The core of any buy-sell discussion in the automotive retail industry has been “the multiple.” It is talked about regularly in Automotive News and several dealership investment banks like Haig Partners and Kerrigan Advisors who publish quarterly reports. With that being said, typically multiples are likely overemphasized. And in our current environment they’re downright meaningless.
Blue sky multiples are a back-of-the-envelope method for estimating the goodwill/franchise value of any particular dealership. The math is simple: take the blue sky multiple and apply it to the trailing twelve months of earnings. While this might be an oversimplification of all the factors considered, the methodology helps dealers quickly assess acquisition offers and their own net worth. Due to transitory factors like inventory shortages and government stimulus, over the past 18 months dealership profits have been consistently setting new records. Those higher profits should directly result in higher transaction values following the logic that a doubling of earnings would theoretically double the value. In fact, the conversation during negotiations is much more complicated.
2019, 2020, trailing twelve months, average last two years, weighted average last three years – these are just some of the earnings’ bases that are being discussed as options for applying multiples. In an attempt to make the multiples make sense, we have made the multiples inherently worthless. What good is a “multiple” that is applied to an inconsistent base of earnings? If we hear Ford is currently selling for 4-times, the question should be 4-times what?
If you’re pursuing a buy-sell during this time, don’t get too hung up on the multiple being paid. Today’s earnings won’t last forever. Instead, be diligent and analyze what you believe is the future cash flow potential of the dealership.
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