the auto rental industry from 2018 to 2023
- The auto rental industry generates $54.2 billion in annual revenue
- The annual profit for the auto rental industry is $3.0 billion
- Experts predict a sizable increase in annual growth (4.0%) from 2023 to 2028
How Much is My Auto Rental Company Worth?
Formulating a valuation for your auto rental company may not be as straightforward as you think. The industry predictions and projections are mixed among experts, and the performance of auto rental companies varies greatly. This makes rule of thumb data a less reliable way to determine value. Nevertheless, it still serves as an excellent starting point. Here is the industry’s rule of thumb data, provided by Business Reference Guide:
- Auto rental companies sold between 1.12 and 3.90 times the Seller’s Discretionary Earnings (SDE)
- Auto rental companies sold between 1.75 and 2.16 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Some more established rental companies with sales greater than $5 million annually sold for as much as 7.10 their EBITDA.
- Auto rental companies sold between 0.79 and 1.69 times the annual net sales
Since rule of thumb data does not provide a precise idea of your company’s value on the market, we strongly recommend working with a business broker who has experience with selling businesses within the auto industry. They can use a comprehensive market-based approach to determine your company’s worth, considering factors that may not show up on financial sheets as well as your company’s financial information. These factors include but may not be limited to your location, the value of your fleet of vehicles, your reputation, and your growth potential in a post-pandemic environment.
A Sales Guide for Auto Rental Company
It helps to understand the sales process for auto rental companies before you begin your exit strategy. Although the process may vary based on the specifics of your company, the most common steps that you can expect include:
- Receive a professional valuation
- Prepare your company for sale
- Bring your company to market
- Negotiate and discuss contingencies
- Receive a signed letter of intent (LOI)
- Follow your due diligence map
- Schedule a time for closing
- Transfer ownership of the company
Step 1: Receive a Professional Valuation
We discussed the valuation process for auto rental companies above. Your market-based valuation determines your worth on the open market. It is important to determine your auto rental company’s worth before you seek a buyer. Otherwise, you risk selling for below market value or asking too much and not receiving an offer that is worth accepting. Your valuation also helps you plan when you sell and if you need to take measures to improve your company’s value.
Step 2: Prepare Your Company for Sale
Your business broker can help you decide when to sell. This is a strategic decision. Ideally, you want to seek a buyer when the market is favorable for sellers. Once you decide to sell, you will begin preparing all you will need for the process. This helps ensure successful negotiations and a fast due diligence process. The most notable documents you will need to collect during this stage are:
- Tax returns (at least three years)
- Profit and loss (P&L) statements
- List of vehicles and other assets
- Employee lists and details
- Client lists and details
- Copy of your insurance policy
- Real estate appraisal (if applicable)
Step 3: Bring Your Company to Market
Once you have prepared your company and financial documents, it is then time to bring your auto rental company to market with the assistance of your business broker. They ensure you sell in a confidential manner. This involves utilizing private networks, reviewing databases, and utilizing other discrete methods to ensure news of a sale is not made public.
Step 4: Negotiate and Discuss Contingencies
Your broker, along with your input, screens offers and negotiates on your behalf. Auto rental companies who understand their value and have a fair asking price often receive multiple offers, which may create a bidding war. Navigating multiple offers and negotiating requires professional help to ensure the process is handled well. Contingencies are also discussed during this stage as well.
Step 5: Receive a Signed Letter of Intent (LOI)
A letter of intent (LOI) details the terms of the purchase agreement. It establishes the purchase price and other important information related to the business sale. After the negotiations, you will select a buyer who allows you to best reach your exit strategy goals. They will then sign the LOI to start the due diligence process (see below).
Step 6: Follow Your Due Diligence Map
The buyer must have an opportunity to verify all information about your auto rental company and ensure they are comfortable moving forward with the purchase. Although due diligence is primarily for the buyer’s benefit, it should still follow a structured timeline and process. For example, here at Sigma Mergers and Acquisitions, we follow a due diligence map, which ensures the buyer is able to receive all they need in a timely fashion while not allowing the process to drag on for months at a time.
Step 7: Schedule a Time for Closing
Closing is scheduled after due diligence. This is scheduled at a convenient time for both parties (the buyer and the seller). Attorneys and brokers may attend the closing as well, along with a financial institution if the buyer is financing the purchase. Notable tasks that are accomplished during closing include:
- Review the purchase documents
- Attain signatures for the purchase agreement
- Transfer ownership of the company
- Confirm the payment is sent to the seller
Step 8: Transfer Ownership of The Company
As mentioned, you will transfer your auto rental company to the buyer during the closing stages of the sale. This may involve transferring licenses and permits, transferring titles, deeds, etc., updating insurance information, notifying employees, and providing full access to all business operations.
Planning Your Exit Strategy? Contact The Pros at Sigma Mergers and Acquisitions
Are you considering selling your auto rental company? If so, then the business brokerage team here at Sigma Mergers and Acquisitions is here to help. We take great pride in helping business owners plan and follow through with their exit strategy, which includes selling your business for fair market value. Schedule a consultation today for a free business valuation.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!