What do these trends have in common? They're combining to change the landscape when it comes to calculating auto dealership valuations. Let's find out why.
Domestic automakers, notably Ford and General Motors, are facing shrinking market shares and the attendant financial woes that result. Buyers of dealerships have taken notice and most aren't willing to wager that those businesses will improve.
The result has been a significant decline in the earnings multiples being paid for domestic dealerships. (These multiples are used to determine “Blue Sky,” the intangible assets of a dealership otherwise known as goodwill.) Some dealerships are reported to have changed hands with no Blue Sky at all. However, import and luxury car dealerships (Lexus and Mercedes-Benz, for example) are commanding high valuations.
Meanwhile, that Blue Sky multiple-of-earnings method is no longer the sole benchmark in determining dealership valuations.
Not by a long shot. Increasingly, buyers are looking at the true earnings potential of a dealership, and the associated return on investment.
Entering into the calculations are factors such as the dealership's location, sales territory demographics, market share and management expertise, as well as average vehicle days' supply (a lower supply means higher profits). And increasingly, the potential value of a dealership's real estate is considered part of the deal, rather than a separate transaction.
Additionally, courts more frequently are requiring that valuations of businesses – including dealerships – be based on relevant comparisons to the company and its industry instead of broad averages across a variety of industries.
This is especially true when valuing and discounting minority ownership interests.
Minority interests are generally discounted because they lack control and are discounted again because they lack a ready market (marketability discount). Depending on the brand mix of the dealership and other factors, a steeper than average marketability discount may be justified.
Dealership valuations may be necessary or advisable for any one of a number of reasons: consideration of selling or buying, estate planning, partner buy-in or buy-out, disputes among multiple owners, divorce, or bankruptcy, to name a few.
Whichever side of the table you’re on – as buyer or seller – be sure you know and understand how dealership valuation trends are changing, and don’t be caught leaving money on the table.