Engage a Qualified Appraiser with Substantial Industry Experience
Dealership business valuations are necessary or advisable for many purposes like buy-sells, business planning, business succession planning, transfer of ownership interests to family members or managers and litigation. Many are surprised that often for the existing owner(s) dealerships are worth more sold than held. An effective valuation examines many attributes and factors, both positive and negative, before accurately concluding a final value.
Dealerships have important and often unique business attributes. The industry is changing fast and has a direct and immediate relationship to the economy. There are typically numerous available potential buyers willing to pay a premium. There are too many vehicle manufacturers and their individual prospects significantly impact dealership values.
Most dealership businesses and controlling interests are valued based upon the conceptual formula: Dealership Business Value = Dealership Tangible Assets’ Values + Intangible Assets’ (Blue Sky) Values. In today’s dealership buy-sell market it is not uncommon for a dealership to be worth more sold than operated!
However, dealership non-controlling ownership interests are most often valued based on expected future cash flows to the subject ownership interest. Because of this and the limited market for non-controlling ownership interests, non-controlling ownership interest values typically are far below their proportionate value of the business as a whole.
There are literally dozens of factors to research and evaluate when determining the value of dealership tangible and Blue Sky assets. Primary Blue Sky value considerations often include the following:
The Dealership’s Franchises
All other valuation factors being equal franchise values are heavily dependent on the brand. According to Kerrigan Advisors Blue Sky Report current manufacturer franchise relative values are in three summary groups —
- High – Porsche, Lexus, Mercedes, BMW, Audi, Land Rover/ Jaguar, Honda, Toyota and Subaru
- Average – Chevrolet, Ford, Chrysler/Jeep/Dodge, Buick/GMC, Infiniti Acura Cadillac Volvo, Hyundai, Kia
- Low – Mazda, Volkswagen
What dealership business buyers generally demand for a specific manufacturer’s franchise is based on the manufacturer’s brand strength, franchise availability, expected new vehicle sales per franchise, the franchise’s typical dealership profitability and the manufacturer’s financial position and sales outlook.
The Dealership’s Specific Franchise Considerations
A franchise’s fit with its local market impacts its value. The higher the franchise suitability with the local demographic the higher the franchise value. Markets with more competition from like-franchises will have lower franchise values.
The condition of dealership facilities often impacts a franchise’s value. Is the dealership’s facility factory compliant or, will the manufacturer soon require costly significant upgrades? Buyers tend to reduce a franchise’s value by some proportion of expected real estate compliance remedy costs.
The Dealership’s Historical “Normalized” or “Adjusted” Profitability
The dealership’s historical profitability level impacts the Blue Sky amount. Profit levels already achieved impact the Blue Sky value more than the opportunity to improve future profit levels.
A dealership’s Blue Sky value is driven by what appraisers call “normalized” or “adjusted” dealership profits. We adjust historical and forecast profits to consider the financial impacts of above/below market-rate compensation and facility rent, extraordinary/unusual income or expense, owner overrides and packs, dealership originated affiliate entity income/loss (reinsurance entities, management companies, body shops, etc.).
We also consider the impact of outstanding commitments on future profitability such customer retention program benefits (car washes, vehicle maintenance, etc.)
The Dealership’s Potential for Profitability Growth
All other factors being equal, two dealerships with identical historical profitability levels and the same franchise will have substantially different values if their profitability growth expectation is substantially different. Is the dealership’s market area growing? Is there growth available in the market areas’ current manufacturer determined planning potential?
Is the dealership currently underperforming in pre-owned vehicles, service and parts or in the finance and insurance department? How likely is it that the current owner will achieve these operational enhancement opportunities and when? And, how likely is it the current owner will sell the dealership and when?
The Dealership’s Likely Buyers and Resulting Possible Valuation Premium
The number of dealership business potential buyers impacts a business’s value. Like in most industries, the more possible buyers the higher the resulting price. Generally, in the dealership industry, dealerships are highly marketable due to the high number of interested buyers. When this condition exists, successful buyers usually determine their offer prices based on what they expect to achieve for operational profit performance versus the current management’s profit performance.
The result is ample available buyers will cause the sale of the dealership business at a premium price over and above what the dealership is worth currently to the seller. On the flip side, if there is only one likely buyer, why would such buyer pay the willing seller any more than what the dealership is worth to the seller?
Having a competent appraisal prepared by an experienced appraiser is essential for any dealer or dealer group. Many dealers have appraisals prepared on a periodic basis as a matter course to supplement business planning and/or performance monitoring.
Kirk Kleckner is eminently qualified to prepare an accurate valuation of a dealership businesses and has been doing so for many years. As a CPA, MBA and former CFO of a $500 million-dollar dealership group, Mr. Kleckner understands the financial and operational aspects of the automotive dealership business that are critical in assessing business value, planning, prospects, risks, and opportunities.
Call Kirk at 612-294-8730 or go to KirkKleckner.com