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Auto Dealer Valuation Insights

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Valuation Issues

New Update: Understand the Value of Your Auto Dealership

If you’ve never had your auto dealership valued, chances are that one day you will.

In our updated whitepaper, we describe the situations that may lead to a valuation of your auto dealership, provide an overview of what to expect during the valuation engagement, introduce some of the specific industry information and key valuation parameters that define the context in which an auto dealership is valued, discuss value drivers of an auto dealership, and describe the valuation methods and approaches typically used to value auto dealerships.

If you own an interest in an auto dealership, we encourage you to take a look. While the value of your dealership may not be top of mind today, chances are one day it will be.

Special Topics

2024 NADC Fall Conference Update

Key Takeaways for Auto Dealers

Mercer Capital attended the National Association of Dealer Counsel (“NADC”) fall conference in Nashville, Tennessee, this past week. Based on our time there, we provide a few takeaways from sessions we attended at this year’s conference. We believe the topics we cover are especially important for auto dealer counsel and their clients during the remainder of the year and beyond.

SAAR Special Topics

Where Is the Auto Dealer Industry in the Cycle?

After a few strong years, automotive retail continues to return toward more “normal” levels. Since the onset of the pandemic, annual light vehicle volumes (“SAAR”) in the U.S. have barely crested the 17 million figure that prevailed consistently throughout 2015-2019. Alongside reduced sales volumes, the pandemic and ensuing chip shortage significantly reduced key expenses (headcount, advertising, and interest expense) while significantly raising margins on the vehicles that dealers were able to acquire and sell. For years, it’s been a question of when, not if, things would normalize. The more difficult follow-up question now is, “Where will earnings and margins normalize?” To answer that question, we look at volumes, days’ supply, and dealership profitability.

Divorce Special Topics

Personal Goodwill in the Auto Industry

This post discusses important concepts of personal goodwill in divorce litigation engagements. The discussion relates directly to several divorce litigation cases involving owners of automobile dealerships. These real-life examples display the depth of analysis that is critical to identifying the presence of personal goodwill and then estimating or allocating the associated value with the personal goodwill. The issues discussed here pertain specifically to considerations utilized in auto dealer valuations, but the overall concepts can be applied to most service-based industries.

Special Topics

2024 State of Auto Finance

Origination, Delinquency, and Portfolio Trends

Explore the shifting landscape of auto finance as we compare the roles of captive finance companies and third-party lenders, track current market trends, and analyze credit quality and interest rates. From assessing the changing face of dealership profitability to exploring the increasing importance of finance and insurance departments, we offer our perspective on the industry’s development and changes in 2024 and potential future.

Special Topics

Mid-Year 2024 Review of the Auto Dealer Industry by Metrics

Tray Tables Up?

We’ve all been on an airline flight nearing the destination when the captain comes on the intercom and informs us that we are about to start our final descent, finish our beverages, and return our tray tables to the upright and locked position.  Instinctively, we know this announcement signals that we have been cleared for landing and will be landing soon.  As I reviewed the key automotive statistics this week in preparation for writing this blog, I couldn’t help but think, has the auto industry been cleared for landing after a three-year flight filled with periods of turbulence and smooth air? In this post, we discuss several key metrics we have tracked over the last several years: new vehicle profitability, the supply of new vehicles, average trade-in equity values of used vehicles, fleet sales, and vehicle miles traveled. 

Blue Sky

What Is the Market 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. We recently focused on the asset approach and the income approach for valuing auto dealerships. This post presents a broad overview of the market approach, the last of the three approaches considered in all business valuations.

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. 

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Key Contacts

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Nicholas J. Heinz, ASA

(901) 322-9788

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David W. R. Harkins, CFA, ABV

(615) 345-0272

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Harrison Holt, ABV

(615) 345-6881

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Kate Mabry

(615) 288-0031

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