By Kenneth R. Rosenfield, CPA
Is analyzing the back end of a dealership an important aspect of determining whether or not you will acquire a dealership? It could very well be the make or break it of taking the deal on!
In analyzing a recent deal, at first blush, it seemed as though the seller was running on 12 cylinders and there wouldn’t be much room for improvement in the operations. Therefore, the extremely high blue sky figure quoted might not produce a fast enough payback to justify the high cost of entry into the market. The selling dealer was over the top in new vehicle sales market share and front-end gross profits. Service absorption looked pretty reasonable as well. So where was the potential for increased sales and profits?
As part of the pre-acquisition process, we request a good bit of reports, pay plans, and data to determine how well the back end has been performing. We like to see how well the advisors are selling quality service, how efficient the technicians are, and the real penetration into the market of units in operation. We also like to look at parts inventory management to look for efficiencies and better utilization of capital in that department.
All too often, we see the same symptoms existing in high volume and deep market penetration vehicle sellers…they rest on their laurels in the back end and just let the that department follow, not work on increasing sales on its own.
But, perhaps the declined sales figure is fairly high with no follow-up system or hours per R.O. are low for their region or for top performers nationally. It is also beneficial to review the current customer list compared to Units in Operation to determine what percentage of the brand’s owners are service customers and if the “lost souls” count is high.
In this case, a repair order analysis revealed that the service department was writing a high percentage of “one liners,” basically exposing the service department to be more of an order taking machine without a good system in place to increase hours per RO or increase customer satisfaction.
By finding the area of marked improvement, we could then overlay some better procedures, selling techniques and methods with a ramp up period and realistically forecast where the land of opportunity was and how much that could generate. The number could be significant, and in this case, was enough to make the payback period much shorter and worth the investment of the buyer.
The hard part in obtaining the data is to not trigger suspicion by the accounting department or the Service Manager. The reports and data we request are standard reports in most DMS systems and typically easily available. They may not be reviewed often by the dealer (although they should!) but the service manager is very familiar with them. The best way to get them is for the dealer to literally ask for them and reduce any suspicion. More detailed analysis should follow with due diligence after an agreement has been formalized.
In summary, it can be very difficult for a purchaser to achieve greater sales and profits when the seller is overachieving in vehicle sales. All too often, exceptional sales types pay little attention to driving sales in the back end, and that place may be the land of golden opportunity for a buyer!
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC. His firm has one of the largest Automotive Retail Practices in the Country with offices located in Orlando, Florida, Manhattan and Florham Park, NJ. He can be reached at email@example.com