Franchise auto dealerships experienced an unusual period of profitability between 2020 and 2023, driven by supply constraints, shifting consumer demand and changing market dynamics. While many operating metrics have since moved closer to historical norms, the industry’s pandemic-era performance continues to influence how dealerships are valued today. The unusually strong earnings generated during that period still raise important questions about normalization adjustments, earnings selection and sustainable performance. The effects of that period continue to influence valuation judgments, particularly when it comes to selecting income streams, normalization adjustments and supportable blue sky multiples.
If one considers 2020 through 2023 to be the “pandemic period” (the pandemic officially ended in May 2023) and contrasts it to what occurred prior to 2020 and after 2023, it becomes apparent that the landscape was ever-evolving and that certain anomalies existed during this period. An analysis of industry data illustrates this extraordinary time.
Using pre-pandemic results as a benchmark, the compound annual growth rate (CAGR) of revenue between 2010 and 2019 averaged approximately 8%, whereas for the years 2020 through 2023, it was about 4%. From 2023 to 2024, the growth rate slowed even further, to around 2%. As a result of slowing revenue growth, dealerships that reported gross revenue of $62.0 million in 2019 reported gross revenue of approximately $72.0 million in 2023 and $74.0 million in 2024. Note that the average inflation rate between 2020 and 2024 was 4.2%, so gross revenue increased at about the rate of inflation.
The average gross profit (sales less cost of goods sold) at dealerships from 2010 through 2019 was around 13% of sales, whereas from 2020 through 2023 it was about 14%, and sometimes greater. The margin increase was driven by dwindling supplies that resulted in supply chain disruptions. The increased margins more than offset the reduction in volume. The average gross profit in 2024 was approximately 12.5%. Margins on vehicles declined as the supply of vehicles returned to “normal.” Given the gross revenue figure of many dealerships, a 1% or 2% increase in gross profit materially impacts the profitability.
The average pretax profit from 2010 through 2019 was around 2 percent of sales, which is generally considered to be close to a long-term average. In contrast, the average pretax profit from 2020 through 2023 typically ranged from 4% to 6% (with outliers on both sides). The average pretax profit in 2024 was around 3% to 4%. Pretax profit increased during the COVID-19 period as gross profit rose and expenses dropped as a percentage of sales. Federal and state assistance programs (e.g., the Paycheck Protection Program [PPP]) added to net profitability.
To summarize, between 2020 and 2024, gross revenue increased at about the rate of inflation. Gross profit and pretax income percentages increased during the same five-year period, while 2024’s operating results more closely aligned with 2019’s results than with the 2020 through 2023 timeframe. In other words, although top-line revenue has increased, the COVID-19 years’ financial metrics are anomalous, and 2024’s current metrics (such as pretax income as a percentage of revenue) more closely resemble 2019’s results.
Appraisers typically refer to the tenets of Revenue Ruling 59-60, which outlines the factors to be considered in valuing an entity. The Revenue Ruling includes a reference to the consideration of economic conditions and facts available at the appraisal date. It goes on to state that “Events of the past that are unlikely to recur in the future should be discounted, since value has a close relationship to future expectancy.” Moreover, it states that if a business is traded in an “erratic market, some other measure of value must be used” and that “the next best measure may be found in the prices at which the stocks of companies engaged in the same or a similar line of business are selling in a free and open market.” Never were these tenets more applicable than during the pandemic.
Performing business valuations during the pandemic required careful consideration of various factors. For example, the condition of the overall economy was difficult to assess and varied over time as the anticipated duration of the pandemic fluctuated. Additionally, economic factors were partially offset by industry-specific factors, such as the increased use of online automobile sales, not to mention the receipt of federal and state assistance (e.g., PPP funds). As the pandemic continued (and the profitability of dealerships increased), the gap in expected value between sellers and buyers grew. In certain instances, sellers sought to capitalize on their newfound profitability, while potential buyers viewed increased profitability as anomalous and were unwilling to consider it in their determination of value. In many cases, buyers used traditional valuation methods, basing their offering price on historical information.
At times, valuation analysts had difficult conversations with potential sellers when their respective business outlooks did not align. The turmoil called into question the methods to use to determine value. Fair market value per Revenue Ruling 59-60 is, “in effect, the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.” The question faced by appraisers and those in the marketplace was determining what constituted “relevant facts.”
A common way that automobile dealerships are valued is by using the blue sky method—a hybrid of the income and asset approaches unique to automobile dealerships. Blue sky (or goodwill) is calculated by multiplying normalized pretax income by the selected blue sky multiple and adding it to the dealership’s normalized equity. Blue sky multiples vary by brand and over time. Common sources of blue sky multiples include the Haig Report and the Kerrigan Advisors Quarterly Blue Sky Report, which are published quarterly. The blue sky multiples are derived from actual transactions and presented as a range that reflects expectations regarding what a buyer in a competitive situation will pay for a dealership’s goodwill. The blue sky method does not calculate the business enterprise value of the subject interest, but rather the goodwill that is added to the company’s equity value on a controlling, marketable basis.
An analysis of blue sky multiples calculated by Haig Partners for the first quarters of years 2019 through 2025 and calculated the mid-point for several key brands. See Table 1. The table reveals several noteworthy trends:
Multiples declined across the board between the first quarter of 2019 and the first quarter of 2020. The luxury brands selected experienced a blue sky reduction of about 10% between 2019 and 2020, while midline imports and domestics experienced reductions of 16% and 21%, respectively.
| Luxury | Q1-2019 | Q1-2020 | Q1-2021 | Q1-2022 | Q1-2023 | Q1-2024 | Q1-2025 |
|---|---|---|---|---|---|---|---|
| Mercedes | 7.50 | 6.75 | 8.25 | 8.25 | 8.25 | 8.00 | 8.00 |
| Lexus | 7.50 | 6.75 | 9.00 | 9.00 | 9.00 | 9.00 | 9.00 |
| BMW | 7.50 | 6.75 | 8.25 | 8.25 | 8.25 | 8.25 | 8.25 |
| Audi | 6.75 | 6.00 | 6.75 | 6.75 | 6.75 | 6.75 | 6.00 |
| Avg | 7.31 | 6.56 | 8.06 | 8.06 | 8.06 | 8.00 | 7.81 |
| Toyota | 6.00 | 5.50 | 6.50 | 7.00 | 7.13 | 7.50 | 7.50 |
| Honda | 6.00 | 5.50 | 6.50 | 6.50 | 6.50 | 6.50 | 6.50 |
| Kia | 3.38 | 2.88 | 3.75 | 4.75 | 5.00 | 5.00 | 5.00 |
| Nissan | 3.38 | 2.00 | 3.50 | 3.75 | 3.75 | 3.50 | 3.50 |
| Mazda | 3.38 | 2.63 | 3.50 | 3.50 | 3.50 | 3.75 | 4.25 |
| VW | 3.50 | 3.00 | 3.50 | 3.50 | 3.50 | 3.50 | 3.50 |
| Avg | 4.27 | 3.58 | 4.54 | 4.83 | 4.90 | 4.96 | 5.04 |
| Ford | 4.00 | 3.00 | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 |
| Chevrolet | 4.00 | 3.25 | 4.00 | 4.00 | 4.00 | 4.00 | 4.25 |
| FCA/Stellantis | 3.75 | 3.25 | 4.00 | 4.00 | 4.00 | 3.50 | 3.50 |
| Buick/GMC | 3.75 | 2.75 | 3.75 | 3.75 | 3.75 | 3.75 | 4.00 |
| Avg | 3.88 | 3.06 | 3.94 | 3.94 | 3.94 | 3.81 | 3.94 |
Source: Haig Partners
Overall, despite the decline in market multiples between the first quarter of 2019 and 2020, blue sky multiples bounced back in 2021 and have not subsequently reverted to their 2020 pandemic levels.
The valuation of dealerships during the pandemic caused valuation analysts to consider factors that, during “normal” times, might not have been scrutinized as carefully. Analysts confronted several challenges in a rapidly changing marketplace. Changes in historic pre-tax earnings percentages during the pandemic period produced corresponding changes in valuations, requiring analysts to carefully consider the “proper” income stream to capitalize, as well as an array of potential normalization adjustments. Results were vastly different depending on whether an analyst used five-year income metrics, a three-year average, the most recent year, or a discounted cash flow analysis. Again, goodwill value was calculated by multiplying the normalized income stream by the selected blue sky multiple. However, while earnings correlations held steady for decades before the COVID-19 period, the pandemic produced historically high — and likely unsustainable — earnings levels. Applying historical blue sky multiples to those temporarily elevated earnings would result in faulty valuation conclusions. Notably, blue sky multiples changed rapidly to capture the heightened risk in the marketplace.
The volatility experienced during the pandemic underscored a fundamental principle of valuation: extraordinary results require careful analysis. For franchise automobile dealerships, temporary shifts in supply, demand and profitability challenged long-standing assumptions about earnings and value, forcing analysts to evaluate what was sustainable and what was not. Although many operating metrics have moved closer to historical norms, the valuation questions raised during that period remain relevant. The experience reinforced the importance of normalization, professional judgment and market-based evidence when assessing value in a changing economic environment.
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