Additional Factors Affect Rise in Dealership Valuation Multiples

Part 2 of 3: What’s Driving the Increase?

by Michael E. Stover, CPA/ABV

Last week, I discussed how Vehicle Sales and Expected Sales Growth are affecting the rise in dealership valuations. This week, I’ll discuss two additional factors that have contributed to the phenomenon.

Reduced Real Estate Risk

Sales level and future sales growth are not the only factors at play in determining how much a buyer will pay for a dealership relative to current earnings. A potential buyer must assess not only the business results, but the assets of the business as well. Aside from inventory, one of the largest assets of a dealership is its real estate.

Real estate investments in general have begun to recover from the recession, which resulted in an oversupply of available commercial and residential properties. Developers and builders practically ceased new work in some markets, allowing market equilibrium to slowly return. This approaching market balance has stabilized pricing, and therefore reduced risk, in many metropolitan markets. To the extent that a given real estate market has recovered, some risk has been removed and the real estate can be more accurately valued. This in turn allows dealership purchasers to base more of their offers on the business side of the dealership, which as we have discussed has grown quite nicely in the last few years.

Basic Supply and Demand Principles

All of the factors previously discussed have attracted more buyers to the market. Of special interest is the increased acquisition activity of International public companies. The 2012 purchases by this group were higher than in any of the previous eight years, and the 2012 figure has already been topped in the first half of 2013. This has tipped the balance to sellers, especially those who line up well against the criteria discussed in a previous blog.

But as more transactions occur, this dynamic may shift. What factors might cause buyers to leave the market, or at least temper their optimism and therefore lower the multiples they are willing to pay? Look for my thoughts on these issues in next week’s issue of Dealership News.

The Brady Ware Dealership Services team and the value of your dealership

Like snowflakes, every dealership is different. Understand the keys to dealership valuation, and you can proactively increase the value of your dealership. Our Dealership Services Team is ready to use their extensive dealership valuation experience to help you understand the value of your dealership.

For more detailed information on dealership valuation, or to determine the value of your dealership, contact Michael Stover at mstover@bradyware.com or 800-893-4283.

Mike’s Accredited in Business Valuation (ABV) credential denotes specialized training and access to resources that allow him to go beyond the core service of reaching a conclusion of value. He also creates value for dealership clients through the strategic application of his valuation analysis.


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