By Kenneth R. Rosenfield, CPA
Looking at acquiring a dealership that is losing money and not meeting its sales expectations? Think it will be a bargain? You need to dig deeper. Why is the dealership not performing? If it is losing money and meeting sales expectations, it could be an issue of not getting enough gross, or of expenses piling up.
This is the time to look at the financial statements hard and compare the gross profits to those of other dealers in similar markets. Is the market extremely competitive, or are do other significant market factors exist? If the dealership is losing money and not meeting sales expectations, what are the factors contributing to that?
A review of the planning potential and market studies by the manufacturer may be in order. The market may be “over dealered,” even if the manufacturer does not think so. Other factors can include absentee ownership, poor business acumen (in many cases, it may not be the original dealer), or a disruption in the marketplace such as an industry closure or temporary economic downturn.
Perhaps the dealer is fatigued with the industry and has totally lost interest in pursuing additional sales. He or she was fine with the status quo of an underperforming dealership.
Regardless, the store may still go for a high price.
So how is an underperforming dealership valued? In cases like this, a multiple of earnings approach may not be practical or make a deal work. In this instance, you would need to analyze the market studies that have been compiled by the manufacturer or similar manufacturers if available, and make a determination of the number of current Units in Operation.
It will be necessary to obtain the planning potential established by the manufacturer to compute the amount of gross profits from the sale of new retail units that should be delivered from the prospect’s location. From there, estimate the used vehicle and service and parts sales that should follow.
At this point, you need to extract current conditions for facilities cost and all other overhead costs. This exercise will produce forecasted and expected earnings from the a correctly-run dealership’s operations. Perhaps at this point a multiple can be used to extract a blue sky figure, but it may not be the amount a seller is willing to accept.
From here there are many ways to circle back to a blue sky figure. One method is to compute the required working capital based on the planning potential and with the average return on investment for that franchise, then figure out the return and the required payback period for the maximum amount of blue sky that would be paid.
Another method is to obtain sales prices of similar dealerships and derive the amount of blue sky per unit in operation. Then apply that figure to the units in operation for the target dealership.
There will always be some minimum amount of goodwill for a franchise regardless if it is making money or not. Too many factors will determine the percentage of net to sales. Underperforming dealerships can still command a significant blue sky figure in today’s environment if the market conditions are in line with the buyer’s requirements.
Another factor to consider in the valuation is the staff. Are the technicians fully certified to work on warranty? Is there a sufficient mix of technicians to work on all significant elements in service? Is the accounting department efficient, qualified and well cross trained? Are all the required special tools in place and in working order?
One of the most difficult aspects of acquiring an underperforming store is instilling high morale and bringing that up to the highest potential. Having a team in place ready to go could be a key factor. All of these elements have an impact on the purchase price and difficulty factor in valuing an underperforming dealership.
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC, a CPA firm with offices in Orlando, Florida, and Manhattan. The firm has one of the largest automotive practices in the country, with a nationwide client base. He can be reached at ken@rosenfieldandco.com and 407-849-6400
