In the wake of the COVID-19 pandemic, automotive dealerships have experienced a significant surge in buy-sell activity, which has fueled many opportunities for dealership owners. While publicly traded dealerships have taken a step back from new acquisitions, privately held counterparts are harnessing the strength of their robust balance sheets to expand their footprint.
According to the Q4 2022 Haig Report released this past March, 566 dealerships were acquired in 2022 — the second-highest number after 2021 — with most of those being private buyer purchases. However, the most recent release of the Q1 2023 Haig Report highlights the controversy between buyers and sellers on purchase prices. This dynamic landscape is bringing up an important question for dealership owners: “What is the true value of my business?” Let’s dive into the pivotal factors that shape the assessment of your dealership’s worth so you, as an owner, can better understand your valuation and drive toward your dealership’s future success.
Here’s What You’ll Learn in this Article:
- Importance of a normalized earnings base for accurate dealership valuation
- Factors that influence the “blue sky” multiple and its role in determining dealership value
- Understanding and calculating the goodwill value of your dealership
- Advantages of seeking outside expertise for identifying key dealership strengths
Establishing a Normalized Earnings Base
When determining the value of your dealership, one of the first steps for dealer owners is to establish a normalized pre-tax earnings base. This process involves examining your dealership’s financials to identify the expenses that may fluctuate if another dealer were to purchase your establishment. While this task can be particularly challenging, even for experienced operators who are well-versed in the industry, it is an essential component of accurately valuing your dealership.
As a dealership owner, you understand the intricate workings of the automotive industry like the back of your hand. However, when it comes to establishing a normalized pre-tax earnings base, there are unique challenges that even seasoned owners may encounter. Identifying the expenses that could change under new ownership requires a meticulous examination of your dealership’s financial records.
One way to overcome these challenges is by seeking the perspective of an outside appraiser who specializes in dealership valuation, such as Apple Growth Partners. By leveraging the specialized understanding of the auto dealership industry, our team can provide specific and tailored insights you may have overlooked, ensuring a comprehensive evaluation of your dealership’s earning potential.
Experienced appraisers in the auto dealership industry possess specialized knowledge and can provide specific insights based on their expertise, including:
- Identifying expenses that may change under new ownership;
- Overcoming the challenges faced by an unconscious bias of seasoned dealer owners in establishing a normalized pre-tax earnings base;
- The value of seeking assistance from an outside appraiser for specialized insights
Determining the Proper “Blue Sky” Multiple
The next focus owners in the industry face when determining the valuation of their dealership is determining the proper “blue sky” multiple in valuing their business. Ultimately, the “blue sky” value of a dealership represents the value above and beyond the physical assets of a dealership.
Multiples are a crucial benchmark to look at when assessing the worth of your dealership and can be found in quarterly reports published by organizations like Kerrigan Advisors and the Haig Group. However, multiples can vary significantly based on several key factors. “Blue sky” multiples can range anywhere from 2x to 10x based on the OEM franchise and nameplate sold. Even within the same nameplate, there is a range of values based on a range of factors. Let’s look at some of the important ones.
Buyer Demand
Understanding the current market and the buying behaviors of your customer base will be essential to determine the current valuation of a dealership. In addition, recognizing and capitalizing on buyer demand is necessary for driving the value of a business. Aligning offerings with the desires and trends of potential customers can significantly impact the multiple assigned to a particular dealership.
Questions to ask:
- Is your car dealership in a high-growth area?
- Does your OEM nameplate have a positive reputation?
- Does your model lineup align with consumer spending for your local market?
Property Status
Another influential factor in your auto dealership’s valuation is your physical location’s status. Compliance with OEM nameplate image requirements can boost your dealership’s value in the marketplace. Aspects such as EV charging stations, car washes, and clean and well-lit customer waiting areas can position dealerships for increased value. Including such elements can positively impact the “blue sky” multiple assigned to a business.
Questions to ask:
- Are you compliant with OEM guidelines, ensuring that your operations meet the standards set by the OEMs?
- Have you invested in electric vehicle charging infrastructure?
- Is your rent expense in-line with industry norms?
- Is your website image aligned with what customers see walking in?
Customer Relations and Reputation
Establishing strong customer satisfaction is vital to building a loyal customer base and a positive reputation. Potential buyers consider these factors when evaluating a business’s value. A robust customer base and a stellar reputation contribute to a higher “blue sky” multiple, highlighting the significance of prioritizing customer relations.
Questions to ask:
- Do you consistently receive high customer satisfaction ratings?
- Is your dealership’s online reputation a testament to positive customer experiences?
- How active is your dealership and staff in the local community?
- Do your employees greet every customer in a positive and pleasant way?
Dealership Culture and Employee Engagement
The culture within a dealership is another aspect to consider when valuing your dealership. A strong and positive workplace culture can play a role when it comes to valuation. Creating an environment where employees feel valued and motivated can positively impact a dealership’s value and can even decrease areas of spending. Self-fulfilled and energized staff can go a long way in driving happy customers.
Questions to ask:
- Is your team composed of experienced, tenured staff members who contribute to low turnover rates?
- Is there a sense of optimism and camaraderie among your employees?
- Do they feel valued as integral members of the team?
- Do your employees treat each other with professional respect?
Calculating the Goodwill Value
Now that you have determined the normalized pre-tax earnings base (A) and the appropriate blue sky multiple (B), you can calculate the goodwill value of your dealership using the formula:
C represents the goodwill value of your dealership. AKA, the additional value over and above the net asset value of your physical assets, including cash, investments, equipment, inventory, and other holdings, after subtracting any liabilities.
While the blue-sky value may not determine the final selling price of your dealership, it serves as a valuable guide for helping automotive dealers optimize a dealership’s setup and profit margins for a successful future and, more importantly, a solid indicator of its worth.
The Importance of Outside Expertise
As knowledgeable operators in the auto dealership industry know and understand, assessing the value of a dealership requires a nuanced consideration of various factors. Seeking outside expertise to help evaluate a dealership, whether for a purchase a sale, or continued succession planning can help an owner gain a competitive edge.
In the fast-paced and ever-evolving auto dealership industry, it can be challenging to identify and leverage your dealership’s unique strengths and advantages at any given moment in the market. Seeking outside expertise allows you to tap into a wealth of specialized knowledge that can help you uncover hidden potential.
Consultants can also objectively analyze your operations, processes, and strategies, providing unbiased feedback and recommendations for improvement. This unbiased viewpoint is invaluable in identifying blind spots and areas that may require attention, ultimately leading to enhanced performance and profitability.
Expert automotive industry consultants like ours at Apple Growth Partners have a unique perspective of being able to dig deep into industry nuances, trends, and best practices, so we can identify areas where your dealership can differentiate itself and excel. We keep an eye on the latest trends that help you stay ahead of the curve without taking time away from your business.
In a rapidly changing industry, having access to external expertise to develop tailored strategies for success will position your dealership to maintain a competitive edge in the market and drive sustainable growth.
At Apple Growth Partners, we are here to help you with all your accounting and financial deal-related matters. Contact us today and let us guide you toward making the best decision you can for your business.
For further information or support related to business transactions in the auto dealership industry, please contact Bethany Lawrence at blawrence@applegrowth.com.