What is your dealership worth?
How do you know? Gut feeling? Accountant’s opinion? Articles in the Automotive News? “Expert” articles?
You could pay a valuation firm $10K-$20K for the answer and it still can be as much as 50% off from the current market value!
When considering a sale, car dealers typically reach out to their accountants for an opinion of value. Values vary based on the premise of the valuations, and if a sale is contemplated, the traditional business valuation methods often turn out to be inaccurate.
The leading method used by accountants is the capitalization method. However, that does not translate into the real street value of a dealership. Each dealership is unique and such valuations ignore a host of items that buyers give a great deal of consideration to when contemplating a purchase. Items like: areas to improve, franchise strength at that moment in time, reputation, business trends, future developments in the community, planning volume, UIO count, PMA, current management, the competition, growth potential, absorption rate and market size, if only to mention a few.
As you know, our industry is ever changing. Although it has been rather robust in the last couple of years, the overall economy is still maneuvering through uncharted territories and the auto industry is of course impacted by it.
Determining the value of a business enterprise and understanding how to calculate the value of your dealership, especially the goodwill portion, is critical. It is a complex process and yet, a large part of it is an art, from applied experience and not an exact science!
The values of two dealerships selling the same brand, showing the same sales and netting the same amount, could vastly differ for a multitude of reasons.
Unlike residential homes, there are no comparables to rely on. Multiple listing services do not exist in our industry, and even if a centralized data center existed, it should not be relied on, since each dealership is surrounded with unique circumstances.
- Does the last recession still have an impact on the value of car dealerships?
- Which brands/franchises are in high demand nowadays?
- What are buyers currently looking for when searching for a dealership?
- How active is the buy/sell environment? What is expected in the near future?
- Do you have environmental concerns that might impact the value?
- Do your financial statements accurately reflect the condition of company? If not, would some items become an issue during an audit or in a buy/sell process?
- Does the dealership have the potential to do better? Is there untapped potential? Any hidden value?
- Is your facility in compliance with manufacturer’s most recent image requirements? If not, how does it impact the value of the dealership?
- Are you paying fair-market rent? How does the associated real estate and the occupancy rate impact the value of your dealership?
And so on and so on…
If you are contemplating selling your dealership, wouldn’t the current market conditions influence your decision? If you are making business plans, aren’t you curious to know the value of your dealership? If you are selling stock to a partner or a family member, wouldn’t you want to know the current market value of your stock? Would the (realistic) value of your dealership influence your business plans? If so…
We can help you with all the answers that impact the value of your dealership. Market conditions are constantly (and quickly) changing, an array of industry-specific value drivers and other considerations influence the value of car dealerships. The automotive industry is a lively landscape with a host of items influencing the values. If your needs require a realistic valuation, or if you intend to sell your dealership, we can assist you. We can also assist with identifying items you need to handle, fix or improve now to create more value for your dealership in preparation for a sale.
There are several ways of determining the value of a dealership. Choosing the right method of valuation and properly managing the immense number of variables is really a mix of art, science and having your finger constantly on the market’s pulse. Working in the trenches daily, we do.
No single valuation method, centralized data center, comparables, set of rules or (any) rule of thumb can determine the value of a dealership.
Dealerships are as unique and complex as the dealers who own and/or run them.
Valuing a car dealership should only be attempted by someone familiar with business valuation principles AND with a thorough understanding of the automobile retailing industry. Depending on your needs/plans, we also suggest that you hire someone who is independent and at an arm’s-length from the operation.
We are a full service and national brokerage firm with a sole focus on car and motorcycle dealerships. As auto dealership brokers, we are in touch with the market’s pulse in connection with buy-sell activity, and are tuned into buyers’ current desirability of franchises, preferred geography and alike. Because of our high volume of business transactions, we are uniquely qualified to assess the current market value of your portfolio and often see trends forming ahead of time.
After more than 25 years in the field and reviewing thousands of dealership operating statements, we have developed a proprietary valuation model. Our proprietary algorithm analyzes, compares and rates 52 different aspects of the financial data and the uniqueness of the dealership, good and bad, to help us arrive at a value. The methodology we use is constantly calibrated to stay current with the market conditions since the auto industry is cyclical and its performance magnifies the boom-and-bust of the overall economy. Buyers’ preference for a specific brand, demographic trends, decreasing gross margins on new vehicles, a constant change in consumer preferences, pressure from the manufacturers to realign franchises and to improve facilities, if only to mention a few, impacts our methodology.
An appropriate application of several valuation approaches, identifying hidden value, along with the use of our proprietary algorithm, will result in the most accurate and current market valuation of the dealership.
We often hear car dealers and car dealership brokers use of rules of thumb, like a multiple of earnings, when discussing the value of dealerships. That is not how value is determined. Bankers don’t use it…investors don’t use it…public companies don’t use it. Is it a multiple of earnings of the last 12 months? Is it a multiple of earnings on a 3-year average? A 5-year average perhaps? And if the dealership is losing money, what is the multiple then…? Zero then?
And yet, over the years, we have sold car dealerships for millions of dollars that lost millions of dollars! Furthermore, each buyer will put a different value on the same dealership!
A value of a dealership is ultimately determined by (a) the likelihood of a dealership to maintain and/or improve sales and profits, and (2) by the buyer’s threshold and desired return on investment.
Different buyers will analyze an opportunity differently based on items like: Geography, brand, scale, synergy, market share, a tuck-in opportunity, opportunity to improve, hidden value, etc.
Please call us for a CONFIDETIAL consultation at 949-461-1372 for more information or to discuss the unique situation you may find yourself in.
We welcome the opportunity to be of service.