Will Dealership Valuation Multiples Continue to Rise?

What Could Slow Them Down?

by Michael E. Stover, CPA/ABV

In previous blogs, I discussed the factors driving dealership valuation multiples to higher and higher levels. The key items discussed were:

This week, I’ll take a look at the flip side of these dynamics and see what might cause multiples to level out or even possibly decrease.

Expected sales growth

Sales will return to pre-recession levels by 2015, driven partly by improving consumer confidence. This increase will raise the prices paid for dealerships, but it’s the expected rate of increase in sales that drives the valuation multiple. But the improving consumer confidence is still not at previous levels, and the uneven economic recovery could shake it if bad news emerges.

Also, the average double digit percentage growth seen through the recovery is not sustainable in the future. Low single digit growth is unit sales is the consensus of industry experts and analysts.

Reduced real estate risk

The risk in acquiring a dealership’s underlying real estate has become lower as markets have stabilized, with some markets seeing the beginning of a recovery. This has allowed dealership buyers to focus on business performance which has been strong, and has driven multiples higher.

But the other side to the real estate recovery is that other forms of real estate investment have become more attractive. This distraction may pull prospective buyers out of the dealership markets as they seek to invest their capital in alternative real estate options. Fewer buyers leads to lower prices, all things being equal.

Let’s take a look at some other fundamentals of supply and demand that could reduce dealership valuation multiples.

Basic supply and demand principles

Sellers: Lured by high multiples, more dealers may offer their business for sale, thereby increasing supply.

Buyers: Current buyers may exit market, satisfied with their selections and the level of their acquisition spending, thereby lowering demand. This could be somewhat offset by new buyers entering the market.

Higher supply and lower demand leads to lower prices. Given that sales will still increase, but at a lower rate, the price decrease naturally corresponds to lower multiples of earnings.

The major result of these shifts will be that only the very best dealerships will command a high valuation multiple. In fact, it may be that only the very best get purchased at all. To learn more about the key components of dealership valuation, read my previous blog on this topic.

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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