by Michael E. Stover, CPA/ABV
After the industry’s near-death experience in 2008 and 2009, with the bankruptcy of Chrysler and General Motors and the precipitous drop in units sold from 17 million to near 10 million, dealership valuations dropped significantly. But valuations have rebounded sharply, and may be at an all time high.
What’s causing this rise in valuations and how does it impact your dealership? Simply put, it is supply and demand. The industry has roared back with a vengeance. From 2000 to 2005, the number of vehicles sold in the U.S. ranged from 15 to 17 million. That dropped to 13 million in 2008 and nearly to 10 million in 2009. Sales started to rebound in 2011 and have grown to a record 17.4 units in 2015. That’s six years in a row of increased sales, which ties the record. And the forecast for 2016 is for another record breaking year. The rate of growth has slowed but the market remains robust.
Not only are industry unit sales at a record level, but unit sales per store are higher than ever, following the closure and consolidation of so many dealerships during the recession. Furthermore, dealership net profits are on the rise. During the recession, dealerships saw their net profit before tax shrink to 1.5%, and then to 1.0%. Average dealership profitability has now returned to over 2%.
So what is the value of your greatest asset, your dealership? That depends. You must consider a number of factors when valuing a dealership. The following aspects are the more important ones.
The franchise—or brand—is often the single largest factor. For example, brands such as Chrysler, Volvo, and Mazda are at the low end of the price range while BMW, Lexus, and Mercedes are at the high end. Geography is also important because customer demographics vary by location. Almost every manufacturer looks to upgrade dealership image, so the condition of your facility might either contribute, or seriously detract from, the value of your dealership.
A proven history of high earnings gives a buyer more comfort concerning the future sustainability of those earnings. Don’t expect to be rewarded with a high valuation multiple if your dealership hasn’t proven that it can deliver the desired return on investment.
Finally, as in sports, the talent of your team will also contribute to the value of your dealership.
A dealership with a superb team, a great facility in a good location, and consistent delivery of high earnings will command the highest purchase price premium.
How do valuation experts assess your dealership’s value? We start with the numbers. We look in detail—and by department—at the sales, expenses, and resulting profitability. The trend in financial results also comes into play. Then we examine the potential return to a prospective buyer and the current rate of return demanded in the marketplace.
However, we can’t perform this type of an analysis in a vacuum. We need to consider the market. Recent sales of comparable dealerships provide a wealth of information. Using our analysis of the returns and the market, we can then consider the factors discussed above that add or subtract from the estimated value.
Like snowflakes, every dealership is different. Understand the keys to dealership valuation, and you can proactively increase the value of your dealership. Our Dealership Advisors Team is ready to use their extensive dealership valuation experience to help you understand the value of your dealership.
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.