By Kenneth R. Rosenfield, CPA
Off we go on short notice to look at some dealerships with a client that is considering an acquisition. We get the first look at the statements on the plane flying to the proposed stores. The dealerships make decent net to sales, but not due to high grosses, high service absorption or great sales techniques. Rather, they keep expenses extremely low and have almost no overhead, so they don’t have to sell a lot of cars to make a profit. This is a preliminary view. We then meet with the dealer and the CFO, and take a look around town.
Our mission: Develop a pricing strategy, a payback computation, and set the deal up for due diligence. How can our client make this deal, which has a high asking price based on blue sky plus investment in real estate, worth his investment?
The facilities are non-compliant, worn and old, and the furniture, fixtures and equipment could use a facelift and new look. The dealerships are in an area where it is tough to get top quality technicians and the zoning ordinances are a little hard to deal with.
The GSM and BDC managers are one and the same, and the parts manager likes to collect parts from long ago and, by the way, hates change. Of course, the prospective seller is not interested in having us go inside to look around, which might start all the employees asking questions.
Some things to consider: How to deal with the noncompliant real estate? Our advice to our client — lease, don’t buy at first. Agree on a cap rate that is market, and get a valuation of the facility “as is”. Then, reduce the value by the cost of image compliance and perhaps add back some value if you are adding service area stalls or improvements that would increase the value and sales volume.
Prospective seller’s “Add backs”…. I love to look at how creative sellers can be in generating add back, especially deferred packs, hidden monies and other items. To find these, we look at the adjusting entries for tax returns and financial statements made by the seller’s accounting firm.
Don’t take just one year into account in developing the blue sky model. We prefer going back three to five years. By doing this we can determine if the “add back” expenses are just a timing difference, or if they straighten themselves over time. If they do, then we wouldn’t include them in the computation for blue sky multiples.
Fully-depreciated Furnitures, Fixtures and Equipment is another favorite item to work out. Does this mean no value should be allocated? This writer thinks there is always some value there. But look at the condition of the hoists, computers, analyzing equipment and everything else sitting inside the shop. If the buyer can negotiate prices for all the items found, there is a potential for some tax write offs for the buyer that are realistic.
If the dealership is located in a small town, it is not unreasonable for the buyer to request a non-compete and confidentiality agreement. We have all too many times seen the selling dealer get bored and go back into business.
And we have been involved in lawsuits where, after the dealership is sold, the GSM’s and managers depart to competitors and take data from the seller’s computer data base. Do a back-end check of who is accessing the system and what they are doing in there. This check can be non-invasive and done in secret.
After all these precautions, use the dealership’s data and overlay your operating characteristics to see what your system can generate in sales, expense structure and impact on the bottom line. Use this to compute estimated income and cashflow to determine how long the business under your operating parameters will pay back your investment. After that is determined, you are ready to see where to go next on this deal!
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. He can be reached at firstname.lastname@example.org and 407-849-6400.