Auto Dealer Valuation Insights

A weekly update on issues important to the Auto Dealer industry

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Auto Dealer Valuation Insights


COVID-19 Coverage SAAR Special Topics

March 2021 SAAR

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.

Blue Sky Mergers, Acquisitions, & Divestitures

Analyzing the Relationship of Rent and Real Estate Values in Dealership Acquisitions

The Opposite, Break-Even or Something In-Between?

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.

Blue Sky COVID-19 Coverage Mergers, Acquisitions, & Divestitures

What’s in a Multiple?

Blue Sky Multiples Improved in 2020 After a Rocky Start, and Buyers Weigh Multiple Years of Earnings

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.

Valuation Issues

Six Events That Trigger the Need for a Valuation

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?

SAAR

February 2021 SAAR

Several Factors Put Pressure on February SAAR, Contributing to a 5.4% Decline from January

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.

COVID-19 Coverage Public Auto Dealers

Q4 2020 Earnings Calls

Sales Return Quicker than SG&A Expenses, But Inventories Continue to Lag Amid Chip Shortages

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.

SAAR

January 2021 SAAR

SAAR Hit Highest Levels Since the Pandemic Began, but Several Factors Could Hinder February’s Growth Prospects

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.

Public Auto Dealers

Public Auto Dealer Profiles: Lithia Motors

This post is the first of a series where we profile the six public new vehicle dealerships; our goal is to provide a reference point for private dealers. Dealers may benefit in benchmarking to public players, particularly those that are significantly larger with numerous rooftops. Smaller or single point franchises will find better peers in the average information reported by NADA in their dealership financial profiles. Public auto dealers also provide insight as to how the market prices their earnings. This week, we start with Lithia Motors (LAD).

Special Topics

Changing Advertising Trends for Sunday’s Big Game

How the Auto Industry Is Spending Advertising Dollars

So it’s the week of the big game. What are you most looking forward to?  The game?  The food – appetizers and snacks?  The halftime show? Or maybe the commercials?  Inevitably, all of us probably have this same list of things in some particular order.  The festivities will probably look entirely different this year with smaller gatherings and pandemic protocols affecting travel and public viewing at restaurants and sports bars.  But what will this year’s commercial line up look like and will the auto industry participate? Will this year serve to be an aberration or is it a reflection of advertising changes impacting the auto industry and auto dealerships?

Special Topics

Headwinds and Tailwinds for Auto Dealers

Your Flight Itinerary for 2021

If you’ve ever been on a flight, you know that the pilot and plane itself can only do so much in determining how quickly you get to your destination. A key factor is which way the wind is blowing. If the pilot announces that there are headwinds, you can expect your flight time to be on the longer side. The opposite is true with tailwinds, and you can expect to arrive at your destination more quickly under these circumstances.

Similarly for auto dealers, sometimes it doesn’t matter what the dealership’s management is like or how good the dealership itself is, as certain headwinds and tailwinds can make it harder or easier to achieve its goals. In this post, we have considered some headwinds and tailwinds heading into 2021.

SAAR

December 2020 SAAR

2021 Predictions for Auto Dealers

Heading into 2021, we’re going to make some SAAR predictions. Although they may or may not prove true in 2021, we believe this exercise is beneficial for auto dealers who should be looking forward to what the year might bring and prepare themselves should these trends materialize.

Blue Sky Valuation Issues

Valuation Considerations for Auto Dealership Entities with Multiple Franchises

The valuation of an auto dealership can be a challenging and complicated process.  The structure of most auto dealerships consists of an entity holding the actual dealership operations and a separate entity owning the real estate and building.  Often the latter is a related party entity that charges the dealership rent for use of the land and building.  Occasionally, the real estate and the dealership operations are contained in the same entity.

We are all used to the local dealership in our town: Bill Jones Honda, Steve Smith Chevrolet.  But what about the larger auto groups that have multiple franchises organized in the same entity?  How are they valued and what special valuation considerations apply to them?

Special Topics

2021 New Year’s Resolutions for Auto Dealers

At the start of a new year, many people, including myself, try to establish resolutions to get the year started off on the right foot.  This is especially prevalent this year with most people welcoming 2021 with open arms after the disaster of a year that was 2020.  When considering the auto industry in 2020 and predictions for 2021, making some “resolutions” for your dealership to prepare for the year ahead could prove to be helpful. With that being said, here are a few common “New Year’s Resolutions” that can be applied to your auto dealership.

Blue Sky COVID-19 Coverage Mergers, Acquisitions, & Divestitures

Weather Report for Auto Dealers

Q3 Climate for Blue Sky Multiples, Transaction Activity, and Other Trends

In the last few weeks, Haig Partners and Kerrigan Advisors have released their Third Quarter Blue Sky Reports and J.D. Power just released its U.S. Sales Satisfaction Index.  We find these reports to be timely and informative of not only where the auto dealer industry is today, but where it is headed.  Through observing all of these different sources, we can achieve a well-rounded understanding of the climate surrounding the auto dealership industry. In this post, we look at a few of the trends and key takeaways discussed in these reports.

SAAR

November 2020 SAAR

SAAR Declined to 15.6 million, Primarily Driven by a Decline in the Number of Selling Days for the Month

After steady increases, SAAR (a measure of Light-Weight Vehicle Sales: Auto and Light Trucks) experienced its first notable decline since April, dropping to 15.6 million from 16.3 million in October. November 2020 is off of the same period in 2019 by 8.4%, and through 11 months of the year, new light-vehicle sales are down 16.7% compared to the same period last year. The calendar differences are important to note for this month with November 2020 only having 23 selling days relative to 26 days in November 2019.

Valuation Issues

Measuring Up: Evaluating Your Auto Dealership Against Benchmark Metrics

In a strange year of oddities, 2020 has all of us constantly evaluating life’s basic truths. Market conditions vary drastically across all industries and even geographically within the same industry due to local government restrictions.  It’s critical for auto dealers to continually analyze all aspects of their business and be ready to capitalize on industry trends.  We previously discussed the use of the NADA dealership profiles as a useful tool to examine timely monthly data based on averages or dealership type.  Three specific metrics in the data have reached their highest level since the data was originally published in 2012: new vehicle retail gross profit per unit, used vehicle retail gross profit per unit, and used-to-new vehicle unit ratio.

Valuation Issues

Valuation Assumptions Influence Auto Dealer Valuation Conclusions

How to Understand the Reasonableness of Individual Assumptions and Conclusions

There are several life events (large and small) that require an owner of an auto dealership to seek a business valuation.  Often the owner of the dealership and their advisors may only view a handful of business valuations during their careers.  It is not unusual for the valuation conclusions of appraisers to differ significantly, with one significantly lower or higher than the other.

What is an owner or their advisor to think when significantly different valuation conclusions are present?  The answer to the reasonableness of the conclusion lies in the reasonableness of the appraiser’s assumptions. However, valuation is more than “proving” that each and every assumption is reasonable.  Valuation also involves proving the overall reasonableness of an appraiser’s conclusion.

SAAR

October 2020 SAAR

October lightweight vehicle sales had their second month in a row above 16 million, coming in at an annualized rate of 16.2 million for the month. Though this is down 0.6% from September SAAR of 16.3 units, it is still a positive sign for the industry that sales have shown notable improvement since the start of the pandemic.

COVID-19 Coverage Public Auto Dealers

Q3 2020 Earnings Calls

Low Supply and SG&A Reductions Lead to Record Earnings

As we do every quarter, we take a look at some of the earnings commentary from major players in the industry. These trends give insight into the market that may exist for a private dealership.

Mergers, Acquisitions, & Divestitures Special Topics Valuation Issues

GM and Nikola Partnership: What Went Wrong and Where Does it Stand?

A new trend has emerged as auto manufacturers are seeking out start-ups for their technology in a mutually beneficial relationship, perhaps best exemplified by GM and Nikola’s plan for a partnership. In this post, we look at the original deal, ensuing issues, and current plans. We will also look at what this trend could mean for dealerships going forward, and the importance of the valuation date.

Valuation Issues

Analyzing Sources of Peer Information for Auto Dealers 

Data Drill Down

In our quarterly newsletters, we use various data sources to keep tabs on the auto dealer industry. This includes items like SAAR to gauge the health and activity of the industry in terms of volumes. In this post, we discuss other metrics that help us analyze the dealerships we’re engaged to value.

Special Topics

How Each Presidential Candidate’s Policies Would Impact the Auto Industry

Tale of the Tape

With the election just two weeks away, we think it’s timely to discuss the candidates’ platforms and determine the impact of their differing policies.  Each candidate’s platform contains positions on many issues – some that would directly impact the automotive industry, and others that would indirectly impact the industry.  A vote for one doesn’t necessarily signal a vote for the automotive industry or vice versa.  While we don’t intend for this blog post to be political, we will examine each candidate’s position on four issues and discuss their impact on the automotive industry: trade policy, taxes, energy, and the environment.

Auto Dealerships

Mercer Capital provides business valuation and financial advisory services to companies throughout the nation in the auto dealer industry.