The valuation of auto dealerships can be very challenging and complex. This week we discuss a recent Appellate Court decision, released from a case (Thomas A. Buckley v. Grover C. Carlock, Jr. et.al.) that we were directly involved in back in 2019. The case centered around a shareholder oppression issue involving a minority owner of an “ultra-high-line” auto dealership. Mercer Capital was hired by the Defendant to serve as the expert witness.
Sorting Through the Madness
What is succession planning? Succession planning is the transfer of value or leadership in a company or organization. For auto dealers, the dealership can represent a lifetime of efforts and relationships with key employees and customers.
This post discusses some of the key factors involved in the succession planning process and why they are so critical.
How Can the Conclusion of Value for the Same Auto Dealership Be Different?
“Price” and “value” are terms that are often used interchangeably but their meaning may not be synonymous in the context of a private business, or in this case an auto dealership. In this post, we examine the differences between “price” and “value.”
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.
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.
A Look at the Importance and Stability of Fixed Operations
While fixed operations may not be grabbing any of the current headlines, auto dealers should remain focused on their importance and stability to the overall success and profitability of a dealership. In this blog post, we analyze the recent historical contribution of fixed operations to overall dealership metrics, analyze several key indicators of future performance, and explore several myths and the changing landscape of the service department and customer relationship.
How Inventory Shortages and Electric Vehicles May Shape the Future of Automotive Retail
Just as December is a good time to look back and reflect, January is a good time to look forward, to 2022 and beyond. When we value auto dealerships, we look back at performance in prior years because this helps to inform reasonable expectations for future performance. Prior to the pandemic, the directly preceding twelve months of performance may have been a reasonable proxy for ongoing expectations. However, throughout 2020 and 2021, discussions about when things will return to “normal” or whether we’re in the “new normal” have taken center stage.
In order to look forward, we must also consider the past, or as Shakespeare’s Antonio would say, “What is past is prologue.” In this post, we look at two key trends in 2021 (inventory shortages and electric vehicles/direct selling) and how they may inform how automotive retailing will look in the future.
Q3 earnings calls across the group of public auto dealers began with similar themes from the prior two quarters: record profits and earnings, record Gross Profits Per Unit (GPU) on new and used vehicles, and tightening inventory conditions. In addition to those themes, we also discuss M&A, inflation, and other areas of profitability for the public auto dealers.
What It Means for Ford, Other OEMs, and Auto Dealers
Rivian Automotive has been in the news a lot recently given its eye-popping IPO. Ford has invested in Rivian and until recently was planning to jointly develop an EV. In this week’s post, we feature a recently published piece from our Family Business Director blog about Ford’s decision to invest in Rivian from Ford’s perspective.
In last week’s blog, we wrote about attending some of the Tennessee Automotive Association meetings and explored the buy/sell considerations discussed there.
This week, we discuss another highlighted topic: the federal legislation that NADA is prioritizing and how that legislation could impact your dealership’s operations.
Benjamin Franklin famously said that the only things certain in this life are death and taxes. While both may be certain, taxes are always subject to change.
In this post, we focus on four particular proposals from the Build Back Better Act that impact estate planning and business valuations for auto dealers: 1) Estate Tax / Lifetime Exclusion; 2) Corporate Income Tax Rates; 3) Capital Gains Rates; and 4) Valuation Discounts for Passive Assets.
Public Auto Dealers Weigh Record Profits, Days’ Supply, and Capital Allocation
Second quarter earnings calls across the group of public auto dealers began with similar themes: record profits and earnings, record Gross Profits Per Unit (GPU) on new and used vehicles, and tightening inventory conditions. This week we take a deeper dive into some of those themes including remarks from management, related to expectations moving forward.
What Are Key Statistics Saying?
As we enter into the second half of 2021, first half statistics are being released and second quarter earnings calls are on the horizon for the public auto companies. We’ve all read the headlines of the auto dealer industry in 2021: heightened profitability, historic gross profits per unit and soaring retail sales prices for new and used vehicles, and inventory shortages and challenges caused by plant shutdowns and the microchip shortage. What are some of the key industry statistics saying about the current and future health of the auto dealer industry? Have they peaked, are they continuing to increase or beginning to decline, and/or how long will the current conditions hold? In this post we attempt to answer these questions.
Pros and Cons of Using Formula Clauses in Buy-Sell Agreements
A formula clause explains how a business will be valued, usually as part of a buy-sell agreement, employment agreement, transfer of interests under certain circumstances, or other agreement entered between owners of a company. In this post, we explain formula clauses, when they are used, why they are used, and why we ultimately recommend they not be used.
In this whitepaper, we break down the value drivers of a dealership, discuss when you might need a formal valuation, introduce the valuation methodologies used by professional business appraisers, and go into some depth about topics such as dealer financial statements and normalizing adjustments to the balance sheet and income statement.
Full Speed Ahead or Partly Cloudy?
A few weeks ago, I sat down with Kevin Nill of Haig Partners to discuss trends in the auto dealer industry and the release of their Fourth Quarter 2020 Haig Report. Specifically, I wanted to focus on the unique conditions impacting the industry, and also the changing methodology that buyers are utilizing to assess dealership values. Haig Partners is a leading investment banking firm that focuses on buy/sell transactions in the auto dealer industry, along with other transportation segments. As readers in this space are familiar, Haig Partners also publishes Blue Sky multiples for various auto manufacturers based on their observations and data from participating in transactions in this industry.
Improved Profitability, Online Tools and Market Share, and High Valuations
Stimulus supported demand for vehicles and significant chip-related supply disruptions have improved profitability while public auto dealers also see fixed operations improving.
A Cautionary Tale Against Rigid Comparisons
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?
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%.
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?
A Roadmap to the Valuation Process
In this post, we will cover seven factors of a highly effective buy-sell agreement for auto dealerships and also touch on several other considerations.
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?
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.
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.