Auto Dealer Valuation Insights

A weekly update on issues important to the Auto Dealer industry

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Valuation Issues


Blue Sky Special Topics

One Dealer Is Not Like the Other

Independent Dealers Industry Segment Highlight

In August 2022, we wrote a blog about the Powersports dealer segment of the auto industry, comparing and contrasting it to the franchised dealers that we spend most of our time writing about.  This week, we highlight another segment of the auto dealer market: independent dealers. Read more about how independent dealers have specific nuances and factors that cause a greater impact to their success and profitability.

What Is the Income Approach and How Is It Utilized for Auto Dealer Valuations?

A thoughtful business valuation of an auto dealership will likely rely on multiple approaches to derive an indication of value. While each approach should be considered, the approach(es) ultimately relied upon will depend on the unique facts and circumstances of the dealership and its operating conditions. This week’s post presents a broad overview of the income approach, one of the three approaches considered in all business valuations. This analysis is incredibly important for auto dealerships to understand due to the expected future cash flows of most dealerships being the primary driver of value.

Electric Vehicles Litigation Special Topics

2024 NADC Conference Key Takeaways

We’re back from the National Association of Dealer Counsel (“NADC”) annual member conference in Napa, California. The conference took place from Sunday, April 14th, to Tuesday, April 16th, and conference attendees included attorneys, auto dealer principals, in-house counsel, and vendors/service providers like us. It was great to see familiar faces, meet new people, and hear how several auto groups are faring in the current environment.

In this post, we provide a brief list of key takeaways from a few of the sessions we attended. We believe the topics covered are especially important for auto dealer counsel and their clients to watch throughout the remainder of the year and beyond.

Special Topics

An Estate Planning Primer

Why Auto Dealers Need to Start Thinking About Estate Planning Again

As the auto industry navigates the aftermath of record performance and faces a looming estate tax exemption cliff at the end of 2025, auto dealers are encouraged to revisit their estate planning strategies. The Tax Cuts and Jobs Act significantly raised the estate tax exemption limit, but with some of its provisions set to expire, many dealers who previously didn’t need to worry about estate planning may now be affected. Given the current political climate and the uncertainty surrounding future legislation, it’s advisable for auto dealers to act sooner rather than later to avoid missed opportunities and ensure the legacy of their family-owned dealerships.

Understanding the Asset Approach

What Is It and How Is It Used for Auto Dealer Valuations?

In an insightful exploration of the asset approach to business valuation, particularly within the auto dealership sector, the post delves into the nuanced process of adjusting dealership financial statements to reflect true market value. It emphasizes the importance of properly evaluating tangible and intangible assets, from inventory and real estate to non-operating assets like goodwill, to arrive at a dealership’s tangible net asset value. This comprehensive guide not only outlines the methodology for making these critical adjustments but also discusses the implications of the Blue Sky valuation method, offering auto dealers a clear pathway to understanding their business’s market value.

Dealership Working Capital

A Cautionary Tale Against Rigid Comparisons

Understanding the intricacies of business valuation, particularly for auto dealerships, involves a comprehensive examination of balance sheets, income statements, and normalization adjustments. We explore the significance of tangible and non-operating assets, the nuances of working capital, and the critical nature of management insights in assessing a dealership’s true value. A case study highlights the multifaceted approach required, underscoring the importance of expert analysis in navigating the complex terrain of financial assessments and valuations.

Do You Know How Much Your Dealership Is Worth?

Whitepaper: Understand the Value of Your Auto Dealership

If you’ve never had your auto dealership valued, chances are that one day you will. The circumstances giving rise to this valuation might be voluntary (such as a planned buyout of a retiring partner) or involuntary (such as a death, divorce, or partner dispute). When events like these occur, the topic of your auto dealership’s valuation can quickly shift from an afterthought to something of great consequence.

Driving Value: Key Components of an Auto Dealership Valuation

The value of an auto dealership is shaped by several factors, similar to how certain components make sports games iconic over time. Some of these value drivers, such as franchise affiliation and real estate conditions, can be influenced by the dealer, while others, like economic performance and location, are largely external. Just as sports fans revel in the nostalgic moments of iconic games, auto dealers can enhance their dealership’s value by understanding these drivers, focusing on what’s within their control, and adapting to external market conditions.

Special Topics

Tax Planning for Auto Dealerships

Why Auto Dealers Might Not Pay “Market” Rent

In business valuation, appraisers seek to normalize historical earnings to establish the level of earnings an investor might reasonably expect from an investment in the subject company. These adjustments may increase or decrease earnings, and they can be for a variety of reasons. Normalization adjustments include surveying various expense categories and determining whether the amount historically paid is considered “market rate.”

Rent paid to a related party is frequently judged to be above or below market, which can be for a variety of reasons. Dealers’ priorities lie more with sales and operating efficiency than tracking what the market says they should pay in rent. The rent paid also may be artificially high or low for tax purposes. In this post, we examine what exactly this means, and why auto dealers may hold real estate in a separate but related entity from the one that owns the dealership operations.

6 Events That Warrant a Business Valuation of an Auto Dealership

Understanding the value of an auto dealership is crucial during significant life events, strategic planning, or potential sale. This piece offers a comprehensive look at various scenarios that might necessitate a business valuation, such as estate planning, death of a dealer principal, and buy/sell agreements. Get to know how regular valuations can help track your dealership’s value over time, enhancing strategic decisions, and preparing for potential offers or disputes.

Blue Sky Mergers, Acquisitions, & Divestitures

What Is the Value of My Auto Dealership?

It Depends on Who's Buying

Wondering what your auto dealership is worth? This post gives practical illustrations of how buyers might determine the premiums or discounts they are willing to pay for your dealership. Discover the unique facets that shape the value of your auto dealership through the lens of three distinct buyer types: strategic, financial, and minority interest. Understand the dynamics influencing your dealership’s value and arm yourself with knowledge for future negotiations.

Special Topics

Plan for the Unexpected

Succession Planning for Auto Dealers

The 2023 NCAA College Basketball Tournament began last week. Many of us have been checking our brackets obsessively.  There’s a reason it’s called March Madness.  Who would have predicted that Fairleigh Dickinson would upset Purdue or that Princeton would upset Arizona and advance to the Sweet 16? The tournament and its bracket challenges are full of possibilities but are also a source of frustration, given the unexpected twists and turns. In certain ways, succession planning for auto dealers mirrors the journey through the tournament. Just as the thought of a #16 seed beating a #1 seed wasn’t on our radars before 2018 (when #16 University of Maryland-Baltimore County beat #1 Virginia 74-54 on March 16, 2018), thoughts of a global pandemic or an inventory crisis caused by a microchip shortage weren’t expected either. The lesson to be learned: Plan for the unexpected.

In this post, we discuss some of the key factors to be considered in the succession planning process and why they are critical. 

Special Topics Used Vehicles

2022 Auto Dealer Industry Metrics Review

Has Profitability Peaked?

As we turn the calendar to March, 2022 is in the rearview mirror, and year-end statistics for the auto industry have been released. How did the industry perform, and what do the metrics tell us about the direction of the industry in 2023? In this post, we discuss the key metrics we track for the industry: new vehicle profitability, the supply of new vehicles, average trade-in equity values of used vehicles, the used-to-new vehicle retail unit sales ratio, fleet sales, and vehicle miles traveled. 

LOV(E): Why Getting the Level of Value Right Is So Important to Auto Dealers

Part II

In this two-part series, we continue our exploration of the “Levels of Value.” The Levels of Value refer to the idea that while “price” and “value” may be synonymous, they don’t quite mean the same thing. A nonmarketable minority interest level of value is very different from a strategic control interest level of value. Last week we described each Level of Value and why the concept is so important to auto dealers.

This week, we discuss four potential transactions in which selecting the appropriate level of value is critical and explain why: 1) estate planning, 2) corporate development, 3) divestitures, and 4) shareholder redemptions.

LOV(E): What Are the “Levels of Value” and Why Does It Matter to Auto Dealers?

Part I

In the spirit of Valentine’s Day, we cover a topic that may seem too theoretical; however, the shareholders in your business must understand it – LOV – or the “Levels of Value.” The Levels of Value refers to the idea that while “price” and “value” may be synonymous, they don’t quite mean the same thing. A nonmarketable minority interest level of value is very different from a strategic control interest level of value. In this week’s post, we explain what each level means and how each specifically relates to auto dealers. This will be the first part of a two-part blog series.

Blue Sky

Six Things to Consider When Working with a Business Appraiser

We’ve turned the page on 2022, another year defined by challenges, record profitability and elevated valuations for auto dealers.  As we enter 2023, there will likely be unique challenges and opportunities for auto dealers regarding business valuations. We will dedicate future posts to the discussion of these opportunities from the perspective of succession planning in an environment with sunsetting tax exemptions and depressed asset values, especially if interest rates continue to rise and profitability subsides in 2023.

We previously discussed six events that could trigger the need for a business valuation. In this week’s post, we discuss six things that attorneys and auto dealers should consider when selecting or working with a business appraiser.

Special Topics

Market Insights on Auto Dealer M&A Activity

A few weeks ago, I sat down with Kevin Nill of Haig Partners to discuss the current state of the M&A market and other timely trends in the auto dealer industry.  Specifically, we discussed some of the movements in Blue Sky multiples for various franchises and interpret the range of multiples that Haig Partners recently published with the release of their Second Quarter 2022 Haig Report.  

Blue Sky Special Topics

Powersports: Alternative Growth Opportunity for Auto Dealers

Auto dealers have experienced heightened profitability over the last two years. For dealers with excess cash from continued profits or remaining PPP funds, have you thought about the powersports industry? As one auto dealer client recently recounted to us, “if you have the skills and experience in selling high volumes of automobiles to consumers, then you have the necessary skills to also succeed in the powersports industry.” In this post, we explain what the powersports industry is and how big it is, as well as highlight similarities and differences to the traditional auto dealer industry for those interested in possibly entering this industry.

Auto Dealerships

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