By Alysha Webb, Editor and Publisher
If you are looking to buy or sell a dealership, make sure you have a firm grasp of real estate values. Real estate is a huge part of any buy sell deal, and paying too much for it can hurt your business prospects. Asking too much for real estate can cause a deal to flounder, said a panel of dealers at a conference before the NADA convention last week.
“You can get rid of your wife, but you can’t get rid of bad real estate. It will stay with you forever,” said Ed Napleton, president of Napleton Dealership Group.
Ed Napelton says understanding real estate is very important for a buyer
Napleton was one of three dealers on a panel discussing buy sell at J.D. Power’s 2015 Automotive Summit in San Francisco. He was joined by Mark Iuppenlatz, vice president of corporate development for Group 1 Auto and Franklin McLarty, CEO of RML Automotive.
What constitutes” bad” real estate? Speaking with Automotive Buy Sell Report after the event, Napleton used an example of a
theoretical Saab dealership with $4 million invested in it. The building is single-use, so if that dealership facility was up for sale, banks would consider and loan on the value of the land minus the cost of removing the building. That will make a 4 million dollar investment into $1.5 million, minus the demo expense, said Napleton.
“The improvements cost more than the land and now it is worth just the land value,” he said.
Real estate cost is a critical component of any deal for Group 1, said Iuppenlatz. Group 1 likes real estate costs to be less than 10 percent of gross profit for luxury stores, for example, he said.
Putting too high a price on the real estate component can kill a deal. RML’s McLarty said real estate is the largest factor in deals not being done for his group.
How much leverage is too much?
Rent is another real estate element that buyers should carefully evaluate.
While some dealers may be pricing themselves out of the market, current blue sky values are “pretty right,” said Napleton. But, he said, they are right for stores that are balanced in their income streams.
“Balanced” means having service cover a certain percent of your fixed costs, having a reasonable ration of new and used vehicle sales, and having a rent factor that is not out of line with the location. Make sure to look at that in your due diligence if you are buying a store, he said.
“Your rent might be good today but not five years from now,” said Napleton.
The panel also discussed financing. Panel moderator Erin Kerrigan said that she was hearing from some dealers that banks were financing the entire amount in a buy sell deal.
The captive lenders are giving more money now, said Napleton, but “I don’t think 100 percent is available.” Banks are willing to lend more towards franchise value, however, he said. In the past they may have only done 50 percent, but now they may lend 80 percent of franchise value for a Toyota or other top 5 store, he said.
For Napleton Group, however, “We don’t want to finance more than 50 percent of the franchise value. We pay cash for the net working capital and put a million for the used cars into every transaction,” said Napleton.
Said McLarty: “Overleverage is a cyclical thing and it will probably create some good opportunities for all three of us.”
