The Ultimate Auto Dealership Valuation Guide
The acquisition of car dealership market is quickly growing in the last 3 years after a dealership and market regression from 2008-2010. If you are in the market to buy a new car dealership, used car dealership or selling one of the biggest factors you are focused on is valuation. The good news is dealership values continue to rise as dealership strength moves upward coupled with a lack of supply.
Dealerships Continue to Provide a Strong Return on Capital
According to Presidio, dealership acquisition provides a superior return to many other investment options. They calculate a roughly 11%-22% yearly return, not factoring in potential appreciation.
Factors Affecting Dealership Valuation
Valuations are by their definition a moving marker, they are fluid in nature and depend on a whole host of factors like location, franchise or used, facility, market, etc. In general a european franchise like Mercedes-Benz or Audi is more highly valued than earnings from a big three domestic dealership Ford, GM or Chrysler. Why is this? European brands tend to earn a more stable revenue stream.
Franchise. The value of a dollar of earnings is dramatically affected by the franchise that is generating those earnings. For example, $1 of earnings generated by either Mercedes-Benz or BMW is more highly valued than $1 of earnings generated from a Big-Three domestic dealership. The dealerships that represent these two German luxury brands generate a higher return on tangible assets and enjoy a more stable earnings stream than their American competitors.
The strongest franchises tend to be the luxury imports, provided the market is large enough and wealthy enough to support a decent level of volume. Next in line are Toyota and Honda.
Dealership groups that represent multiple franchises often trade at a premium because larger volume operations attract larger buyers who enjoy a lower cost of capital. In addition, a buyer can have a strong management team operate several dealerships, not just one.
Dealership size impacts the risk rate. A small store with limited potential may suffer a lower valuation. Conversely, a small store with potential could generate a premium valuation. Hypothetical buyers may pay a premium if they believe they can rapidly increase profits. The preowned market is about 2.5X the size of the new car market, so there will always be opportunities for franchised dealers to grow market share in the preowned segment.
Employees. A strong management team can be the difference between profit and loss. generates pretax profit, as a percentage of sales, equal to 2% or less. According to NADA he average dealership generates net profit of 2.2% before taxes as a percentage of total sales. If a dealership does $20 million in sales, you can estimate that the profit is roughly $440,000.
Costs don’t have to veer off course too badly before losses start. Competition among dealerships is intense.
Location. The attractiveness of a specific location and the costs associated with that location are an important part of the equation. Areas with expanding populations and strong demographics support higher valuations, as do dealerships with highway locations.
A location along a highway with a high traffic count in front of the store is more valuable, as is one in close proximity to other franchised dealers and to major retailers. Also, a location is considered more valuable, per acre, if the parcel of land is large enough to house all departments in a single building, plus a significant amount of storage space for new and used vehicle inventory.
Distance between similar franchise dealers is highly important because, as the distance between dealerships shrinks, the level of competition may increase and profitability may decline. If a dealership is within a dealer row representing many different brands, that row may become a destination location for car buyers and increase customer traffic in the dealerships.
Remember, there are a lot of car dealerships in the country, and they can be benchmarked and compared to each other. The valuation multiples appraisers use will vary depending upon how successful a car dealership is and its potential for future growth. If two car dealerships that represent the same franchise operate within 20 miles of each other, the dealership that generates twice as much profit isn’t necessarily worth twice as much. If the appraiser is valuing the business for an acquisition, the underperforming dealership may have more upside potential. People buy assets based on what they think they can earn versus what the person who currently owns it earns.
It is important to own the land the dealership is on; it provides the ultimate flexibility if a relocation, renovation, or even sale of the property or underlying business is necessary. Investing in improvements on properties the dealer does not own does not make economic sense. Over the long term, properties have proven to increase in value. Next to inventory, real estate is often an auto dealership’s largest asset, and it can have a fairly significant effect on a dealership valuation.
Quality of the facility. Acquisitions and sales of dealerships are subject to factory approval. Buyers look at their total investment. If somebody is selling a car dealership and the facility is in disrepair when they sell it, the factory can require the dealer or buyer to invest, upgrade, and/or expand the facility. The more the dealer is required to invest in the real estate, the less overall value the car dealership has from the seller’s point of view.
Investments in expanding service, to make car repairs more convenient may generate the largest ROI. Manufacturers often want their franchisees to have a consistent look and can be very specific about a facility’s appearance. Upgrades to the showroom and customer waiting areas may not have a high ROI, particularly if the current facilities are clean and modern and the only changes are to make the dealership’s look more consistent with the manufacturer’s request. In contrast, expanding the space for available inventory, adding service capacity, and investing in customer improvements in the service department could provide an ROI, if the current facility’s capacity is constrained.
A dealership that meets all manufacturer requirements is more valuable because there is less un-certainty as to the purchase price and the ability to generate profits. If buyers have to commit to a capital improvement project, they have to purchase the dealership with an estimate of how much that would cost.
Used Car Dealership Valuation Factors
In terms of size, BizMiner reports that in 2011 single-site dealerships with fewer than 25 employees averaged almost $1.7 million in sales, and firms with branch locations averaged $2.6 million in sales. On the other hand, NADA reports that in 2011 the average new car dealership sales realized almost $35 million. Smaller sales generally mean less profits. Used car dealerships are high-risk businesses. From the standpoint of the importance of the key person, the risk rate is higher than a new car dealer.
The total value of any auto dealership is current value tangible net worth plus blue sky, so the main issue is the lack of blue sky value. In most cases, a profitable used car lot’s success can be attributed to the owner. If the owner dies, how much of his customer base will remain? It’s a difficult question to answer, but in most cases the sales volume will deteriorate over time. Someone who buys a successful used car dealership should have concerns about the prospects of prior customers returning and maintaining the sales volume.
The barriers to entry are low, resulting in a competitive, fragmented, and saturated market. Any one can open a used car dealership. One of the biggest barriers is related to zoning requirements, if they exist. New car dealerships, on the other hand, are subject to franchise agreements that limit the number of dealers in a given area.
A used car dealer’s best prospects for an owner is to sell the dealerships to an employee. That employee might be able to keep the track record going. By selling the dealership over time to that employee, the owner has a better chance of obtaining a higher price. Otherwise, the owner is going to have a hard time finding someone who will pay any material amount of blue sky.
General Used Car Dealership Industry Statistics
Retail price: 50% are $5,000 to $10,000
Average price: $8,875 to $10,000
Average monthly inventory: 31.50 autos
Average age of cars sold: 60% 3 to 5 years
Approximately 350 cars sold annually by independent dealers
Dealers: number of independent dealers in U.S.: 37,717
Source: CNW Marketing Research, www.niada.com 2012
Franchise Blue Sky Multiples
BMW/MINI. Highly desirable. Sales increased 13.8% in 2012. Premium products, youthful image, and excellent fixed operations. MINI remains a plus, although facility requirements are increasing. Same multiple range: 5.5x to 7.5x.
Mercedes-Benz. Highly desirable. Sales were up 12.7% in 2012. Most Autohaus facility improvements are completed, and the A Class should bring in younger customers. Slightly higher multiple range: 5.5x to 7.5x.
Lexus. Still in demand thanks to a sales increase of 23% in 2012 from new products and higher post-tsunami inventory levels. Few Lexus stores have sold recently, but the recovery should lead to some sales in 2013. Stable multiple range: 6.0x to 7.0x.
Porsche. Sales increased 20.7% in 2012. New vehicle margins are among the highest in the industry, and Porsche’s plans to add more products should bring additional volume. Stable multiple range: 6.0x to 7.0x.
Audi. Very desirable to buyers. Sales were up 18.5% in 2012. Audi wants to nearly double its volume by 2018. Profits per store are still lower than other premium luxury stores but gaining. Many buyers are looking for these stores. Stable multiple range: 5.5x to 6.5x.
Jaguar/Land Rover. Despite low volumes, the margins are very high on LR products, and fixed ops are strong. Slightly higher multiple range: 3.5x to 4.5x.
Acura/Infiniti/Volvo. Low sales volumes per store and uneven product lines mean profits are often small relative to facility expense. Also lower-priced products from BMW and Mercedes may hurt these brands. Not many buyers are seeking these franchises. Stable multiple range: 3.0x to 4.0x.
Midline Import Blue Sky Multiples
Toyota. Sales increased a remarkable 27.1% in 2012. Buyers see Toyota as one of the most desirable franchises given its business model that leads to high profits per store. Slightly higher multiple range: 5.0x to 6.0x.
Honda. Despite criticism about the 2012 Civic, Honda dealerships sold over 300,000 of them, which helped to maintain buyers’ perceptions that Honda stores are still easy to run and quite profitable. Sales were up 23.7% in 2012. Slightly higher multiple range: 5.0x to 6.0x.
Hyundai. Sales increased 8.9% in 2012, the lowest growth rate in years perhaps due to a lack of capacity. If the used cars and fixed operations departments catch up, these franchises are likely to be much more profitable. Seen as an up-and-coming franchise. Same multiple range: 4.0x to 5.0x.
VW. Sales increased 35.1% in 2012. VW has made a $1 billion investment in its plant in Tennessee and is committing to 800,000 new-unit sales in the next four years-plus, an 83% increase from their 2012 sales. Top 10 buyers purchased seven VW franchises in 2012, more than any other brand. Slightly higher multiple range: 4.0x to 5.0x.
Kia. Sales grew 14.9% in 2012. Although we combined Kia with Hyundai in previous reports, dealers are telling us they have a harder time making money with their Kia stores and are slightly less interested in acquiring more of them. Lower multiple range: 3.5x to 4.5x.
Nissan. Sales were up 8.2% in 2012. Despite its status as a major franchise, few buyers are seeking these franchises. Factory relations can be challenging. Lower multiple range: 3.0x to 4.0x.
Subaru/Mazda. Subaru is a desirable franchise in markets with snow but has struggled in Southern states. Sales increased 26% in 2012. Mazda sales grew by 10.6% in 2012. Few buyers seek these franchises. Same multiple range: 3.0x to 4.0x.
Domestic Blue Sky Values
Ford. Sales grew just 5% in 2012, much slower than the market. While the company is making progress, we were surprised that Top 10 buyers purchased just one Ford store in 2012. Slightly higher multiple range: 3.25x to 4.0x.
Chrysler-Jeep-Dodge-Ram. Another terrific year, with 2012 sales up 20.6%. Fewer stores and hit products are driving a big lift in profits per store. Buyers are interested in these franchises again. Higher multiple range: 3.0x to 4.0x.
GM. Sales increased only 3.7% in 2012, much lower than the market average. Dealers also complain about poor communications with the factory. Lower multiple range: 3.0x to 3.5x.
Rules of Thumb When Valuing a Dealership
- 0% to 10% of annual sales plus inventory.
- 0 to six times SDE plus inventory.
- 0 to five times EBIT.
- 0 to four times EBITDA.
- Depending on the franchise, makes three to six times EBITDA plus real estate and hard assets.
- Blue sky—two to four times EBIT earnings.
- Total transaction value in the industry currently ranges from two to four times pretax earnings.
- Blue sky—two to three times net profit or new unit sales (most recent year) times average front-end gross profit per unit.
- Hard assets at cost—new parts, FF&E—Book + 50% depreciation.
- Blue sky—three times recast earnings.
- The goodwill component of the sale price of an auto dealership (franchised only) normally falls within the range of 2% to 6% of gross revenues. Where added to the assets or book value of the business, this is a reliable method of determining price.
- Goodwill = one to three times pretax earnings (recast). Parts = current returnable parts.
- FF&E = book value + one-half depreciation.
- New vehicles = net dealer cost.
- Used cars = as agreed.
Buying a franchise or used car dealership is a serious undertaking. I hope this guide gave you a basic appreciation for the amount of work that will need to go in to researching, acquiring good data and ultimately valuing a car dealership. I’d highly recommend consulting an industry expert, reading current valuation news and ultimately involving your lawyer and CPA.
Have you sold or purchased a dealership? What was your experience like?