Dealership Valuation

Yes. Because of various factors such as the perceived reliability of the brand or the luxuriousness of the brand’s vehicles, the profit margin associated with those brands is often higher than the more “run of the mill” vehicles sold. As a result, the nameplate of those vehicles can affect the overall value of the dealership and certain nameplates are inherently more valuable than others.

Yes, “blue sky value” is a consideration, and can often comprise a large component of the entity’s overall value. Blue sky is determined by applying a multiple to the adjusted pre-tax income of the dealership. The dealership’s other assets and liabilities are then added and subtracted from the Blue Sky Value to arrive at the value of the dealership.

Many things can affect value including simple things like product line itself. For example, a consideration can be the launch of a new or “refreshed” vehicle. 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, and suddenly demand surges as “everybody wants one.”  The new and/or improved vehicle may have an updated engine, increased gas mileage, better handling, new technology, a nicer interior, and any other number of items that put it ahead of the predecessor models. All these things can impact the overall value.

Yes, the condition of the facility is a consideration in your dealership valuation. If you had two identical dealerships, except one is up to date in its facility upgrades and the other is not, the dealership that is up to date is likely worth more (everything else being equal) than the other. Facility upgrades, image programs, etc. are only part of the consideration though. If a dealership is being transacted upon, there should be an environmental assessment done as part of the transaction. Legal counsel should be apprised of any potential contamination issues as this could affect the overall deal.

Location is an important consideration in the valuation of a dealership. 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 many more units in more rural areas. In addition, urban areas that may have been underserved in the marketplace can be more valuable because of the untapped market share to be enjoyed. An additional consideration is the number of franchises within the driving radius of a dealership’s location.

Most certainly, the economic performance of a dealership is a factor in the value of a dealership. Economic performance encompasses many different things when it comes to dealerships. It includes such things as; growth, the total number of units sold, the mix of new versus used vehicles sold, service revenue, the gross profit associated with each source of revenue, the rent as a percentage of gross revenue (and the lease terms), administrative and totality of compensation and benefits, interest expense associated with debt, the amount of debt and its relationship to inventory turnover, and a myriad of other factors for consideration.

There may well be value to an assembled workforce. This is important in the valuation process as two dealerships with the same top-line revenue, can report very dissimilar profits. The reason for the disparity can often be explained by 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 the determination of income and need to be considered in the valuation process and those decisions are attributable to the management team in place.

The blue-sky multiple is applied to adjusted pre-tax income.  Common normalization adjustments to the income of the dealership include:

1. LIFO Inventory– Dealerships typically use LIFO to account for vehicle inventory. This method tends to overstate the cost of sales.  Therefore, the LIFO reserve is added to income.
2. Owner’s Compensation– Compensation paid to the owner and their relatives may need to be adjusted to reflect market compensation.
3. Interest– Non-Floorplan interest and excessive floorplan interest are added to income
4. Rent– Typically the dealership owner also owns the real estate that the dealership operates out of. A market rent adjustment is often required to normalize income.
5. Perquisites– Personal expenses paid by the dealership are added to income

That will depend on the reason for the valuation being performed and the applicable standard of value. Common discounts include a discount for lack of control (DLOC) and discounts for lack of marketability (DLOM). As stated, these may be applicable depending on the valuation purpose and subject interest valued.

Yes. Common standards of value include fair market value, fair value and investment value. The chosen standard of value can influence decisions made in the valuation process which in turn will influence the overall conclusion of value. For example, if using the investment value, emphasis may be placed on the assumption that the store being valued is underperforming but can be “turned around” by the potential buyer. A different standard of value could cause a different conclusion of value.