How Profitable are Auto Repair Shops? Profits & Break-even

If you are planning to open an auto repair shop, you need to understand how you can turn your revenues into profits. In other words, you must know how much revenue you must generate to reach break-even and make profits.

The auto mechanics industry in the US is valued at $78.4 billion in 2022, growing at +1.9% CAGR from 2017-2022.

According to Jerry, Americans spent $1,986 on average in 2019 on car repairs (or $165 a month), which is inside the sweet spot of $100 and $200 per month of the suggested budget for car maintenance by experts.

Despite being a huge industry in the US, it’s also a very competitive one with very high operating costs. If you’re wondering how much profits you can make with an auto repair shop, you’d have to consider first all the costs you must pay for to run such a business. Let’s dive in!

What is the average turnover of an auto repair shop?

IBIS World reports that there are 282,637 auto repair businesses in the United States in 2022. Thus, if the auto mechanics market is $78.4 billion, the average revenue per auto repair shop is approximately $275,972.

By these numbers, the average number of customers your auto shop will require to generate an annual turnover of $275,972 is 1,672 per year (assuming, the average spending by US citizens is $165.50 per month for auto repair and servicing).

Of course, these numbers are US averages, and the actual turnover of your business will depend on various factors such as:

• Location
• Size of the auto repair shop
• Frequency of customers, etc.

As far as the take-home salary of an auto repair shop owner is concerned, Climb the Ladder reports that auto shop owners earn anywhere between $45,380 and $113,643 per year. Zip Recruiter is a little less optimistic with ab average salary of $53,641 per year.

What is the average profit margin for auto repair shops?

According to Small Business Chron, auto repair shops generally have a profit margin of 50-65% for labor and 20-28% for parts sales.

Yet, it doesn’t tell us much about the average net profit margin of an auto repair shop, after deducting all expenses (not just labor and spare parts).

How does an auto repair shop make money?

Typically, an auto repair shop makes money by charging clients a flat fee or an hourly rate for the services offered. 

That translates to charging a set price for simple services like an oil change or fixing a flat tire. An auto body shop may charge an hourly rate or a predetermined charge based on parts and labor costs. 

Generally, providing a one-stop shop is a great way to maximize profitability and keep customers coming back even when they do not need car repair services. 

To illustrate and so you understand how a car repair shop makes money, we look at different services offered at the auto repair shops. Therefore, if you are looking to increase profit margins or to make your car repair business more profitable, you can introduce the following services:

Scheduled Auto Maintenance

Routine car maintenance is an essential service for keeping a car running properly. The regular maintenance covers oil changes, tire rotation, and brake pad replacements. According to American Automobile Association, car owners spend an average of $1,186 per year on scheduled maintenance.

Wheel Balancing and Alignment 

The beauty of wheel alignment and balancing is that you enjoy a high-profit margin if you priced it correctly. Other than the labor costs you pay to your mechanic, the rest is nearly profit. For the two services, the profit margin largely depends on how much you charge the vehicle owners and pay the technician. 

Sale of Service Parts

If you own an auto repair shop, opening a parts sale shop is another revenue stream you need to maximize your profit margins. To ensure customers’ trust, supply genuine parts from accredited car dealers. Experts say a repair can generate gross profit margins between 20 to 40 percent for each piece installed. 

Engine Tune-Up Services 

The engine tune-up service can include checking, diagnosing, and replacing spark plugs, wires, and distributor caps. Other services can include changing fuel filters, air filters, and oil filters. According to AutoZone, the engine tune-up service costs between $40 and $800, depending on what the service constitutes. However, the cost could be beyond the estimates based on vehicle type and replacement parts. 

Auto Body Repair 

Another profitable revenue stream for auto-repair shops is the bodywork. Statistics show that the labor charge on auto body repair ranges between $75 and $150 per hour. Luxury cars with pricier parts and requiring sophisticated technology cost more to repair. 

How much does it cost to run an auto repair shop?

There are various recurring costs of running an auto repair shop and they include: 

• COGS (40-50%): this is the sum of the costs incurred to source the spare parts you need to purchase in your inventory to perform the repairs. It also includes things like paints, tools, etc
• Rent (5-10%) depending on the location and surface. Prime locations will likely spend 10% or more whilst tier 2 locations spend 5% or less
• Salaries (15-20%). Salaries vary depending on the size of the auto repair shops. In general, expect to pay 15 to 20% of your revenues in salaries to pay for the mechanics, receptionists and any other administrative staff
• Marketing (5%): mostly offline marketing (e.g. partnerships, billboards, etc.)
• Operations and other (5%): includes expenses like janitorial services, bookkeeping, etc.
• Capex: these are capital investments incurred at the start of operations (e.g. refurbishment of the building, equipment, etc.). Although significant, the amount varies a lot depending on the size of auto repair you operate (see more on startup costs at the beginning of this article)

In general, it costs anywhere between $84,000 and $96,000 per month to operate an auto repair shop of 5,000 sq. ft. with 4 mechanics.

We’re including below the revenue to profits breakdown chart of a large auto repair shop generating over $6 million turnover per year (~12% net profit margin). The most important expenses by far are COGS (the spare parts, customs and delivery) as well as labor (staff salaries).

How to forecast profits for an auto repair shop?

In order to calculate profits for an auto repair shop, you must first forecast revenues and expenses.

Forecasting revenue for an auto repair shop

Revenue can easily be obtained by multiplying the number of customers by the average order value (AOV).

Revenue = Customers x Average Order Value

For example, if you have 30 customers in a week spending on average $1,000 in repairs and maintenance, monthly revenue is about $120,000.

Forecasting expenses for an auto repair shop

There are 2 types of expenses for an auto repair shop:

• Variable expenses: these are the COGS as explained earlier. They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
• Fixed expenses: most salaries, rent, marketing and all the other operating costs listed above

Calculating profits for an auto repair shop

When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.

In order to get to EBITDA, we use the following formula:

EBITDA = Revenue – COGS – Operating Expenses

To make it clearer, we’ve included below the profit-and-loss of an auto repair shop (from our financial model template for auto repair shops).

Whilst gross margin (after variable costs) is rather low (~50-60%) as explained earlier, EBITDA margin can go up to 10-20% depending on the auto repair shop, and net profit margin up to 5-15% for the most profitable businesses.

Naturally, not all services have the same gross margin. For example, whilst scheduled maintenance have very high gross margins (80-90%) as little parts are used (if at all), other services like body repairs usually have lower gross margins (40-50%).

Indeed, a big part of the latter price you charge customers goes into the spare parts that you need to order and pay from your supplies (including transport, custom and delivery costs).

What is the break-even point for an auto repair shop?

Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.

Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs.

Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs. As we just saw, auto repair shops typically have rather low gross margins (50-60%). That’s because almost a big part of expenses are variable costs (the spare parts among other things).

The break-even point can easily be obtained by using the following formula:

Using the same example earlier, let’s assume your auto repair shop generates $120,000 in turnover per month and has the following cost structure:

Operating Costs	Variable vs. fixed	Amount (per month)
COGS	Variable cost	$40,000
Staff salaries	Fixed cost	$50,000
Rent	Fixed cost	$8,000
Marketing	Fixed cost	$5,000
Admin, bookkeeping & other	Fixed cost	$3,000
Total		$106,000

The break-even point would then be:

In other words, you need to make at least $96,000 in sales to turn a profit. Assuming a customer spends $1,000 on average, your break-even is 96 customers per month. In other words, you make profits once you have repaired or serviced 96 cars per month.

How to increase profits for an auto repair shop?

There are various strategies that you can use to increase the profits of your auto repair shop, and they include:

• Customer Loyalty Programs: These programs can help to increase customer loyalty and increase their lifetime value
• Offer Routine Services at a Flat Fee: Linear rate pricing encourages customers to return again and again
• Give Service Warranty: Provide a service warranty which becomes a powerful marketing tool
• Customer Referral Program: Reward your existing customers for driving referral traffic
• Automation: Automate certain services such as booking to reduce labor costs and provide a better user experience
• Reminders: Remind your customers about the service due date
• Diversify Service: Expand the services you offer to attract more customers
• Wholesale Purchase: Wholesale inventory purchase can reduce your COGS and increase profitability