By Stuart McCallum and Steven A. Schumacher, CPA, ASA, Crowe Horwath LLP
Maintaining dealership value is an important goal for all owners. Business practices that enhance dealership value should be standard operating procedures, but some decisions that owners make can detract from the value of their companies.
Last week we ran the first part of this series, with suggestions such as avoiding the assumption that markets in every part of the country are the same. This week we offer more tips on how to get the best value for your dealership in a buy/sell.
- Not Paying Yourself Enough Rent
Stuart McCallum
Some dealers do not charge an appropriate level of rent for the dealership property that they own in a separate real estate entity because charging less rent boosts the earnings of the dealership. Some even pay themselves no rent. Owners who do not charge an appropriate level of rent are cheating themselves in two separate ways: first by accepting a below-market return on their real estate investment, and by hiding soft spots in their financial and operational performance.
Another reason to charge market rate for rent is that peer data usually includes real estate. Theoretically, the value of a franchise should be the same whether a dealer owns the property or rents it. The only difference between owning and renting is that owning avoids a rent expense while renting creates an expense.
- Investing in Facilities You Don’t Need
Image compliance requirements aside, owners may have contemplated aggressive facility expansion or upgrades, especially in light of a favorable lending environment. These bigger showrooms and service centers do not always generate enough volume to justify the cost of the new facilities, however.
For example, an owner who adds two or three service bays to an existing facility is not creating additional value unless the dealership can attract more customers to the service center as a result of the additions.
Before investing in new facilities, owners need to ask themselves two questions: What return will I get from my investment, and what is the value proposition of the facility investment? Owners who cannot effectively answer these questions should think twice before making an investment that could end up lowering their dealership’s value.
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Stuart Schumacher
Employing Unnecessary Personnel
In a similar vein, owners should review their total organizational structure and determine if some of the highly specialized skills they have in-house are really necessary. For example, it may sound impressive for an owner to say, “I’ll have my general counsel (or chief information officer or chief marketing officer) look at that,” when the required function could be outsourced much more economically to a local firm.
Specialized skills don’t come cheap, and owners must determine how much value these skills add to their dealership.
- Adding Costs Through Central Cost Centers
With the emergence of large dealership groups, there has been a push for the centralization of certain overhead costs.
In its most basic form, a central cost center should reduce total overhead costs by consolidating roles that may not require a full-time employee at each dealership in areas such as human resources and information technology. However, without consistent professional oversight, what starts out as a cost reduction effort quickly can lower a dealership’s value.
To make sure that central cost centers contribute to dealership value, owners should review their personnel roster at least once a year to determine if central cost centers are, indeed, reducing costs and not adding to them.
- Investing in Captive Insurers
Many owners have set up captive insurers and other offshore finance and insurance companies to increase their after-tax earnings. While earnings for the current owner indeed may be higher than they otherwise would have been, that doesn’t always translate into increased dealership value.
Take the case of proprietary extended service contracts. If those contracts are not accepted at other dealerships, they become worthless to customers who move away from the dealerships that sold them the contracts. And when customers are dissatisfied, they use the internet to let the world know.
Thus, what starts as a product to increase dealership value could end up as a liability that erodes it.
- Keeping Succession Plans Under Wraps
Succession plans work best when all parties involved know what is expected. Too many succession plans fail when owners don’t designate their successors in advance – and that can result in losses of staff and sales for the company.
It is better for the business when owners let family members or friends know who the designated successor is and when the succession is likely to take place. When owners are transparent about succession plans, the transition likely will be smoother when the time comes to shift from the old owner to the new.
Another issue that can affect dealership value is succession tax planning. How owners structure the transfer of their dealership to the next generation is something to discuss with legal and tax advisers to minimize the tax effect of the transition.
Taking Steps to Protect Dealership Value
On an annual basis, dealerships should create schedules that detail potential normalization adjustments. These adjustments can include the effects of adjusting rent to market, eliminating or adjusting owner compensation, discretionary expenses, and even nonrecurring events such as hail damage.
The rationale for preparing these schedules on an annual basis is so that certain events and notes are memorialized while they’re still top of mind. These schedules also can assist in benchmarking the dealership’s performance against annual peer data.
Many factors can have a negative effect on dealership value. By identifying these factors and addressing them before they become problems, owners can strengthen what is likely their largest personal asset and the largest asset for their families.
Stuart McCallum is with Crowe Horwath LLP and can be reached at +1 630 706 2093 orstuart.mccallum@crowehorwath.com.
Steve Schumacher is a partner with Crowe Horwath LLP and can be reached at +1 630 586 5260 or steve.schumacher@crowehorwath.com.
Crowe Horwath is a global public accounting, technology, and consulting firm.
