Dealerships can be valued using several approaches, including the income, market and asset approaches. Within each approach, various methods and assumptions may be considered. A dealership valuation typically includes tangible assets such as cash, inventory and equipment, as well as goodwill, more commonly known as “blue sky” associated with the dealership. This FAQ explores the financial, operational and market factors that can affect a dealership’s blue-sky value and overall valuation.
Yes, blue sky value is a consideration and can often comprise a large component of a dealership’s overall value. Blue sky is determined by applying a multiple to the adjusted pre-tax income of the dealership. The blue sky value is added to the dealership’s net asset value to arrive at the value of the dealership.
Yes. The blue sky multiples are specific to the nameplate. The blue sky multiples factor things such as the brand tier, perceived reliability, manufacturer relations, profit margins, market share, etc. As a result, the vehicles’ nameplate affects the dealership’s overall value, and certain nameplates are more valuable than others.
Many factors can affect value, including the product line itself. For example, the launch of a new or “refreshed” vehicle can be considered. It is not uncommon for product lines to receive a refresh every few years. When that happens, the updated or new model can receive acclaim causing an increase in demand. The vehicle may have an updated engine, increased gas mileage, better handling, new technology, a nicer interior or other features that put it ahead of predecessor models. All these factors can impact the dealership’s overall value.
Location is an important consideration in dealership valuation. For example, certain luxury nameplates may sell more units in more affluent urban areas, whereas a nameplate selling largely pickup trucks and four-wheel drive sports utility vehicles may sell more units in rural areas. In addition, urban areas that may have been underserved in the marketplace can be more valuable because of the untapped market share. The number of competing franchises within the dealership’s market area is another consideration.
Yes, the condition of the facility is a consideration in a dealership valuation. If two dealerships are identical except one is up to date on facility upgrades and the other is not, the dealership that is up to date is likely worth more, all else being equal. Facility upgrades, image programs and other facility considerations are not the only part of the analysis. If a dealership is being transacted upon, an environmental assessment should be done as part of the transaction. Legal counsel should be informed of any potential contamination issues, as these could affect the overall deal.
Economic performance is an important factor in a dealership’s value and encompasses several financial and operational considerations, including:
These and other factors can influence the overall value of a dealership. The value of a dealership can be boiled down to its overall profitability, which is driven by a multitude of factors including margins from automobile sales and fixed operations, and expense containment, some of which are beyond the control of the dealership such as interest expense.
An assembled workforce can be an important consideration in a dealership valuation.
Two dealerships with the same top-line revenue can report significantly different profits. The disparity can often be explained by differences in the quality of the management team. The structuring of salesperson compensation, the speed at which service is performed, the inventory turnover and the prompt paydown of floor-plan debt are all vital in determining income. These factors must be considered in the valuation process, because many of those related decisions are attributable to the management team.
The blue-sky multiple is applied to adjusted pre-tax income. Common normalization adjustments to the income of the dealership include:
Common standards of value include fair market value, fair value and investment value. The standard of value is often determined based on the reason for the valuation. Fair value may be applicable in disputed matters, whereas fair market value is applicable for estate and gifting purposes. Finally, investment value, may be used for transactional purposes, when the entity being valued is underperforming but can be “turned around” by the potential buyer. As a result, different standards of value can lead to different conclusions of value.
The applicability of valuation discounts depends on the purpose of the valuation and the applicable standard of value. Common discounts include a discount for lack of control (DLOC) and discounts for lack of marketability (DLOM). These discounts may apply depending on the valuation purpose and the ownership interest being valued.
Withum’s Dealership Services Team works closely with the Valuation Services Team to provide industry-specific insight throughout the valuation process. Our professionals hold a range of valuation, accounting and financial credentials and have experience with regional market conditions, tax considerations and auto dealership regulations. Contact our team to learn more about dealership valuation services.
For more information on this topic, please contact a member of our team.
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