Along the road to building the value of a dealership, it is necessary and appropriate to examine the dealership in a variety of ways. Each provides unique perspective and insight into how a dealer is proceeding along the path to grow the value of the dealership and if/when it may be ready to sell. Most dealers realize the obvious events that may require a formal valuation: potential sale/acquisition, shareholder dispute, death of a shareholder, gift/estate tax transfer of ownership, etc. A formal business valuation can also be very useful to a dealer when examining internal operations.

So, how does a dealer evaluate their dealership? And how can advisers or formal business valuations assist dealers examining their dealership? There are at least six ways and they are important, regardless of the size. All six of these should be contemplated within a formal business valuation.

  1. At a Point in Time.  The balance sheet and the current period (month or quarter) provide one reference point. If that is the only reference point, however, one never has any real perspective on what is happening to the dealership.
  2. Relative to Itself Over Time. Dealerships exhibit trends in performance that can only be discerned and understood if examined over a period of time, often years.
  3. Relative to Peer Group. Many dealers participate in 20 groups. Among other things, the 20 groups can provide statistics that offer a basis for comparing performance relative to other dealerships.
  4. Relative to Budget or Plan. Every dealer of any size should have a budget for the current year. The act of creating a budget forces management to make commitments about expected performance in light of a company’s position at the beginning of a year and its outlook in the context of its local economy, industry and/or the national economy. Setting a budget creates a commitment to achieve, which is critical to achievement. Most financial performance packages compare actual to budget for the current year.
  5. Relative to Your Unique Potential. Every dealer has prospects for “potential performance” if things go right and if management performs. If a dealership has grown at 5% per year in sales and earnings for the last five years, that sounds good on its face. But what if similar locations have been growing at 10% during that period?
  6. Relative to Requirements by Franchise. Increasingly, dealerships are subject to requirements by the franchise including facility enhancements, working capital levels, CSI and SSI ratings, sales volumes, profitability, etc.

Why is it important to evaluate a dealership in these ways? Together, these six ways provide a unique way for dealers and key managers to continuously reassess and adjust their performance to achieve optimal results. A formal business valuation can communicate the dealership’s current position in many of these areas. Successive, frequent business valuations allow dealers and key managers the opportunity to measure and track the performance and value of the dealership or over time against stated goals and objectives.

Originally published in the Value Focus: Auto Dealer Industry Newsletter, Mid-Year 2018.

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