Financial advisory firm MD Johnson Inc. works in the dealership buy sell space. The firm, based near Seattle, can handle every facet of the deal from market studies to strategic planning to the closing. That sets MD Johnson Inc. apart from a mere broker. Something else sets MD Johnson Inc. apart from many buy sell advisory firms, however.
“We are considered a fiduciary,” Mark Johnson, president of MD Johnson Inc., tells Automotive Buy Sell Report. That is “a completely different level of responsibility.”
According to the Securities and Exchange Commission, being a fiduciary “means you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests.”
For MD Johnson Inc., that means becoming fully integrated into a client’s business to determine both the best value for a dealership and the most appropriate buyer, says Johnson.
“To really be effective you need a deep understanding of a client’s business,” he says.
MD Johnson Inc. works primarily on large, complex transactions of $100 million or more. But, says Johnson, “Our primary goal is not to get the last cent. Our primary goal is to find a good buyer who will close and pay a fair price and won’t try to renegotiate.”
Having a dealership or dealership group not sell after it has gone to market and been exposed to all the possible buyers “is the worst possible outcome,” says Johnson. “It brands the dealer as unreasonable.”
Doing a deal properly takes time, he advises. Between the time a buyer is identified and the dealer gets paid involves four to six months of hard work, says Johnson.
During that time, his team puts in some 400 hours assembling all the due diligence materials, categorizing that material, putting it on a data site, working through environmental issues, and more.
“We use a check list with 45 items,” says Johnson.
His team only gets paid when the client gets paid.
MD Johnson Inc. has closed 100 percent of the transactions it has submitted for manufacturer approval, says Johnson. In the 16 years it has been in business, MD Johnson Inc. has advised on more than $5 billion in transactions.
Paying for cash flow
The firm is doing deals all over the country, and Johnson considers it “a normalizing market.” Buyers are still willing to pay a premium for certain stores. “There hasn’t been a downturn,” he says.
The overall auto retail market is slowing, and a market slowdown can affect dealership valuations because of a fall in profitability, says Johnson. However, “if you can estimate a cash flow at a certain point in the future, the buyer is still willing to pay for that cash flow.”
Enough dealerships change hands to make it an efficient market, says Johnson. “It comes down to how volatile is that brand, and how difficult it is to operate that franchise.”
There can be some 100 salient factors that drive value, says Johnson. Location is always important, of course. “A dealership in Iowa is not the same as a dealership in Texas.”
The swing in the multiple can be as much as two times earnings, says Johnson.
He calls applying a multiple to an entire brand a ploy “to create advertising.”
As for what franchises are hot right now, Toyota, Honda, and Porsche are all sizzling, says Johnson. But one franchise rises to the top – Subaru.
“A lot of people are looking to buy Subaru,” he says. “They are great to work with and they don’t over-dealer.”