By Adam Henderson, Sr. Analyst, Portland Office, Integra Realty Resources
Automobile dealerships are becoming increasingly popular among outside investors due to the high rate of return dealerships offer. It is important for these new investors to understand the specific components that go into establishing the value of an automobile dealership. This article will provide an introduction to automobile dealership valuation and a brief overview of these components.
Real Estate– An identified parcel or tract of land, including improvements, if any.[1]
The property rights to be conveyed must be identified. The fee simple interest could be owned by the same or separate parities. The land and improvements may be leased to the current operator or the land only could be leased for a period of time. The improvements on leased land typically revert to the land owner upon the expiration lease.
Personal Property – Identifiable tangible objects that are considered by the general public as being “personal” – for example, furnishings artwork, antiques, gems and jewelry, collectibles, machinery and equipment; all tangible property that is not classified as real estate.1 This can include owned, leased, or financed machinery and equipment.
Intangible Property – Nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts distinguished from physical assets such as facilities and equipment.1
This component is often referred to as “Blue Sky” in the automobile dealership industry. This is the most subjective component of value and much time is spent negotiating this amount. A method of calculation used to determine blue sky is multiplying pretax income by a multiple of earnings factor. These factors typically range from 2.5x to 7.5x. Higher multiples are associated with luxury brands such as: Mercedes-Benz, Porsche, Audi, Lexus, and BMW. Lower multiples usually domestic brands (Ford, GM, and Chrysler).These multiples can vary depending on the market and specific issues associated with the real estate. For example, automotive manufacturers require periodic image updates to their franchise facilities. These renovations may cost a significant amount and are necessary to maintain the agreement with the manufacturer. A dealership in need of this renovation would likely sell using a lower blue sky multiple to account for this upcoming expense.
Inventory and Cash – This includes: New Vehicles, Used Vehicles, Demonstrator Vehicles, and Parts and Accessories.
There are specific complexities associated with each component presented above, along with several methods used to value each component. This article provided a brief overview of these components. However, it is necessary for any serious investor to learn more about the value drivers within each component and understand that each automobile dealership operation is different and must be carefully analyzed.
Adam Henderson is a senior analyst in the Portland, Oregon office of Integra Realty Resources. He can be reached at (503) 222 7066 or ahenderson@irr.com.
[1] (The Dictionary of Real Estate Appraisal, 2010)
