By Gregory P. Dougherty, CPA, and Ronald Sompels, CPA, Crowe LLP
A favorable market is prompting some dealership owners to consider selling their businesses, and, with the forecasts for the next couple of years looking optimistic, it is not difficult to find interested buyers. But a dealership sale is not a matter to be entered into without much forethought.
Many dealers go deep into the process and having already expended a tremendous amount of time, money and stress, realize they do not want to sell after all. To avoid such a scenario, dealers should consider a variety of critical factors early on.
Reasons to Sell
Selling a dealership is one of the biggest decisions most dealers will make, and the last thing they want is to second-guess themselves. To determine whether a sale is the right course of action, potential sellers should clearly identify their reasons for selling.
The following are among the most common reasons:
- The amount of return for the effort required is not sufficient.
- Dealers are working too hard and not enjoying it anymore.
- The business has changed substantially from when the dealers first started.
- Dealers simply are bored of doing the same thing day after day.
- Other succession or exit plans are not feasible.
- Dealers are facing issues that require significant capital to solve (for example, manufacturer facility requirements) and are not willing to assume the associated risks.
- Manufacturers are adding new points in the area that will increase competition.
- Other opportunities exist to invest time and wealth.
- Dealers believe the future holds too much risk.
Additional valid reasons to sell exist, of course. The point is that sellers should have solid, articulable motivation and goals for the sale.
Reasons Not to Sell
Potential sellers also should think about reasons that can weigh against pursuing a sale, including:
- The lack of adequate challenges post-sale. Successful businesspeople do not become successful by accident. They work hard and enjoy planning, making decisions, solving problems, and overcoming challenges. When they realize that selling means the “vehicle” that makes that all possible is no longer going to exist, some dealers ultimately cannot go ahead with a sale. The younger the potential sellers, the more likely they will find themselves restless and unfulfilled after selling. Such dealers might not yet have achieved all they hope to in their business lives.
- The lack of similar investment opportunities. Most sellers understand the risk of operating a dealership but might be uncomfortable with the risk of investing their money in the stock market or other investments where they have far less control. Moreover, they probably will not be able to earn the same returns or enjoy the same perks that come with owning a dealership. Even if some dealers choose to just step back a bit in their role rather than sell outright, they might earn more than they could elsewhere, even if they receive diminished returns as a result of their diminished role.
- Concern about a drop-off in performance. Dealers might worry that no one else will have the ability to continually improve performance. Odds are, these concerns are valid – a new owner will not be able to execute on improvement opportunities as well as someone with years of experience. In addition to the difficulty of watching the deterioration of a business that they have poured sweat and tears into, dealers might have to accept a lower price because of the disparities between the results they could get out of the business and those that a new owner could achieve.
- The inability to avoid consequences. Some dealers consider selling in hopes of escaping some negative consequences. For example, one dealer might owe his employees $1 million in back pay and want to unload the dealership so he does not have to make that payment. However, potential buyers learning of the issue likely would adjust their offer prices accordingly. Buyers’ assessments of the negative effects of existing issues on a dealership’s value might run much higher than the costs of simply addressing the issues.
Alternatives to Selling
Dealers who are reluctant to give up their role in the dealership altogether have other options available. For example, a dealer could find a strong, trusted partner to assume the day-to-day responsibilities; the dealer would continue to provide the vision and big ideas but leave the execution to the partner.
Dealers also could get some immediate value out of the dealership without giving up the entire business, through leveraging or selling part of the business. By opting for this approach, dealers can take advantage of the current high values for dealerships while remaining in the game but also reducing risk.
Although surely monumental, making the decision to move ahead with a dealership sale is only the first step in the process. Among other things, dealers might need to obtain a business valuation from a qualified appraiser. The next article in this series will explain how a dealership’s value is determined, including factors that can drive up – or drive down – the value.
Greg Dougherty is a partner with Crowe LLP, one of the largest public accounting, consulting and technology firms in the U.S. He can be reached at 1 813 209 2406 or firstname.lastname@example.org. Ron Sompels can be reached at 1 813 209 2401 or email@example.com. Both work within the Crowe retail dealership services group, which provides comprehensive deep industry specialization to more than 750 dealership clients.