NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
After long sleepless nights and days of indecision, walking around and talking to myself, weighing all the pros and cons, I have finally made up my mind to sell my dealership!
Now what? How do I find a Buyer? How do I qualify a Buyer? Should I tell my employees? Should I tell the factory? How much are my fixed assets worth? How much is my goodwill (blue sky) worth? How do I decide on an asking price? Can I get all cash? How much will I have to give the government? What do I do with my receivables and payables? Should I sell assets or stock? How do I get factory approval? Should I sell the real property or lease it? How long will the sale take? Who do I call for help? Should I call my attorney? Should I call my accountant? Should I try and sell it myself? Should I call a broker?
Selling a dealership has become a complicated and intricate transaction, and a Seller should proceed carefully through the maze. The following article is designed to provide you with a framework with which to undertake this journey, to direct your attention to matters about which you should think.
First, you need to analyze yourself and your business. How many of the above questions can you answer honestly? How well do you understand your financial statements? How much do you know about taxes? Are you on L.I.F.O.? Do you know the tax consequences of L.I.F.O. upon sale? Do you know the fair market value of your furniture, fixtures and equipment? Do you know the value of your real property and improvements, even if you are leasing? Is your rent at a reasonable rate? How long do you have control of the real property.?
If you have sold or purchased a dealership within the past five years you may be more informed than most. However, if you do not feel comfortable that you have the answers to the above questions, then you should consider obtaining help in areas obtaining in which you do not feel completely qualified.
A few of the steps necessary to bring your dealership to a smooth and successful sale include the following:
FIXED ASSET VALUE:
If you are not sure of the value of the fixed assets of the dealership, then you should obtain an appraisal from a knowledgeable “fixed asset appraiser” who specializes in automobile dealerships. The fixed assets include all mechanical and service equipment, parts and accessory equipment, furniture, fixtures, office equipment, phone systems, computer equipment, special tools, signs and any other tangible personal property utilized in the operation of the business.
REAL PROPERTY & IMPROVEMENT VALUE:
If you own the real property and improvements, it is always a good idea to obtain an M.A.I. appraisal to establish the value of the real property. The appraisal is useful to obtain a reasonable lease value of the dealership even if you have decided not to sell the real property and improvements. The appraiser should have extensive experience in appraising automobile dealerships within your general area.
Meet with your accountant and review your financial statements. Verify the accuracy of all of the assets, liabilities and net worth of the business as shown on the most recent Balance Sheet. Make sure your parts and accessory inventories do not include any obsolete or unsaleable merchandise. Also review your used vehicle inventory to confirm the values arc realistic. Also, make sure the most recent Profit & Loss Statement and the Profit & Loss Statements for at least the past three years are accurate.
VALUING INTANGIBLE ASSETS:
Depending on who you talk to, there are many ways and formulas to arrive at the “intangible asset” value of the dealership including discounted cash flows, excess earnings capitalization, price earnings ratios, and dividend paying capacity. Unfortunately, valuation formulas commonly used in valuing other businesses do not work very well in valuing new car dealerships because the formulas do not take into account factors vitally important to a dealership such as its type of franchises, current and forthcoming product, length of the lease term including options, capitalization improvements that might be necessary for a new owner or tenant to make as well as a variety of other considerations that simply cannot be put into a formula. Additionally, many of the formulas commonly used in valuing businesses were geared to large Wall Street acquisitions and tend to overvalue a smaller business like a dealership.
What many people outside the industry do not understand is that automobile sales activity greatly depends on what is popular in any given year. Franchises that sell long-popular vehicles bring higher sales prices than franchises that sell less popular vehicles. For example, a Mercedes-Benz, BMW, Ford, Toyota or Honda franchise will bring a higher sale price than less consistent performing franchises. This is true even if all other aspects of the business, including pretax net profits, are exactly the same.
Notwithstanding the importance of these factors, the first step to be taken in calculating the intangible value of the dealership is to determine the dealership’s “adjusted pretax net profit” which adjusts the last year-end Profit and Loss Statement to a realistic profit or loss, by taking into account several possible adjustments. Such adjustments may include: factoring in a reasonable dealer salary eliminating LIFO adjustments; adjusting for rent increases or decreases to bring the rent to current market value (unless you are leasing from an unrelated third party); and otherwise making those adjustments necessary to show the “actual pretax net profits” of the dealership. The number arrived at should be a pretax net profit amount that a buyer with good management skills and popular model vehicles can reasonably expect to realize on an annual basis for the foreseeable future.
Once you have calculated the “adjusted pretax net profits” of the dealership, you will then have a base on which to estimate the “intangible asset value” of your dealership. This is usually accomplished by applying a multiplier to the “adjusted pretax net profits.” Unfortunately, the correct multiplier for any given new car franchise may change from year-to-year, and therefore it is important to know the current market value (multiplier) of each franchise in order to arrive at the current market value of the “intangible asset value” of any dealership! Multipliers usually range from 1.25 times to 3 times the annual “adjusted pretax net profits” of the prior year. If there are multiple franchises, the most desirable franchise’s multiplier is used.
It should further be noted that every single dealership is unique, with its own set of special circumstances. It is important to make proper adjustments to the sale price, either up or down, based on those particular circumstances. For example, an adjustment should be made if the last year’s net profits were exceptionally low due to the owner’s bad health, dishonest employees, extraordinary expenses, etc. Or perhaps the dealership is just ending a twenty-five year lease and rent is going to double in the future. These and a variety of other circumstances have to be taken into account. Assuming that you have properly accounted for all of the variables, you can then arrive at the estimated “intangible asset value” of the dealership by multiplying the “adjusted pretax net profits” by the multiplier of the most desirable franchise, as mentioned above.
What about a dealership that is either marginally profitable or showing losses? If losses are due to circumstances that are impossible or very difficult for a new buyer to correct, then the Seller is going to be fortunate to sell his dealership for just the “hard asset value.” In other words, the Seller cannot expect to receive any compensation for the “intangible asset” value. This is especially true if the dealership does not have a “stand alone” franchise. A “stand alone” franchise is a franchise strong enough to support the costs of the dealership and generate a reasonable net profit. Just a few examples of dealership problems that may not be impossible but which are very difficult for a Buyer to correct are:
a. A long term lease that is far above current market rates requiring personal guarantees.
b. A facility that is too old to have much useful life left and does not present itself well.
c. Any factory requirement that would require a substantial investment by the new Buyer.
d. A dealership that is in a high crime area or located in an undesirable area for customers.
e. A dealership that does not have space to grow and no additional space is available.
f. Contamination problems that would be costly and disruptive for the business to remediate.
g. Multiple leases that fragment the dealership and do not have concurrent lease periods.
However, some dealerships showing losses or that are marginally profitable may still command a value in excess of the “hard asset” value. These dealerships would need to have a very desirable franchise, or combination of franchises, and problems that can be reasonably corrected by a new buyer who possesses good management skills and proper capitalization. Examples of these types of problems facing dealerships are as follows:
a. The dealership that has not been properly managed (from the Buyer’s perspective).
b. The dealership is undercapitalized.
c. The owner has been ill and has not been able to run the dealership properly.
d. There are expenses that only pertain to the seller and would not impact a new Buyer.
Any owner who intends to sell a dealership that is marginally profitable or is showing losses should consult with someone who knows the current market place, franchise values, and can properly evaluate all of the factors necessary to determine the value of the business.
As you can see, selling a dealership is a very complex transaction. It is not possible to address everything that needs to be considered in a single article. Because each dealership is unique, it is impossible to give a “cookie cutter” approach to valuing any particular dealership. However, the above information does apply to all dealerships and would be necessary under any type of sale, including a sale of assets or a sale of stock.
Unfortunately, because of tax considerations, environmental regulations, legal matters, knowing the current market place for selling and properly evaluating a dealership, it is not an easy matter for any one person, including the owner, attorney, accountant or broker, to be able to accomplish a sale by themselves. My best advice would be to obtain the skills of those advisors who have a proven track record in the automobile dealership field in their particular area of expertise. Unless you know them well, ask for references. Successful dealership sales completed with the fewest problems tend to be joint efforts involving the owner, his attorney, accountant and broker all working together with a common goal for the benefit of the owner.
This article was written in 1996.