Buying a Smog Shop in California

In 2016, there were approximately 14.5 million automobiles registered in California. New cars do not need a smog check for the first 6 years. All the gasoline powered vehicles driven on California roads are required to get emission tested every two years or when there is a change of ownership. There are millions of cars that need a smog check every year. So buying a smog shop can be a good investment, or it can be a bad choice. How can you tell if it is a good idea?

The State of California allows smog centers to either test the car’s emissions or to repair the car to meet the requirements. The Department of Consumer Affairs/Bureau of Automotive Repair directs vehicles that are more likely to fail, called high emitter profile, to a Test Only Center.

What is High Emitter Profile?

In general, HEP vehicles are typically older model-year vehicles with higher mileage. A methodology was developed to identify vehicles most likely to fail the emissions test. It then directs them to Test-Only stations and it was named the High Emitter Profile. It uses a variety of data to determine those vehicles most likely to fail such as model year, mileage, vehicle history, etc.

All the data collected from the smog inspection goes into a database called Vehicle Identification Database (VID). The VID is used by the Department of Motor Vehicles (DMV), BAR (Bureau of Automotive Repair), and other government agencies. Also stored is general vehicle data such as:

• Make, model and year
• Vehicle miles traveled. Notes about high mileage or very low mileage for the age of the car
• Emissions-related recalls
• Technical service bulletins
• A history of failing smog tests along with the technician/station that received a citation.
• Pattern problems and engine size

Definition of a Smog Test Only Center

If you are considering buying a smog shop, you need to know that a smog test only center is allowed to do only smog checks, but no repairs. Repair shops may not do smog checks. A test only Smog Check Center has an obligation to insure a non-biased smog test inspection. They cannot perform repairs and cannot profit by failing your car.

Every state has different rules regarding how they test for auto emissions. California has privately owned test centers. Private business owners can be licensed by the State of California and the Department of Motor Vehicles to do testing of automotive emissions. If someone who is buying a smog shop wants to do the testing himself, he must pass the ASC, California State Smog Test. The time frame to take the course, pass the test and get the licensed issued is 6 months.

A non-licensed owner can hire a licensed smog check person for $2,500 to $3,000 per month net (after payroll deductions and income tax withholding). One smog test only shop I did due diligence on for a business buyer paid the smog technician $70,000 per year while another location only paid $40,000 per year but did give bonuses.

The purchase price of a Smog Test Only Center

In recent months many smog test only centers in California, have come on the market. The published profit numbers are impressive. People buying a smog shop have had a lot of interest in these Smog Test Only shops.  A lot of these shops on the market appear to be making a lot of money. The truth is-some are and others are not.

When buying a smog shop in California, there is a lot more to be known about the business besides the profit number. Let me give some examples:

• Some smog test only shops have fixed prices for the test.
• Others offer $10.00 coupons or accept the coupons issued by their competitors.
• I just heard about one Smog Test Only Shop located in Northern California that has a posted price of $99.00 and negotiates a different price with every customer. The owner does not work at the business, so the tester has complete flexibility in his negotiations. This makes it difficult for an owner to control employee theft.
• Another variation between shops is how many employees there are. Some have a service writer and a technician on site at all times. Others let the technician also do the order write ups.
• Some places have two smog technicians each working 40 hours a week. Other smog test only centers have the smog test technician work 60 hours, per week, with the technician making time and half on the extra 20 hours per week worked.

It is important to make sure that all overtime is paid properly, where required by law and payroll taxes are being paid on 100% of the wages. Some smog test only centers illegally pay their staff a portion of the wages under the table. A business buyer has to be very careful to determine if this is being done or not. The sellers sometimes forget to mention this little important fact so you must ask.

Have an Expert Look at the New Lease

Another big consideration when buying a smog shop or any business, for that matter is the location, the competitor’s locations, and the location’s rent-including the CAM (Common Area Maintenance) and the other lease terms. The lease terms and conditions can affect half the value of a business. Never sign or assume a lease without having an attorney or an experienced real estate broker look at it carefully.

Smog Centers Are Regulated By the Legislature and Dept. Of Motor Vehicles

Government agencies change the rules periodically. You must be aware of what rules there are and what changes have been made and will be made. Then you must determine the future effects of any rule changes that will be taking affect. As part of doing my due diligence on any industry I study the industry carefully. That is one of the actions that a good due diligence expert does to protect his clients.

Two smog test only centers can be doing the same volume, charge the same prices and have completely different profit numbers, because of how they run the shop and handle their payroll. That means that the value of these two similar locations could be the same or they could be drastically different.

Never buy a business without an experienced due diligence expert assisting you.

When you sign an offer to buy a business, the listing broker will always advise you, in writing, to hire an outside CPA or other due diligence expert to assist you with the business review. The reason that agents do this is in case you sue. His attorney can tell you “My client told you, in writing, to get outside help, and you didn’t listen to that advice.” Take that very good advice, even if he gives you verbal suggestions to the contrary. If the adviser has experience in the subject industry he is worth his weight in gold. Due diligence usually costs less than two percent of the purchase price and is always worth 20 times what it costs.

Since no one can know everything about every type of business, it is important to note that any buyer especially a novice should never buy a business without at least one outside adviser. I myself have experts on my staff, for my client’s use but also so that I have advisers advising me. One definition of an educated individual is a person who knows where to go to get the answers to questions. Let me know if I can be of help.

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Have you had any experience good or bad with doing or not doing due diligence? Let us know.

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