By Erin K. Tenner, attorney
The buy/sell business has been hot for well over a year now. The “good deals” are harder to come by than they were just a year ago. But what really makes a deal good or bad?
There are many factors that will go into a decision to buy a dealership, and often those factors are subjective. But too often a good deal is missed, or a bad deal is made, because too much focus is given to the goodwill multiplier and subjective factors such as how well you know and like the make. Sometimes the objective factors tell a different story.
Working in the buy/sell business for twenty-eight years has given me a global view of how to find a gem of a dealership. The formula is not going to be the same for every deal, but here are a few things to consider if you are looking to buy:
1. Location, location, location.
You have heard it said that location matters when buying real estate. The same is true for buying an auto dealership. A Ford dealership in an upscale neighborhood may not do as well as a Ford Dealership in a working class community with a need for trucks. Why? The markets are very different. A Ford dealer in a luxury market would need to upgrade the facility to meet the luxury market’s expectations. For a make that doesn’t sell luxury vehicles, making that investment may be challenging.
Why did the Ford dealership in Beverly Hills fail twice even though the traffic going by it was plentiful? Beverly Hills does not provide easy access for people coming in from other cities where people may be more likely to buy Fords. Add to that the perception that you are going to pay more if you go to Beverly Hills to buy a vehicle because rents are higher, and it is an impediment to success.
Physical barriers like mountains can also be an issue. Check the area you are looking in to see if there are any physical barriers to access to portions of the relevant market area. Blue collar workers are less likely to visit a dealership that requires traversing a gas guzzling slope (and white collar workers who drive more upscale makes may be less like to go through an area known for crime) when another dealership in the other direction doesn’t have those obstacles.
2. Check market data.
Make sure you really know the area in which you are intending to buy. What are the demographics? What employers are in the area and how many people do they employ? Who will your biggest competitors be and how are they doing? If you have not been in the area in a while, don’t assume that nothing has changed. A town that employed only a few hundred workers ten years ago may employ thousands of workers now.
3. Check factory data.
How the current dealer is doing is worth looking at, but how you will do in the market is going to depend on how you operate the business, which may be very different from how the prior owner operated. In addition, the market area could be changed by the manufacturer.
Ask about the relevant market area, any proposed changes, as well as the competitors in the area, both existing and proposed. Included in the factory data is the performance evaluations for the existing dealer. Ask the dealer to provide them. If the dealer is underperforming in certain areas ask the dealer his point of view on reasons for the underperformance and check it out for yourself. Is the impediment real or just perceived? Is it something that can be changed or something the dealer has no control over?
4. Price.
A good question to start your analysis with is: What is the average goodwill being paid for the make I want to buy? There are market reports that can tell you average multiples being paid for the different makes. But, when considering if the multiple you are willing to pay is fair, location and relevant market data should also be considered.
For example, in a high growth area, a higher multiple may be warranted than the multiple commonly being paid for that make. Likewise, there are considerations that might warrant a lower multiple than the average being paid for a given make.
A dealership that has great growth potential because of the area it is in may be limited in its growth potential if the city will not allow the dealer to expand the facility because, for example, the necessary parking isn’t available to accommodate the growth, or traffic would be adversely affected, or prohibitively expensive code compliance is required to comply with earthquake or ADA requirements, or because the building has been labeled “historical” and just cannot be modified.
Don’t sell yourself short when assessing whether or not a deal is a “good deal.” There is a lot more to the equation than the goodwill multiple touted by the market.
Erin K. Tenner is a buy/sell attorney in Los Angeles, California. She can be reached at erin@cardealerattorney.com or 818-707-8410.
