By Francis P. Brown, J.D., MIM, LL.M., CM&AA®, Director of Key Family Wealth
& Joan B. Kaye, Senior Vice President and Relationship Manager, Key Private Bank
Which Make & Model Best Describes Your Dealership?
Generally speaking, there are two different types of dealerships in the auto industry. No, I’m not referring to new vs. used, but “lifestyle” dealerships and “value creation” businesses. Neither is inherently better than the other, but, as a business owner, it is critically important to know what type of dealership you have.
Francis P. Brown
Not only will it help you understand how the world – in particular, potential buyers – views your business, it will also enable you to develop realistic expectations about your business’ value and your approach to succession planning and retirement.
The term “lifestyle” is used to classify dealerships that are run and operated by entrepreneurs who are highly motivated to be their own boss. Business owners work just hard enough to generate the income they desire to live a comfortable lifestyle. The term most commonly applies to a dealership run by a sole practitioner or husband-wife team, for example.
While a large segment of lifestyle dealerships is classified based on the amount of discretionary income the owner takes home or the size of the business, the categorization more often reflects a state of mind. For example, one auto dealership with more than $20 million in annual revenue operated the same way it did when the owner assumed control from his father. At that time, the annual revenue was only $5 million.
Attributes of a Lifestyle Dealership
Most lifestyle businesses depend heavily on the founder or owner’s skills, personality, energy and contacts. These owners started a dealership because they were motivated by independence or mastery of their talent and wanted to work in a particular city or state, on a schedule they could set or with family members or friends.
Since a lifestyle dealership owner is usually the primary decision-maker, chief rainmaker and sole driving force behind the business, success is often determined by the quality of life he or she can maintain. For example, if the owner wants to purchase a new boat, buy a second home or fund a child’s college tuition, then he or she will be motivated to grow the business.
Similarly, the owner’s management style is centralized, and command over operations and expense and spending decisions is tightly controlled at the top. Typically, since decision-making is informed by lifestyle, strategic plans and clear budgets are not in place. The result? These dealerships don’t attract outside investors when the time comes to sell.
Attributes of a Value Creation Dealership
The alternative to a lifestyle business is a value creation or equity value business. The common thread among these types of dealerships is that this category of entrepreneurs is focused on growing the dealership’s value, so the operations and profits are sustainable and, more importantly, transferable. This makes it highly probable they will maximize their return on investmeent when it comes time to sell the business.
Joan B. Kaye, Key Private Bank
While founders of these businesses can have a larger-than-life personality, value creation dealership owners are interested in earning returns at a rate higher than their cost of capital. They are focused on maximizing profits and are looking to reinvest money back into the business.
These owners use a management style that is decentralized, with strong senior management teams in place who are empowered to implement initiatives in accordance with well thought out and documented strategic plans. The goal is to grow and manage the dealership as an asset, with an eye to the future and an eventual sale.
Since decisions are rooted in strategic plans that focus on maximizing rate of return, there’s a clear focus among employees, goals are aligned, and there’s better execution throughout the organization. Expense control and spending decisions are managed through approved budgets and, ultimately, these businesses easily attract outside investors.
Why does it matter?
Understanding the type of dealership you own and operate is important for several reasons.
First, how your business is perceived by investors or potential buyers will have a significant impact when it comes time to plan how and to whom you’ll transfer ownership of your business. Second, if you’re able to find a buyer, you’ll learn that market price for lifestyle businesses is lower than for value creation businesses. Third, if you’re happy running a lifestyle business and want to continue doing so, you can set your expectation levels related to your business succession and retirement planning accordingly.
To get top dollar for your dealership and ensure you live a comfortable life in retirement, regardless of which type of business you’re running, you can take steps to increase its current value now, while building up your nest egg. Don’t find yourself in a disappointing position of expecting to sell your business to fully fund your retirement, only to realize you didn’t fully maximize its potential.
Joan B. Kaye is Senior Vice President and Relationship Manager with Key Private Bank. She can be reached at Joan_B_Kaye@KeyBank.com or 1-516-660-9851.
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2018. CFMA #180411-387802
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