Over the next month, my colleague David Harkins and I will present to three groups regarding auto dealer valuations:  Auto CPA Group, ASA Philadelphia Chapter, and Lane Gorman Trubitt’s Controllers Roundtable. The focus of these presentations will include important considerations in auto dealer valuations, from applicable valuation methods to value drivers in a store valuation to special considerations in litigation/buy-sell matters. This week, we share some highlights from our upcoming presentations.

Traditional Market Approaches

Readers of this blog will be familiar with our thoughts that traditional market approaches are generally not applicable for the valuation of auto dealerships, specifically single rooftop operations. In traditional market approaches, we speak specifically of the guideline publicly traded method and the guideline transactions method. A majority of auto dealership valuations involve single-point (one rooftop) privately held dealerships. A guideline publicly traded market approach involves obtaining multiples from the six publicly traded auto dealer companies and comparing and applying those metrics to the subject dealership. Comparisons under this method are limited, given that the publicly traded auto dealer companies own a large portfolio of stores across many brands and are situated in many states — compared to single point dealers representing one brand in a single location.

Similarly, the guideline transactions methods involve using databases, such as DealStats and CapIQ, that report private transactions of auto dealerships. Limitations of these databases include the size of dealerships involved and the lack of information regarding the number of rooftops and brands. In the auto dealer industry, a market transaction approach is better suited to consider the Blue Sky multiples of the franchises reported quarterly by two investment banking firms in the auto dealer transaction space:  Haig Partners and Kerrigan Advisors.

Can the guideline publicly traded method ever apply to the valuation of a private dealership? The short answer is yes. If the subject auto dealer involves a dealer group that owns multiple rooftops and/or multiple brands in its portfolio, then a consolidated valuation of that subject auto dealer would be more comparable to the publicly traded auto dealer companies. Perhaps the better question to ask of the subject auto dealer is — are there decision makers or a group of decision-makers in addition to the general manager and/or dealer principal? In other words, if the subject auto dealer has a president, board of directors, or strategy team, it could be a worthy candidate for the guideline publicly traded method, which could provide a reasonable indication of value.

Value Driver Shifts

Important value drivers in an auto dealer valuation include brand/franchise, quality of real estate, management/employees, competition, buyer demands and conditions, and recent economic performance, among others. While all continue to be value drivers, shifts in the current conditions of the auto dealer industry have made two of these slightly less important than in recent years.

Real Estate — While most auto dealers are organized with the dealership operations held under one entity and the real estate held under a related entity, the real estate quality has always impacted the value of dealership operations. In prior years, the real estate condition and the dealer’s compliance with OEM signage and brand/image requirements was always a crucial element. As retail sales have shifted to digital or online sales, dealers have fewer consumers on their physical lots to purchase a vehicle. With this shift in consumer behavior, the importance of real estate has taken a slightly lesser role in dealership value. Perhaps a bigger shift in real estate is the electronic vehicle (EV) requirements dictated by the individual franchise. Dealers that opted into various levels of EV sales have to make substantial capital investments in EV infrastructure, including chargers and service bays.

Employees/Management — This value driver has also diminished slightly in its importance in auto dealer valuations. Key positions such as General Manager and department heads (New Vehicle, Used Vehicle, Fixed Operations) will continue to be vital to an auto dealership’s success. The shift to digital/online retail now requires auto dealers to have fewer salespeople physically present at the dealership. Low CSI scores may help a buyer at the negotiating table, but acquirers are more focused on what they think they can produce at the store rather than the historical performance of employees pursuing different operational and sales playbooks.

Buy/Sell Litigation

In this industry, it’s very common for an owner to incentivize a general manager or key employee by offering ownership through an employment and buy/sell agreement.  Often, we are brought in on the back end of these transactions after the general manager or key employee is terminated. Litigation typically results when disagreements occur over the dealership and subject interest value when terms of the buy-sell are either never formalized or ambiguous. Some helpful tips to potentially avoid litigation on the back end of these transactions are as follows:

1. Draft formal buy-sell agreements that state key items such as standards of value, triggering events, and valuation methods and timing. Standards of value refer generally to fair market value vs. fair value. For simplicity, we refer to fair market value as the value considering applicable discounts for lack of control and marketability and fair value as the value without considering any discounts, also known as pro rata value.
2. Consistency in buy-in and buy-out transactions. Our recommendation for these events is to apply the same level or standard of value. In other words, if the general manager buys in at fair market value, they should be bought out at fair market value or fair value and fair value. We often see complications and ambiguity when no standard of value is formalized, or there is confusion between the standard of value or introduction of book value.
3. Involve a valuation professional on the buy-in. To avoid potential pitfalls on the back end of these transactions, involve a qualified valuation professional on the front end to establish the dealership’s value and subject interest at buy-in, as well as the distinctions between the standards of value.
4. Consider the importance of a quality general manager. A general manager can greatly influence a dealership’s success, profitability, and value. If a successor general manager candidate isn’t viable from the family ownership group or outside, dealers may consider the potential impact or decrease in value to the dealership if a successful general manager is not appointed.
5. Range of Values for Negotiations. In disagreements on the buy-out or back-end of these transactions, it can be helpful to ask your valuation professional to provide a range of values based upon either the fair market value or fair value standards. In those cases where the standard of value wasn’t formally defined in the beginning, the range of values can assist the dealer in negotiations by understanding the differences in indicated values from these standards of value.

 Conclusions

At Mercer Capital, we provide valuations of auto dealerships for a variety of purposes. Additionally, we monitor and cover the industry on a weekly basis. That analysis, along with our experience on projects, gives us insights into auto dealership valuations and shifts that occur in value drivers, valuation methods, and buy-sell considerations. We look forward to sharing more on these topics at our upcoming events.

If you have an auto dealership valuation need, please contact a professional on the Mercer Capital Auto Dealer team.