Will Dealerships Become Less Valuable if Tax Rates Rise?
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%.
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 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.
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?
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.
In this post, we review Haig’s Q2 report on trends in auto retail and their impact on dealership values. We’ll also look at how Blue Sky multiples have rebounded after declines in Q1. While most brands saw a partial recovery, a return to pre-COVID multiples was largely reserved for brands with the highest multiples in their category (luxury, mid-line import, and domestic).