A weekly update on issues important to the Auto Dealer industry
We are pleased to release our latest edition of VALUE FOCUS: AUTO DEALER INDUSTRY NEWSLETTER. The newsletter features a commentary on industry data from year-end 2020. Additionally, this edition includes two timely articles: “The Seven Factors of a Highly Effective Buy-Sell Agreement for Auto Dealerships” and “The Chip Shortage Is Making It Feel Like 2020 Again.” Download this latest issue.
Most transactions involving auto dealerships are structured as asset sales, so dealer principals may take this mindset when considering a business valuation. Generally, the assets acquired by a buyer include new vehicles, used vehicles, parts, fixed assets, and the blue sky or intangible value of the franchise. However, the inventory (predominantly new and used vehicles) is typically financed 100% through short-term lines of credit referred to as floor plan. If the largest portion of current assets are offset with corresponding short-term debt and other working capital items such as cash are not involved in a dealership transaction, a dealer might wonder why does working capital matter?
In the early stages of the Biden administration, much of the tax-related discussion surrounding the auto industry has been related to credits for electric vehicle manufacturing and investment in EV infrastructure. In this post, we discuss the valuation implications for auto dealers of the proposed increase in the federal corporate tax rate from 21% to 28%.
After a tumultuous February due to weather conditions, March SAAR has bounced back with a vengeance. March SAAR of 17.75 million units is the second-highest of all time for the month, just shy of March 2000. There are two main factors driving this increase. While the winter storms had a negative impact on February SAAR, it likely caused pent-up demand that helped drive sales in March. Beyond simple delays, flooding forced some to replace damaged vehicles. Secondly, the Biden administration passed a Covid-19 stimulus bill at the beginning of March, and $1,400 paychecks hit many Americans’ wallets. This influx of cash may have also spurred a massive increase in vehicle sales.
The relationship between rent and fair market value of the real estate has an impact on the components of an auto dealer acquisition. While the impacts may be opposite and felt on both sides of the two entities, the impact on the real estate can have a greater effect given lower capitalization rates and/or higher capitalization factors than most implied blue sky multiples. We provide a discussion of the topic with an example in this post.
In this post, we present recent Blue Sky multiples along with the reporting of profitability moving from the last 12 months to the last 3 years. According to Haig Partners, buyers have historically focused on adjusted profits from the last 12 months, which has been viewed as the best indication of expectations for the next year. Throughout most of 2020, Haig’s reported Blue Sky multiples were applied to 2019 earnings as these were viewed as the best indication of a dealership’s “run rate” prior to any COVID impact. When profitability improved and uncertainty began to decline around June 2020, multiples applied on these 2019 earnings rebounded. Now into 2021, Haig reports that buyers are using a three-year average of adjusted profits from 2018 through 2020 as the best prediction of future profits.
Auto dealers, like most business owners, are focused on many aspects of their business: daily operations, strategic vision, competition, industry conditions, the state of the economy, etc. It is less common for auto dealers to be concerned if/when their business might need to be valued. Often, they are made aware of the need for these services by their trusted advisors including attorneys, financial planners, accountants, etc.
What are common events that trigger the need for a valuation for an auto dealership?
As we previewed in our January SAAR blog, February SAAR (a measure of Light-Weight Vehicle Sales: Auto and Light Trucks) declined as expected to 15.7 million from 16.6 million the previous month. This is a decline of 6.6% from the same period last year. In this post, we discuss the factors that contributed to this decline and expectations for March.
As we do every quarter, we provide themes from the Q4 earnings calls as discussed by the major players in the auto industry. These trends give insight to the market that may exist for a private dealership which informs our valuation engagements.
January 2021 SAAR (a measure of Light-Weight Vehicle Sales: Auto and Light Trucks) increased to 16.6 million from 16.2 million in December. Though this is a decline of 1.4% from the same period last year, this is the highest that SAAR has been since the pandemic began. Light truck sales were behind this growth, as they captured 77.8% of all new vehicles sold in the past month. Despite January’s peak, two significant events could hinder February’s outcome.
