Key Takeaways
Public and private markets use fundamentally different valuation frameworks, with public investors emphasizing P/E multiples and liquidity, while private buyers focus on blue sky multiples, adjusted earnings, and asset-specific underwriting.
Private buyers may justify higher valuations due to localized synergies, operational improvement potential, and unique transaction dynamics that are not reflected in public market models.
Blue sky multiples are shaped by macroeconomic conditions, brand strength, competition, and asset scarcity, and are unlikely to fully converge with public market valuations due to structural differences in investor behavior and time horizons.
In Part 1 of this series, we discussed why John Murphy joined Haig Partners, his plans to expand its strategic advisory offering, and his long-term outlook on the dealership model. In Part 2, we turn to valuation: how public and private markets think differently about dealership assets, why private buyers sometimes pay premiums, and what ultimately moves blue sky multiples over time.
Public vs. Private: Two Different Valuation Frameworks
In the public markets, the dominant metric for dealership stocks is the price-to-earnings ratio (P/E). While analysts may reference EV/EBITDA or other measures, P/E tends to anchor valuation discussions in automotive retail. Public investors are evaluating a liquid security with broad ownership, audited disclosures, and quarterly reporting discipline. Balance sheets among public dealership groups are generally solid, so equity multiples often carry more weight than enterprise value metrics, particularly when contrasted with capital-intensive OEMs that require significant ongoing investment in production facilities.
Private transactions operate differently. Buyers typically focus on a blue sky multiple applied to adjusted earnings, plus the appraised value of real estate. The analysis often involves normalizing earnings, evaluating add-backs, and assessing forward-looking performance potential. The framework is less about trading multiples on a screen and more about underwriting a specific asset.
Murphy notes that while public market multiples should not be ignored, they are not always the best comparable for smaller private groups. The scale, liquidity, investor base, and reporting environment are materially different. Public dealership groups compete for capital alongside global companies across all industries. Private buyers, by contrast, are focused exclusively on the economics of a specific store or portfolio.
He also observes that fixed operations and used vehicle earnings remain underappreciated in certain corners of the public markets. Even after multiple economic shocks, the durability of service and parts revenue is not always fully reflected in trading multiples. That dynamic can contribute to valuation gaps between public equities and private transactions, where operators may place greater weight on the stability of recurring gross profit streams.
Why Private Buyers Sometimes Pay More
A frequent question in valuation circles is whether private dealership valuations should trade at a discount to public multiples or vice versa. In practice, the relationship is not always intuitive.
Murphy points to several structural differences. Public companies face constant scrutiny from institutional investors. Capital allocation decisions must be defensible to public shareholders. Acquisitions that are dilutive in the near term can weigh on stock prices, even if strategically sound.
Private buyers operate under different constraints. They are often evaluating a specific store within a defined geographic footprint. A dealership across the street may represent a rare opportunity that will not present itself again for years. Synergies from local scale, shared management, and market dominance can justify a higher multiple.
In addition, private transactions often reflect circumstances that do not fit neatly into public market frameworks. Family dynamics, real estate ownership structures, tax considerations, and capital positioning can all influence the economics of a deal. In that sense, “dealer math” in the private market can look very different from valuation models applied to publicly traded groups.
Human capital also plays a role. An experienced operator may believe that a mid-performing store can be improved materially under new leadership. If a buyer has confidence in its team’s ability to lift throughput, improve fixed ops capture, or enhance cost discipline, it may rationally underwrite higher forward earnings than historical results would suggest.
Public market investors, evaluating a multi-billion-dollar enterprise, are less likely to assume dramatic structural improvement across an entire portfolio. The result can be a persistent gap between public trading multiples and private transaction multiples, particularly for well-positioned assets.
What Moves Blue Sky Multiples Over Time
While individual transactions reflect local dynamics, broader bands of blue sky multiples are influenced by macro and industry-specific forces. Economic cycles remain central to multiple expansion and contraction. Recessions, credit tightening, or external shocks such as the Great Financial Crisis or the pandemic can compress multiples quickly. Conversely, strong earnings environments and abundant capital can expand valuation bands.
Brand strength and product cadence also matter. Sustained gains or erosion in market share can alter long-term expectations for units in operation, used vehicle supply, and fixed operations revenue. Dealers aligned with strong brands and favorable product cycles often command premium multiples relative to weaker peers.
Competitive threats represent another variable. Murphy highlights the potential impact of well-capitalized entrants, whether technology-enabled retailers or foreign manufacturers entering the U.S. market. A significant new entrant capable of materially shifting brand market share could reset expectations for throughput, fixed absorption, and long-term earnings power. Such a shift would likely affect not only individual store valuations but broader multiple bands across affected brands. Structural changes in competition can alter growth expectations and perceived risk, which ultimately influences valuation.
At the same time, the franchise system’s limited supply provides underlying support. There are a finite number of points, and manufacturer approval is required for entry. As capital continues to seek access to a scarce asset class with durable earnings characteristics, that scarcity can provide long-term support for multiples, even as short-term conditions fluctuate.
Will Public and Private Multiples Converge?
Murphy is cautious about assuming full convergence between public and private valuation frameworks. Institutional investors and private operators approach risk, capital allocation, and time horizons differently. Unless public dealership groups reach significantly larger scale and attract broader investor attention, some divergence may persist. Differences in time horizon and operational proximity between institutional investors and private operators may further reinforce that divergence.
Ultimately, valuation remains both analytical and market-driven. Comparable transactions, public trading multiples, and discounted cash flow analysis all provide insight. Yet the definitive measure of value remains what a willing buyer will pay in an open transaction.
While our role as valuation professionals is to simulate the perspective of hypothetical willing buyers and sellers, an owner approaching an exit often faces a more nuanced reality. Legacy considerations, timing, and the presence of a small number of highly motivated buyers can materially influence outcomes in ways a purely hypothetical framework cannot fully capture.
For dealers, that reality reinforces the importance of preparation. Earnings quality, operational discipline, brand alignment, and strategic positioning all influence how the market will price an asset when the time comes. In our view, thoughtful analysis of both public signals and private transaction data provides the most balanced perspective. As market conditions evolve, understanding these dynamics can help dealership owners make more informed strategic and valuation decisions.
To discuss how current market conditions and transaction trends may affect your dealership’s value, we invite you to contact one of the professionals at Mercer Capital. In addition to our valuation work for “triggering events” such as estate planning and marital dissolution, we help auto dealers understand what they own and what a future buyer may think of your dealership today, similar in spirit to the advisory approach taken by Haig Partners.