By Don E. Ray, Portfolio Reinsurance
I get asked this question all the time: What is the Multiple for brand X? The reality is that that is an impossible question to answer. Many people consider the determination of the Multiple to be a science. I know some brokers/transaction advisors publish such info, but how applicable are their Multiple ranges to your specific dealership, whether you are the Buyer or the Seller?
Here are some initial general considerations:
- Is the Multiple based on historical earnings only?
- Are these historical earnings for one year or a series of years?
- Are calendar years considered or trailing twelve months?
- Are all the years treated the same way or are they weighted?
- Are earnings normalized for items such as:
- Rent
- Fringe benefits
- Family on payroll
- Dealer compensation
- Interest
- Product over remits with spiffs back to dealer or other dealership personnel
- Are underperforming and over performing dealerships assigned the same Multiple?
- If not, which category is generally assigned a higher Multiple?
- For example what is the Multiple of a dealership historically losing money?
- Should opportunities of enhanced profitability be considered in determining the Multiple?
- If so, how much consideration should be given to potential verses historical earnings?
- How does retention or replacement of key personnel impact the Multiple?
Also, how is the Multiple impacted by affiliated businesses such as a retro program or a separate reinsurance company for F&I products from the perspective of the Buyer and the Seller? Here are some considerations each party may have:
Buyer’s Perspective:
- Will you change the current F&I Provider/Servicing Agent at the dealership?
- Will your staff need to be retrained with a change?
- Are any of the dealership staff members receiving commissions directly from the current Agent and/or Provider?
- What is your Reinsurance/Profit Participation Investment Opportunity?
- Does this influence the acquisition cost you are willing to pay?
Seller’s Perspective (Involved in a Reinsurance/Profit Participation Program):
- What Fees & Penalties do you have in relation to Termination/Run-off?
- Do you have any outstanding advances from Current Providers/Agents?
- What has been the Buyer’s Reinsurance/Profit Participation Investment Opportunity?
- Does this Influence the Blue Sky you are asking for your dealership?
- How will consumer product claims be managed when your existing book of business is in Run-Off?
A Seller (with a reinsurance structure) Risk Mitigation Action Plan should include at least the following:
- A review of the Reinsurance Structure: Treaties, Trusts, Banking, Minutes
- A validation of the reserves and financial statements of the Reinsurance Company
- The financial condition of Reinsurance Company and the Front Carrier to perform
- A meeting with the Current Provider to establish protocols for on-going claims adjudication, reporting and accounting
A Seller (with a self-retained program) Risk Mitigation Action Plan should include at least the following:
- Review Administrator Dealer Agreements and Performance Restrictions
- Validate the booked vs. actual contingent liability
- Financial condition of the Front Carrier to perform
- Meet with the current Provider and establish protocols for on-going claims Adjudication, Reporting and Accounting
- Investigate reassignment of the Risk to 3rd party
And what about loyalty programs such as Lifetime Powertrain, Tires for Life, Maintenance? Who is responsible for the cost of honoring these contracts and what is the cost? Both the Buyer and the Seller should consider a Risk Mitigation Plan that includes the following:
- Review Dealer Administration Procedures and Accounting to Validate Current Contingent Liability and Trailing Liability
- Verify Protocols for On-Going Claims Adjudication, Reporting and Accounting
- Investigate Reassignment of the Risk to 3rd Party
- Verify Lender and State Compliance: Insurance Department, Department of Business Regulation
As you can tell, the Multiple range is an art, not a science. Please make sure you are considering all the colors needed to paint the best picture.
Don E. Ray works at Portfolio…THE Reinsurance Company for Auto Dealers. He can be reached at 917-359-5128 or dray.portfolioco@gmail.com
