It Could Be a Good Time to Buy Dealerships

First, General Motors eliminated Oldsmobile. Now comes the recent announcement from GM’s Bob Lutz that another line, possibly Buick, could be on the chopping block if sales performance does not improve. Meanwhile, combined manufacturers’ sales projections for 2005 are down. Dealers’ expenses are up. Manufacturers’ programs are down or going away. In general, future profitability looks weak.

But wait – there’s more. States’ attorney generals are challenging finance commissions. They could be capped or eliminated. Interest rates are going up, negatively affecting floor plan rates and causing buyers’ payments to increase. Overall, gross profits may be down and dealers will not be able to boost them via manufacturers’ dealer cash incentive programs.What does all of this mean? It could be a good time to buy a dealership.

Why? Because you don’t buy a dealership based on one year’s projections or performance and many potential sellers who were on the fence have decided to list their dealerships for sale. More stores available for sale gives more opportunity for a buyer to choose the right one and to negotiate the price of a store.

Statistics Demonstrate Increased Value

Consider the following statistics comparing 1970 to 2002.

• Average annual dealership sales have gone from $1.7 million to $26.4 million.
  
• Average dealership net income has increased from $34,000 to $527,000.



• Blue sky (goodwill) average value was $102,000; 32 years later it was $1.844 million.



• Average real estate value has skyrocketed ($169,700 versus $1.848 million).

Inflation aside, those are some impressive gains. During that 30-plus year stretch, there were certainly down years. Overall, though, the dealership business has been pretty healthy.

There is more good news. Yes, sales projections for 2005 are down compared to 2004’s 16.91 million units sold. However, in 1998 total new vehicle sales in the United States were 15.5 million. Sales every year since then has been more than one million to nearly two million higher.

So, buying a dealership, when you consider long-term potential, may make sense in today’s economic climate. With that being the case, we want to provide you with insight into some basic approaches and concepts concerning not only buying a dealership, but also selling one. Here is the first one:

Do not represent yourself in negotiations.

“An expert in dealership valuations and sales or purchasing dealerships can take advantage of those who represent themselves and the dealer will never know it,” said Fred Robbins of Robbins, Kelley, Paterson and Tucker, a Cincinnati, Ohio, law firm specializing in dealership transactions.

To find out more, contact Dan E. James, MBA,CPA at (801) 399-3377. We can help you with formulas, definitions and direction concerning sales and purchase items, including binding elements of a non-binding agreement, parts inventory, used vehicle and new vehicle inventories, and demonstrators.