What's your dealership worth? Guidelines to setting a price

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.

When you consider selling your dealership, the first question that arises is, what’s it worth?

While the marketplace itself ultimately provides the answer to that question, you can obtain a strong sense of what the total price should be by valuing the various assets of the business. The purpose of this article is to provide you with a few guidelines about assessing the value of the various assets of your dealership in an asset sale (versus the sale of stock in the dealership corporation):

1. Fixed Assets: Look at your factory statement to see what your original acquisition costs are and also your current book value. Then add equipment that may have been expensed such as factory tools or leased equipment. The seller will naturally want to sell near original acquisition cost and the buyer will want to buy at book value. If this price difference (spread) can not be resolved, a qualified automotive appraiser is retained to appraise the assets. Usually the appraiser’s numbers (fair market value) will be somewhere between original acquisition cost and book value.

2. New Vehicle Inventory: Typically, the inventory is sold at invoice less holdback. Adjustments are normally made for demonstrators with excess of 3,000 miles and for non-current model cars. Occasionally the advertising charge on the invoice plus any factory credits or rebates can be an issue. The selling dealer needs to realize that if he has collected, or will be collecting, the holdback on the vehicles in inventory, upon escrow closing he will have to pay the full invoice amount (flooring) yet not receive the full invoice amount from the buyer.

3. Used Vehicle Inventory: This is usually the quickest to resolve. The seller’s used car manager and the buyer’s used car manager walk the lot. What they can’t agree upon is wholesaled or left on the lot for 30 days on consignment for the buyer to sell and then wholesaled by the seller. The seller needs to examine his used car inventory in advance to see if he will be faced with some losses upon liquidation.

4. Parts and Accessories Inventory: A physical inventory is normally taken by an outside automotive parts inventory service. Care should be taken in reviewing the packing slips for a proper cut off and some sample test counts should be made of the physical to double check the accuracy. Before taking the inventory you should determine how the inventory will account for the following situations:

a. Part number is current but the box is damaged (can not be returned).

b. An old parts number that has been superseded but the superseded parts number is in the current parts catalog.

c. Obsolete parts. Attention should be given to what is considered an “obsolete part.” Outside of the true obsolete part, a part will not be on the obsolescence report if it has sold once in the past twelve months. Therefore, if a particular part number has twelve items in inventory and you sold three in the past year (4 year supply), thought should be given to what to do if the part cannot be returned.

5. Work in Process and Sublet Repairs: Check with your business manager for the accuracy of these amounts on your factory statement. On the date of escrow closing or month end, a list of WIP and sublet repairs in progress will be prepared and verified by the seller and buyer. The seller should make a very strong effort to close all repair orders especially body shop repair orders so he (seller) can retain the profit on these repair orders.

6. Miscellaneous Inventory & Shop Supplies: Again a list is prepared of the gas, oil and grease inventory and any other inventory items not included in the parts inventory. As far as the body shop, a list of unopened cans of paint, solvent (open and unopened), sandpaper & steel wool (open and unopened) should be compiled. With current mixing machines, opened cans of paint normally do not have value.

7. Various Security Deposits and Proration of Expenses: Review your prepaid expense account and security deposit account on your statement. Verify the accuracy of your statement and make sure the statement includes all items, including items that may not have been set up on your factory statement. Also list various expenses paid during the month or quarter etc., that have a economic benefit to the buyer.

8. Goodwill and Covenant not to Compete: This number varies depending on franchise, location of the dealership and past profit of the dealership. You, the dealer, probably have a figure in mind but market conditions will ultimately decide the price. Contact an experienced automotive attorney/CPA that can assist in calculating a goodwill/covenant price.

Now that you have a general idea of what to expect and what you may receive on the sale of your assets, you’re probably wondering how much money you will retain.

Since this example is a asset sale, you still retain ownership of your corporation. The proceeds will go to your corporation (items 1-8 above). This will naturally increase your cash position. You’ll keep collecting your various receivables (vehicle a/r, parts & service receivable, contracts in transit), then pay your various liabilities (AP, loans). What’s left over in the bank accounts is yours before income taxes.

Lastly and most importantly, you must then consider your income tax consequences from the sale. You need to contact your tax adviser since your tax liability will depend on a variety of issues such as the type of your entity (C corp, S corp, LLC), LIFO inventory, etc.

Some of the above can be performed by your business manager but most likely your CPA will be required. Some non accounting/tax issues will also need to be resolved such as possession of service records and car deals, tax clearances letters, telephone numbers and the dealership name. Also, at the start of the selling process, an experienced automotive attorney needs to be retained for the drafting of the buy sell agreement and various legal issues.

In summary, the above items are not an all inclusive list but do cover the major items. Complete the worksheet included with this article to give you an approximate value of your dealership before payment of liabilities and income taxes.

This article was written in 1996.