The Importance of Accurate Dealership Valuations

Throughout the life of any business, having a proper valuation is important for several reasons, but many dealerships, especially legacy family businesses that have been in business “forever,” have not gotten a valuation done in years.

There are many companies out there that can do business valuations, but dealerships are different, notably due the fact that the auto industry is franchise-driven. Different brands use different multiples of earnings levels. Plus, dealership valuations have separate terms and rules, which is why hiring a firm that specializes in the auto industry is vital to getting an accurate valuation of your auto dealership.

But first, let’s go through some basics, so you can talk to any firm with confidence.

What is a dealership valuation?

A dealership valuation is an accurate picture of what the dealership is worth.

EBITDA (earnings before interest, taxes, and depreciation) is heard often when speaking about a business valuation. When it comes to auto dealerships, this number is extremely important. Blue Sky value is calculated using multiples of pre-tax earnings -- EBITDA. While dealership revenues do fluctuate from year-to-year, especially in 2020, a down year versus a loss still has a positive value based on the pre-tax earnings.

A vast majority of properly developed auto dealership appraisals must be calculated by using only one method, Blue Sky plus normalized pre-tax net worth, also known as the “Hybrid Income Approach.” Other methods come into play in very rare cases. 

Hybrid Income

Earnings must be normalized in order to properly compute Blue Sky. The normalizing process computes add-backs and adjustments to income based on certain key income and expense levels. These are rent expenses as compared to an acceptable ROI at current property value and dealer salary costs as compared to brand benchmarks. In addition, non-recurring and personal expenses as well as undeclared income like used car packs must be considered. These add-backs and adjustments to income will normalize the reported profit of the dealership. These facts must be known and integrated into the valuation process to produce the valid value of the dealership. This is why hiring an auto industry expert to do your valuation is so important. A typical business appraiser would not understand these intricacies. 

Asset-Based

Simply put, an asset-based approach is based on total assets minus total liabilities. Those assets and liabilities can be both tangible and intangible items. Tangible assets hold great value to the dealership owner because it is a sort of physical security blanket if things were to go south for the dealership. This appraisal method is only used when a dealership is about to close its doors, which puts the franchise in jeopardy, or when the franchise has no or very little Blue Sky value.

Comparison

In the auto industry, new vehicle dealerships are franchised. Comparing what a same brand store sold for with regard to Blue Sky value and/or Blue Sky expressed as a multiple of EBITDA. Accurate sales data is extremely hard to find. The only sources would be the buyers and sellers, but they are not typically willing to disclose such confidential information. On occasion when they do, it has proven to be inaccurate in many cases. OEMs see the buy-sells as part of a buyers’ application, but they rarely know the true Blue Sky value in the transaction because of reallocation of a portion of the Blue Sky to FF&E and real estate, for instance. The comparison information is used only as a double-check on local Blue Sky vales but cannot be considered reliable whatsoever. 

In any appraisal, local demographics, regional and national economic trends  and same brand/other brand competition play important roles in the valuation process. Need we say more? This is why you need to use a professional, experienced, auto industry valuation expert!

So why do you need an accurate dealership valuation?

There are many benefits to having an up-to-date, accurate valuation, but there are a few that are most important.

• It confirms that you have the right amount of insurance for your business.
  While insurance is not everyone’s favorite topic, it is an extremely important one. As a business owner, every dollar counts, and over-paying for insurance based on a bad appraisal hurts your bottom line. Not having enough insurance could leave you high-and-dry in the event of an emergency. As stated above, a general business valuation doesn’t cut it. Taking control of determining the correct amount of insurance is an important responsibility.  Do not rely on your insurance company. A dealership valuation from an auto industry expert, offers you the comfort of knowing that you have the most accurate business value.
• It helps you understand the status of your business.
  Aside from keeping an accurate valuation on file for insurance purposes, an accurate dealership valuation helps the dealer principal gain a deeper understanding of the current state of his or her dealership. Knowing where your dealership stands will help with important business decisions such as expanding your brand by buying another dealership, doing upgrades on your current dealership, or maybe even deciding to sell. The valuation will help reinforce if now is the right time to make a move or if it is not.
• It’s an important step in succession planning.
  When you’re ready to start planning for your succession, you must have a very accurate dealership valuation no matter what route you take. If you plan to pass down your dealership to family, the monetary worth of the dealership should be included in both the official paperwork and in personal considerations surrounding your decision. If you’re setting up an Employee Stock Ownership Plan (ESOP), you need an accurate valuation to determine the price or worth of each share. If selling is your long-term plan, whether to family or a third party, obtaining a valuation now will give you an idea of how you can live your life after the sale, helping your plan for the future.

Whether you think you are ready to expand, you are not sure of your dealership’s condition, or you are ready to exit the business, it is extremely important to have an accurate, up-to-date valuation at your fingertips. 

GW Marketing Services is THE recognized expert in auto dealership valuation. With more than 40 years in business and the completion of hundreds of appraisals, our valuation approach has been proven time and time again.